Secure Home Holdings LLC
CASE SUMMARY: Secure Home Holdings Plan to Hand Equity to 1L Lenders; 2L Lenders to Receive No Distribution, Agree to Be Treated as Unsecured in Exchange for $1M Waiver and Consent Fee
Mon 04/26/2021 14:16 PM
Relevant Documents:
Voluntary Petition
First Day Declaration
Plan of Reorganization
Disclosure Statement
Motion for Combined Plan/DS Hearing
DIP Financing Motion
First Day Hearing Agenda
Secure Home Holdings LLC and various affiliates, including My Alarm Center LLC, which provides security and smart home automation to residential and small-business customers throughout the United States, and ACA Security Systems LP, a customized home security services provider provider, filed for chapter 11 bankruptcy protection on Sunday night, April 25, in the Bankruptcy Court for the District of Delaware. In the wake of the pandemic’s suppression of door-to-door sales activity and home installations, which represent a significant source of the Secure Home’s contracts, the debtors filed chapter 11 bankruptcy to pursue a plan that would provide for the distribution of the debtors’ reorganized equity to their first lien lenders. General unsecured creditors, along with existing equity, would receive no distribution.
For access to the relevant documents above as well as our First Day by Reorg team's coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities including the Secure Home Holdings bankruptcy filing Request a Trial here.
The second lien lenders, in exchange for a $1 million waiver and consent fee plus an up to $200,000 payment for certain professional fees, “admit and agree that they hold no secured claims and all of their claims will be treated as unsecured claims in Class 4 for purposes of the Plan,” waive any rights under an intercreditor agreement including a “first lien cap,” agree to support and not contest the plan, and agree to the same treatment of their unsecured deficiency claim as the first lien deficiency claim (emphasis added).
The debtors have secured $45 million in DIP financing commitments from the majority holder of the debtors’ first lien prepetition obligations, Invesco, and the remaining first lien lenders, including $15 million of new money and a rollup of $30 million of prepetition first lien obligations. The DS says that “while the Company is executing its chapter 11 process, the Company will explore efficient sources of liquidity including, among other things, a revolving line of credit, a term loan facility, or equity-based financing.” The DS includes the option of the debtors obtaining exit financing and/or DIP take-back loans. The terms of any exit facility, “if obtained,” would be set forth in a plan supplement.
Under the plan, (a) DIP lenders would be paid (i) outstanding amounts in full under the new-money DIP facility either in cash or (with the prior written consent of the consenting secured lenders) DIP take-back loans and (ii) holders of claims under the rollup DIP facility would be paid in full with reorganized equity at an implied equity value based on an assumed plan enterprise value of $145 million after deducting the estimated funded portion of the exit facilities and any DIP take-back loans on the effective date, (b) at least $95 million (assuming $30 million outstanding under the first lien facility become the DIP rollup claims) of first lien secured claims would be converted to equity, and (c) $106.5 million of first lien and second lien deficiency claims would be treated as GUCs and in turn receive no distribution on those claims.
The proposed restructuring would deleverage the company’s capital structure as follows:
The first day hearing is scheduled for tomorrow, Tuesday, April 27, at 1:30 p.m. ET.
The company reports $100 million to $500 million in both assets liabilities, and its prepetition capital structure includes:
The debtors are represented by Chipman Brown Cicero & Cole as counsel, Skadden, Arps, Slate, Meagher & Flom as special bankruptcy counsel, M3 Advisory Partners as financial advisor and Raymond James & Associates as investment banker. KCC is the claims agent. Mohsin Meghji and Keshav Lall of M3 Partners are the co-chief restructuring officers. The case has been assigned to Judge J. Kate Stickles (case No. 21-10745).
Events Leading to the Bankruptcy Filing / Prepetition Restructuring Efforts
The debtors attribute the bankruptcy filing to an (i) inability to circumvent certain projected covenant defaults regarding the debtors’ prepetition revolver, reducing the company’s ability to access liquidity and, consequently, its ability to replace attrition and grow their business through new contract generation and (ii) the Covid-19 pandemic, which curbed door-to-door sales activity and in-home installations, a significant source of the debtors’ new contracts, and led to increased costs regarding maintaining employee health, transitions to remote working and overtime pay.
“As a result of the current economic environment, disruption within the home security industry, and the decision by two of the Debtors’ major lenders to exit all home security loans, the Debtors defaulted under both of their credit agreements,” the debtors say, adding that these defaults left the debtors unable to draw on their revolving credit facility and stressing that they also lack significant cash reserves.
