CASE SUMMARY: Northwest Hardwoods Files Prepack Supported by 95% of Secured Notes Claims and 94% of Common Stock in Wake of Tariff-Driven Lumber Glut

Relevant Documents:
Voluntary Petition
First Day Declaration
Plan
Disclosure Statement
Cash Collateral Motion
First Day Hearing Agenda

Northwest Hardwoods, Inc., a Tacoma, Wash.-based privately held lumber manufacturer with 20 production facilities in the western, glacial, and Appalachian regions of the United States, filed for chapter 11 protection early this morning, Nov. 23, in the Bankruptcy Court for the District of Delaware, along with two affiliates. As previewed, the debtors have filed a chapter 11 plan of reorganization and disclosure statement premised on a restructuring support agreement with consenting stakeholders holding more than 95% of the secured notes claims, and 94% of the outstanding common stock in Hardwood Holdings, Inc. Continue reading for our First Day team's analysis of Northwest Hardwoods chapter 11 filing and Request a Trial for access to the above documents and analysis as well as our coverage of thousands of other stressed/distressed debt situations.

The RSA was entered into with an ad hoc noteholder group, certain affiliates of Littlejohn & Co. LLC (holds 84.4% of common stock) and Forest Field Limited (holds 9.7% of common stock) and would deleverage the company’s balance sheet by nearly $270 million, “with significantly reduced annual debt service costs on a go-forward basis.” The proposed plan provides for (a) the existing ABL facility to be refinanced with a new $100 million exit ABL facility, (b) secured noteholders under the 2014 and 2015 notes to receive a pro rata share of 99% of the new common stock (subject to dilution from a management incentive plan that would reserve 10% of the equity) and a $110 million senior secured exit take-back term loan facility, (c) existing equity to receive a 1% share of the new common stock (subject to dilution from the MIP) and (d) general unsecured creditors to be paid in full. The chapter 11 case would be funded “primarily through the use of cash collateral.” The reorganized company would be a private company.

The debtors are targeting confirmation by Jan. 6 and a Jan. 22 effective date.

The first day hearing is set for tomorrow, Tuesday, Nov. 24, at 11 a.m. ET.

The company reports $100 million to $500 million in both assets and liabilities, including approximately $421 million in total principal amount of funded secured debt and $25 million in total outstanding general operating debt and “similar unsecured obligations.” The company’s prepetition capital structure includes:

The debtors say that they are seeking a plan voting deadline of Dec. 16, but as of the petition date the debtors “already have garnered votes to accept [the] Plan from approximately 83% in amount of Class 4 Secured Notes Claims and approximately 98% in amount of Class 9 Existing Equity Interests.”

The company points to (i) “significant and unanticipated hurdles resulting from increasingly aggressive trade restrictions between the U.S. and China,” which have hampered Northwest’s ability to service its funded debt, and (ii) the Covid-19 pandemic, which has “brought the operations of many of the Company’s customers to a halt.” Due to the escalation of trade tensions and the resulting decline of North American hardwood lumber sales in China, a surplus of hardwood lumber accumulated in the U.S. market, causing a drop in domestic pricing and in overall sales volumes, the debtors say. “The Company has not been immune to these industry forces and, due to lower demand, has closed certain of its facilities, including those in Mount Vernon, Washington; Maury River, Virginia; Garibaldi, Oregon (sawmill only); Coos Bay, Oregon; and Front Royal, Virginia,” Northwest adds.

As a result of the foregoing, the debtors entered into negotiations with the ad hoc noteholder group, resulting in the company’s election to skip a $14 million interest payment under the secured notes due August 2020, with the ad hoc group agreeing to forbearance. Concurrently, the company entered certain supplemental indentures under the secured notes that amended the grace period with respect to the debtors’ obligation to make the August 2020 interest payment, which allowed the company to avoid a cross default under the ABL credit agreement. These agreements provided the parties additional time to complete negotiations on the RSA.

The debtors are represented by Gibson, Dunn & Crutcher in New York and Young Conaway Stargatt & Taylor in Wilmington, Del., as co-counsel and Huron Consulting Services as financial advisor. Prime Clerk is the claims agent. The case has been assigned to Judge Christopher S. Sontchi (case number 20-13005).