The pandemic also affected the debtors’ efforts to raise capital and pay down debt. Prior to the pandemic, the debtors had signed letters of intent with two parties for certain asset divestitures, and confirmatory diligence was nearly completed. However, both potential purchasers materially reduced their offers post-pandemic, rendering the transactions no longer viable.
Seeking additional liquidity to extend the time available to pursue a transaction, on April 27, 2020, the debtors obtained a $6.8 million loan under the federal Paycheck Protection Program. While the PPP loan was obtained to extend the debtors’ runway for a potential out-of-court transaction or solution, the defaults triggered “severely constrained the Debtors’ ability to do so.” Consequently, the debtors and their lenders entered into forbearance agreements to allow for the pursuit of an M&A transaction.
The debtors also pursued multiple potential refinancing proposals, recapitalizations and potential sale transactions with prospective purchasers. Numerous potential lenders and acquirors were solicited, data rooms were established, and due diligence was conducted, eventually resulting in several letters of intent for potential going concern sales. The forbearance agreements were amended and extended multiple times to permit these processes and negotiations to continue.
As a result of these efforts, the debtors eventually garnered the support of their first lien lenders and entered into a letter of intent that contemplated a sale transaction with a third party and an initial two-week exclusivity period. As the debtors continued to negotiate the details of the contemplated sale with the third-party buyer and their first lien lenders, they agreed to two subsequent two-week extensions of the exclusivity period.
Substantially concurrent with the expiration of the exclusivity period (as extended), the buyer informed the debtors that it would not be able to clear financing contingencies to allow it to consummate the contemplated sale. The debtors and their advisors promptly pivoted to further engage with the majority holder of the debtors' first lien obligations, Invesco, and the remainder of the first lien lenders regarding an alternative transaction and restructuring proposal. After further negotiations, the debtors reached an agreement with the first lien lenders on the terms of a plan of reorganization.
Background
Secure Home Holdings, headquartered in Newtown Square, Pa., with regional offices in Los Angeles, Atlanta and the Texas cities of Fort Worth, Houston, Tyler and San Antonio, is a national provider of technologically advanced security solutions, including residential and commercial security systems, home automation systems, smoke and carbon monoxide detectors, and other security offerings. The debtors’ family of security brands include “such well-known national and regional brands” as My Alarm Center, Alarm Monitoring Service of Atlanta, Hawk Security Services, ACS Security and LivSecure.
The company’s revenue is primarily derived through alarm monitoring contracts, accounting for $88 million of revenue in 2020, and to a lesser extent installation and other services, which totaled $7 million in 2020.
The debtors’ products include home security equipment installation, monitoring and support services, “smart” home applications, alarm equipment and support services (smoke, fire, carbon monoxide, flood and intrusion), monitoring services and premier home security, guard patrols and guard response services.
The debtors have approximately 491 full and part-time employees and utilize contractors, subcontractors, temporary employees, consultants and third-party service providers of support, building, call center operations, field work, installations and repairs and other services.
Secure Home’s corporate organizational structure is shown below:
The debtors’ largest unsecured creditors are listed below:
DIP Financing Motion
The debtors request a $45 DIP facility, including $15 million of new-money term loans on an interim basis, and a rollup of $30 million of prepetition first lien obligations upon entry of the final order, with a majority of prepetition first lien lenders serving as DIP lenders, prepetition agents Seaport Loan Products and Acquiom Agency Services serving as co-administrative agents and Acquiom Agency Services as serving as collateral agent.
According to the DIP credit agreement, the debtors would be permitted (a) to draw up to $10 million of new-money loans during the interim period, plus an additional $5 million subject to a minimum liquidity amount of “[$1,500,000],” and (b) if during the interim period, the debtors have not borrowed more than $10 million, then they may request an additional $5 million during the final period, subject to the minimum liquidity amount.
The DIP financing bears interest at the eurodollar rate plus 5% or the base rate plus 4% with respect to new-money term loans, and the eurodollar rate plus 4.25% or the base rate plus 3.25% with respect to rollup loans (plus 2% for the default interest rate in any instance). The DIP financing matures on the earliest of (i) 90 days after closing, (ii) 23 days after the petition date if the final DIP order has yet to be entered, (iii) 35 days after the petition date if the final DIP hearing is at the confirmation hearing, (iv) the effective date of any plan of reorganization, (v) the date that is the earlier of (a) the date of a sale of all or substantially all of the debtors’ assets under section 363 and (b) 15 days after entry of any order approving a sale of all or substantially all of the debtors’ assets, and (vi) other customary events.
To secure the DIP financing, the debtors propose to grant priming liens, with the consent of the first lien and second lien lenders, on all of DIP collateral constituting prepetition collateral, subject only to the carve-out and “Permitted Prior Liens.” Upon entry of the final order, the DIP liens would encumber avoidance action proceeds and the proceeds from any disposition of leaseholds.
In support of the proposed DIP financing, the debtors filed the declaration of Raymond James managing director Geoffrey Richards, who states that Raymond James conducted a market check by seeking competing DIP financing offers from the debtors’ second lien lenders and 12 other prospective lenders. No other proposals were received. The primary reasons for the lack of competing proposals were because (i) the first lien lenders are unwilling to permit a priming lien in favor of a third party and (ii) the other potential lenders are unwilling to provide a DIP facility junior to the first lien lenders.
The facility includes various fees, including a 1% upfront fee, agent fees pursuant to an agency fee letter and the payment of (i) all reasonable and documented out-of-pocket expenses incurred by each agent and its related parties, (ii) all reasonable and documented out-of-pocket expenses, up to $10,000, incurred by CIT and its related parties, and (iii) all reasonable and documented out-of-pocket expenses, up to $10,000, incurred by First Midwest and its related parties.
In exchange for a waiver and consent fee of $1 million for the benefit of the prepetition second lien secured lenders and no more than $200,000 of legal fees of the prepetition second lien agent, the prepetition second lien secured lenders have agreed to consent to the DIP facility. The second lien lenders have also agreed to waive certain rights under an intercreditor agreement including a “first lien cap,” agree to support and not contest the plan, consent to the treatment of their unsecured deficiency claim in the same manner as the first lien deficiency claim and to be bound by any third-party releases in an approved plan. The debtors filed a motion to file the DIP financing fee letter under seal.
The company proposes adequate protection to its prepetition first lien lenders in the form of replacement liens, superpriority claims and payment of fees and expenses.
In addition, the debtors propose 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), in each instance subject to the final order.
The carve-out for professional fees is $150,000 plus any “Transaction Fees” if earned and payable up to $3.975 million, less all credits, as contemplated by the engagement letter between the debtors and Raymond James for the debtors’ professionals and $50,000 for UCC professionals.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
The lien challenge deadline is the earlier of confirmation of a plan or 75 days after entry of the interim order. The UCC lien investigation budget is $25,000.
Solicitation Procedures Motion / Confirmation Timeline
The debtors’ disclosure statement approval motion proposes the following confirmation-related timeline:
Plan of Reorganization / Disclosure Statement
Treatment of Claims and Interests
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
The first lien secured claims would receive new equity remaining after issuance of the DIP equity allocation (new equity issued to the DIP lenders at at implied equity value based on an assumed plan enterprise value of $145 million after deducting the estimated funded portion of the exit facilities and any DIP take-back loans on the effective date, subject to dilution from the management incentive plan).
The second lien secured claims are fixed at $0 and the second lien deficiency claims, to be included in the class of general unsecured claims, are allowed, for purposes of the plan, at approximately $34 million.
DIP Claims
The DIP lenders would receive (a) payment in full of the amounts outstanding under the new-money DIP facility and any interest accrued under the DIP facility, payable in either cash or (with the prior written consent of the consenting secured lenders) an equal amount of DIP take-back loans and (b) payment in full of the principal amounts outstanding under the rollup DIP facility (of $30 million), payable in a pro rata share of the DIP equity allocation.
Management Incentive Plan
The plan contemplates a management incentive plan with terms to be included in a plan supplement.
Liquidation Analysis
The DS includes a hypothetical liquidation analysis assuming a chapter 7 liquidation on April 25, concluding the following recovery estimates under a chapter 11 plan and chapter 7 liquidation:
The full liquidation analysis follows:
Financial Projections
The DS includes financial projections for the seven-month period ended December 2021 and for fiscal years ending December 2022 through 2025.
Valuation
The debtors’ investment banker, Raymond James & Associates, has prepared a valuation analysis assuming a reorganization on June 18, based on financial projections for fiscal years ending December 2021 to 2025.
Based on the financial projections and solely for purposes of the plan, Raymond James estimates that the enterprise value of the debtors falls is between $115 million and $175 million, with a midpoint of approximately $145 million.
Other Plan Provisions
The plan provides for releases of (a) the debtors, (b) the DIP agents, (c) the DIP lenders, (d) the first lien agents, (e) the second lien agent, (f) each prepetition secured lender, (g) the exit agent and (h) each of the exit lenders. In addition, the plan includes an exculpation provision in favor of the debtors, the reorganized debtors and the released parties.