Background

Northwest Hardwoods, according to the first day declaration of Northwest Holdings chairman and CEO Nathan Jeppson, is one of the largest U.S.-based manufacturer of North American hardwood lumber based on sawmill capacity, with production facilities, warehouses and distribution centers located throughout the country. Since its founding in 1967 as a sole sawmill operator, the company has grown into a large multinational corporation serving more than 2,000 customers in over 60 countries, selling a variety of domestic hardwood lumber, exotic hardwood lumber, hardwood plywood panel products and other wood products.

The business has a current estimated annual hardwood lumber capacity of approximately 320 million board feet. Its North America operations include 20 facilities that produce over 20 species of domestic hardwoods. The company’s facilities are strategically located near high production timber baskets and key shipping ports in the Western, Glacial and Appalachian regions of the U.S. The debtors also own and operate three distribution centers/warehouses and operate thirteen 13 leased inventory warehouses scattered throughout the country. In addition to its domestic hardwoods lumber business, Northwest imports and distributes over 18 species of exotic hardwood lumber and sells hardwood plywood panel products and engineered wood products.

The majority of the debtors’ hardwood products are sold for use in the “appearance” wood markets with applications such as kitchen cabinets, hardwood flooring, millwork, molding and furniture. Northwest’s customers consist primarily of manufacturers of a broad range of end use applications including millwork, cabinetry and flooring, doors and windows, recreational vehicle paneling and industrial pallets, as well as distributors and home improvement retailers who supply hardwood products to small manufacturers or retail consumers. The company also sells lumber suitable for industrial applications, such as pallets, railroad ties and cants. Demand for the company’s “appearance” hardwood products has historically benefited from high demand for North American hardwood in global markets, particularly in China from which a material portion of the company’s revenue has been derived in recent years.

The company’s corporate organizational structure is below:

The debtors largest unsecured creditors are listed below:

10 Largest Unsecured Creditors
Creditor	Location	Claim Type	Amount
Keystone Transportation Solutions	Fairfax, Va.	Promissory Note	$   2,432,500
Superior Hardwoods of Ohio	Wellston, Ohio	Trade	2,175,889
PT Basirih Industrial	Banjarmasin, Indonesia	Trade	998,530
Weyerhaeuser – Logs	Longview, W.Va.	Trade	511,541
Dingess Lumber	Summersville, W.Va.	Trade	417,696
Sitco LLC	Dubuque, Iowa	Trade	360,497
Cornerstone Systems Inc.	Memphis, Tenn.	Trade	213,917
Laurel Creek Hardwoods	Richwood, W.Va.	Trade	170,508
AFCO Credit Corp.	New York	Trade	168,429
Concannon Lumber Co	Linden, N.J.	Trade	161,389

The case representatives are as follows:

Representatives
Role	Name	Firm	Location
Debtors' Co-Counsel	David M. Feldman	Gibson, Dunn & Crutcher	New York
	J. Eric Wise
	Matthew K. Kelsey
	Alan Moskowitz
Debtors' Co-Counsel	Sean M. Beach	Young Conaway Stargatt & Taylor	Wilmington, Del.
	Jacob D. Morton
Debtors' Financial Advisor	N/A	Huron Consulting Services	N/A
Debtors' Claims Agent	Benjamin J. Steele	Prime Clerk	New York
Debtors' Tax Accountant	N/A	Moss Adams	N/A
Investment Banker and Financial Advisor to the Ad Hoc Noteholder Group	N/A	Guggenheim Securities	N/A
Co-Counsel to the Ad Hoc Noteholder Group	Jeffrey D. Pawlitz	Willkie, Farr & Gallagher	New York
	Weston T. Eguchi
	Agustina G. Berro
	Erin Ryan
Co-Counsel to the Ad Hoc Noteholder Group	Laura Davis Jones	Pachulski Stang Ziehl & Jones	Wilmington, Del.
	Timothy P. Cairns
Co-Counsel to Littlejohn & Co., as Sponsor Equityholder	Scott K. Charles	Wachtell, Lipton, Rosen & Katz	New York
	David E. White Jr.
Co-Counsel to the Prepetition ABL Agent	Brian Swett	McGuireWoods	New York
	Ha Young Chung
Co-Counsel to the Prepetition ABL Agent	John Knight	Richards, Layton & Finger	Wilmington, Del.
Counsel to the Indenture Trustees	Thomas A. Pitta	Emmet, Marvin & Martin	New York
	Elizabeth Taraila
United States Trustee	Juliet M. Sarkessian	Office of the U.S. Trustee	Wilmington, Del.