Under the plan, the members of the new board would be designated in a plan supplement.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
First Day Declaration
Plan of Reorganization
Disclosure Statement
Motion for Combined Plan/DS Hearing
DIP Financing Motion
First Day Hearing Agenda
| Summary |
| Secure Home Holdings is a national provider of technologically advanced home and commercial security solutions |
| Attribute the filing to the pandemic’s impact on door-to-door sales and in-home installations as well as difficulties pursuing out-of-court sale and M&A transactions |
| Filed a plan that would provide for the distribution of the debtors’ reorganized equity to their first lien lenders; second liens and general unsecured creditors, along with existing equity, would receive no distribution |
Secure Home Holdings LLC and various affiliates, including My Alarm Center LLC, which provides security and smart home automation to residential and small-business customers throughout the United States, and ACA Security Systems LP, a customized home security services provider provider, filed for chapter 11 bankruptcy protection on Sunday night, April 25, in the Bankruptcy Court for the District of Delaware. In the wake of the pandemic’s suppression of door-to-door sales activity and home installations, which represent a significant source of the Secure Home’s contracts, the debtors filed chapter 11 bankruptcy to pursue a plan that would provide for the distribution of the debtors’ reorganized equity to their first lien lenders. General unsecured creditors, along with existing equity, would receive no distribution.
For access to the relevant documents above as well as our First Day by Reorg team's coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities including the Secure Home Holdings bankruptcy filing Request a Trial here.
The second lien lenders, in exchange for a $1 million waiver and consent fee plus an up to $200,000 payment for certain professional fees, “admit and agree that they hold no secured claims and all of their claims will be treated as unsecured claims in Class 4 for purposes of the Plan,” waive any rights under an intercreditor agreement including a “first lien cap,” agree to support and not contest the plan, and agree to the same treatment of their unsecured deficiency claim as the first lien deficiency claim (emphasis added).
The debtors have secured $45 million in DIP financing commitments from the majority holder of the debtors’ first lien prepetition obligations, Invesco, and the remaining first lien lenders, including $15 million of new money and a rollup of $30 million of prepetition first lien obligations. The DS says that “while the Company is executing its chapter 11 process, the Company will explore efficient sources of liquidity including, among other things, a revolving line of credit, a term loan facility, or equity-based financing.” The DS includes the option of the debtors obtaining exit financing and/or DIP take-back loans. The terms of any exit facility, “if obtained,” would be set forth in a plan supplement.
Under the plan, (a) DIP lenders would be paid (i) outstanding amounts in full under the new-money DIP facility either in cash or (with the prior written consent of the consenting secured lenders) DIP take-back loans and (ii) holders of claims under the rollup DIP facility would be paid in full with reorganized equity at an implied equity value based on an assumed plan enterprise value of $145 million after deducting the estimated funded portion of the exit facilities and any DIP take-back loans on the effective date, (b) at least $95 million (assuming $30 million outstanding under the first lien facility become the DIP rollup claims) of first lien secured claims would be converted to equity, and (c) $106.5 million of first lien and second lien deficiency claims would be treated as GUCs and in turn receive no distribution on those claims.
The proposed restructuring would deleverage the company’s capital structure as follows:
The first day hearing is scheduled for tomorrow, Tuesday, April 27, at 1:30 p.m. ET.
The company reports $100 million to $500 million in both assets liabilities, and its prepetition capital structure includes:
- Secured debt:
- First lien (Seaport Loan Products and Acquiom Agency Services, as co-agents): $197 million (including accrued interest)
- Second lien (Goldman Sachs Specialty Lending Group as agent): $34 million (including accrued interest)
- Equity: The debtors are privately held. A list of equityholders follows:
The debtors are represented by Chipman Brown Cicero & Cole as counsel, Skadden, Arps, Slate, Meagher & Flom as special bankruptcy counsel, M3 Advisory Partners as financial advisor and Raymond James & Associates as investment banker. KCC is the claims agent. Mohsin Meghji and Keshav Lall of M3 Partners are the co-chief restructuring officers. The case has been assigned to Judge J. Kate Stickles (case No. 21-10745).
Events Leading to the Bankruptcy Filing / Prepetition Restructuring Efforts
The debtors attribute the bankruptcy filing to an (i) inability to circumvent certain projected covenant defaults regarding the debtors’ prepetition revolver, reducing the company’s ability to access liquidity and, consequently, its ability to replace attrition and grow their business through new contract generation and (ii) the Covid-19 pandemic, which curbed door-to-door sales activity and in-home installations, a significant source of the debtors’ new contracts, and led to increased costs regarding maintaining employee health, transitions to remote working and overtime pay.