DS Approval Motion / Confirmation Timeline

The debtors’ disclosure statement approval motion proposes the following confirmation-related timeline:

Plan / Disclosure Statement

Below is a chart of the plan’s classes, along with their impairment status and voting rights.

 

Treatment of Claims and Interests

The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:

• Class 1 - Other secured claims: At the option of the debtors and with the consent of the required consenting noteholders: (a) payment in full in cash on the effective date, (b) the collateral securing the claim, (c) reinstatement or (d) such other treatment rendering the claim unimpaired or (e) the indubitable equivalent of the claim.


• Class 2 - Other priority claims: Treatment consistent with section 1129(a)(9) of the Bankruptcy Code, as determined by the debtors with the consent of the required consenting noteholders.


• Class 3 - ABL claims: Paid in full in cash with the proceeds of the exit ABL facility.


• Class 4 - Secured notes claims: Pro rata share of and/or interest in (a) 99% of the new common stock (subject to dilution from the management incentive plan) and (b) the senior secured exit take back debt of $110 million; claims to be allowed in an aggregate principal amount of at least $378.6 million.


• Class 5 - General unsecured claims: At the debtors’ option and with the consent of the required consenting noteholders: (a) if the claim is due and payable on or before the effective date, payment in full in cash, (b) if not yet due and payable before the effective date, payment in the ordinary course or (c) such other agreed treatment to render the claim unimpaired.


• Class 6 - Intercompany claims: At the option of the reorganized debtors and with the consent of the required consenting noteholders, (a) unimpaired and reinstated or (b) imapaired and canceled and released without any distribution.


• Class 7 - Section 510(b) claims: Discharged, canceled, released and extinguished with no distribution. The DS says that the debtors believe that no such claims exist.


• Class 8 - Intercompany interests: At the option of the reorganized debtors and with the consent of the required consenting noteholders, (a) unimpaired and reinstated or (b) impaired and canceled and released with no distribution.


• Class 9 - Existing equity interests: Pro rata share of 1% of the new common stock “on a fully diluted basis and set at the equity value as of the Effective Date” (subject to dilution from the management incentive plan); existing interests canceled, released and extinguished.

The anticipated capital structure on emergence is below:

Plan Milestones

The restructuring milestones contemplated under the RSA are as follows:

• Interim cash collateral order: Entered within five days of petition date


• Plan supplement: Filed within seven days before plan objection deadline


• Final cash collateral order: Entered within 35 days of the petition date


• Confirmation order: Entered within 45 days of the petition date


• Plan consummation: Within 60 days of the petition date

Management Incentive Plan

The plan contemplates a management incentive plan, for which 10% of fully diluted equity as of emergence would be reserved.

Other Plan Provisions

The plan provides for releases of the debtors and the reorganized debtors, the consenting noteholders, The Bank of New York Mellon as indenture trustee and consenting equityholders. In addition, the plan includes an exculpation provision in favor of the debtors and the reorganized debtors and their current and former directors and officers.

Under the plan, the new board would initially be determined by the required consenting noteholders in consultation with the debtors or reorganized debtors, but must include the president of Hardwoods Holdings.

Exit ABL Facility

The $100 million exit ABL facility, with Bank of America as agent, would be secured by first priority liens on the ABL priority collateral and second priority liens on the notes priority collateral. Bank of America would fund $60 million and Wells Fargo $40 million of the facility. The facility would include a $25 million sub-limit for letters of credit and a $20 million sub-limit for swingline loans. The facility includes an accordion feature allowing the company to request an increase in commitments by up to $50 million. The loan bears interest at L+2.125%, with 2% added for the default rate, and would mature on the earlier of five years from closing and 91 days prior to the maturity of the term loan facility. The loan is subject to a $100,000 closing fee for Wells Fargo. The facility is subject to an unused line fee of 0.375% and a 0.125% letter of credit fee.

Exit Take Back Facility

The exit take back debt facility of $110 million in the form of term loans or notes would be secured by first priority liens on all notes priority collateral and second priority liens and on all ABL priority collateral. The term loans or notes would be deemed advanced in exchange for a portion of the claims arising from the Notes. The term loans would be distributed to all noteholders on a pro rata basis. The facility bears interest at 7.5% (provided that the company may elect a PIK toggle at a rate of 9.5%), with 2% added for the default rate, and would mature on the earliest of five years after closing or the date of acceleration of the exit term loans.

Financial Projections

The following financial projections are included in the DS:


 


 

 

Liquidation Analysis

The DS includes the following liquidation analysis:

 


Valuation

The DS says that the debtors and the ad hoc noteholders group, in their negotiations, “considered a range of total enterprise values” between $175 million and $250 million. The DS adds that the reorganized debtors would emerge with $113 million of net debt. The imputed net equity value of the reorganized company would range between $62 million and $137 million.

Cash Collateral Motion

The debtors request the use of cash collateral of the prepetition secured lenders as the primary source of funding for operations and chapter 11 administration costs.

The debtors propose as adequate protection replacement liens and superpriority administrative expense claims with respect to the prepetition ABL facility and notes, payment of professional fees of the prepetition agents, the ad hoc noteholder group and the sponsor equityholder, financial reporting and maintenance of insurance. The prepetition ABL agent would also be entitled to cash payments of prepetition and postpetition interest at the non-default rate plus other fees, costs and expenses. Replacement liens for the prepetition noteholders would be junior to the ABL replacement liens. Upon entry of the final order, the replacement liens would attach to avoidance action proceeds.

The debtors also propose, subject to the final order, a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).

The carveout for professional fees is $1 million for the debtors’ professionals and sponsor equityholder Littlejohn & Co. LLC and $25,000 for the professionals of an official committee of unsecured creditors.

The proposed budget for the use of cash collateral is HERE.

The use of cash collateral is subject to the following milestones:

• Interim order: Entered by Nov. 31


• Final order: Entered by Dec. 28


• DS order: Entered by Jan. 7, 2021


• Confirmation order: Entered by Jan. 7, 2021

The lien challenge deadline is 60 calendar days after the appointment of the official committee of unsecured creditors and for any other party in interest, 75 calendar days after the entry of the interim order. The UCC lien investigation budget is $50,000.

Other Motions

The debtors also filed various standard first day motions, including the following:

• Motion for joint administration
  
  
  
  • The cases will be jointly administered under case no. 20-13005.
  
  
  
  


• Motion to establish trading procedures
  
  
  
  • The debtors seek to establish trading procedures for its common stock, to be able to object to and prevent transfers if necessary to preserve net operating losses. The debtors have about $18.4 million in NOLs as of Dec. 31, 2019, and carryforwards of disallowed business interest expense of approximately $45.9 million.
  
  
  
  


• Motion to pay trade creditors
  
  
  
  • The debtors seek the authority to pay up to $22.5 million in prepetition trade claims and approximately $800,000 in customer programs. The motion says that a substantial portion of the trade claims are general unsecured claims, which would be paid cash in full under the planor leave otherwise impaired. “The remaining trade Claims likely either: (a) are entitled to priority under section 503(b)(9) of the Bankruptcy Code or (b) may, if unpaid, give rise to mechanic’s or other liens against the Debtors’ property,” the motion follows.
  
  
  
  


• Motion to pay employee wages and benefits
  
  
  
  • The debtors summarize their employee obligations as follows:
  
  
  
  

 

• On an interim basis, the debtors seek to pay the following employee obligations:

 

 

• Motion to use cash management system
  
  
  
  • The company has bank accounts with Bank of America, Truist Bank, Wells Fargo and US Bank.
  
  
  
  


• Motion to maintain insurance programs


• Motion to pay taxes and fees
  
  
  
  • The debtors estimate that they owe $750,000 in taxes and fees, of which they seek to pay $235,000 on an interim basis.
  
  
  
  


• Motion to provide utilities with adequate assurance


• Application to appoint Prime Clerk as claims agent