“As a result of the current economic environment, disruption within the home security industry, and the decision by two of the Debtors’ major lenders to exit all home security loans, the Debtors defaulted under both of their credit agreements,” the debtors say, adding that these defaults left the debtors unable to draw on their revolving credit facility and stressing that they also lack significant cash reserves.
The pandemic also affected the debtors’ efforts to raise capital and pay down debt. Prior to the pandemic, the debtors had signed letters of intent with two parties for certain asset divestitures, and confirmatory diligence was nearly completed. However, both potential purchasers materially reduced their offers post-pandemic, rendering the transactions no longer viable.
Seeking additional liquidity to extend the time available to pursue a transaction, on April 27, 2020, the debtors obtained a $6.8 million loan under the federal Paycheck Protection Program. While the PPP loan was obtained to extend the debtors’ runway for a potential out-of-court transaction or solution, the defaults triggered “severely constrained the Debtors’ ability to do so.” Consequently, the debtors and their lenders entered into forbearance agreements to allow for the pursuit of an M&A transaction.
The debtors also pursued multiple potential refinancing proposals, recapitalizations and potential sale transactions with prospective purchasers. Numerous potential lenders and acquirors were solicited, data rooms were established, and due diligence was conducted, eventually resulting in several letters of intent for potential going concern sales. The forbearance agreements were amended and extended multiple times to permit these processes and negotiations to continue.
As a result of these efforts, the debtors eventually garnered the support of their first lien lenders and entered into a letter of intent that contemplated a sale transaction with a third party and an initial two-week exclusivity period. As the debtors continued to negotiate the details of the contemplated sale with the third-party buyer and their first lien lenders, they agreed to two subsequent two-week extensions of the exclusivity period.
Substantially concurrent with the expiration of the exclusivity period (as extended), the buyer informed the debtors that it would not be able to clear financing contingencies to allow it to consummate the contemplated sale. The debtors and their advisors promptly pivoted to further engage with the majority holder of the debtors' first lien obligations, Invesco, and the remainder of the first lien lenders regarding an alternative transaction and restructuring proposal. After further negotiations, the debtors reached an agreement with the first lien lenders on the terms of a plan of reorganization.
Background
Secure Home Holdings, headquartered in Newtown Square, Pa., with regional offices in Los Angeles, Atlanta and the Texas cities of Fort Worth, Houston, Tyler and San Antonio, is a national provider of technologically advanced security solutions, including residential and commercial security systems, home automation systems, smoke and carbon monoxide detectors, and other security offerings. The debtors’ family of security brands include “such well-known national and regional brands” as My Alarm Center, Alarm Monitoring Service of Atlanta, Hawk Security Services, ACS Security and LivSecure.
The company’s revenue is primarily derived through alarm monitoring contracts, accounting for $88 million of revenue in 2020, and to a lesser extent installation and other services, which totaled $7 million in 2020.
The debtors’ products include home security equipment installation, monitoring and support services, “smart” home applications, alarm equipment and support services (smoke, fire, carbon monoxide, flood and intrusion), monitoring services and premier home security, guard patrols and guard response services.
The debtors have approximately 491 full and part-time employees and utilize contractors, subcontractors, temporary employees, consultants and third-party service providers of support, building, call center operations, field work, installations and repairs and other services.
Secure Home’s corporate organizational structure is shown below:
The debtors’ largest unsecured creditors are listed below:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| Goldman Sachs Specialty
Lending Group LP |
Irving, Texas | Bank Debt | $ 33,950,283 |
| Invesco Credit Partners
Master Fund II LP |
New York | Bank Debt | 14,956,336 |
| Invesco Senior Floating
Rate Fund |
New York | Bank Debt | 11,395,325 |
| Woodforest National Bank | Woodlands, Texas | PPP | 6,063,085 |
| CIT Bank NA | New York | Bank Debt | 6,063,085 |
| OCM FIE LLC | Los Angeles | Management
Fee |
2,900,000 |
| Invesco Floating Rate
ESG Fund |
New York | Bank Debt | 2,517,787 |
| Invesco European Senior
Loan Fund |
New York | Bank Debt | 1,992,891 |
| Invesco Credit Partners
Opportunities Fund 2020 |
New York | Bank Debt | 1,914,858 |
| Invesco Dynamic Credit
Opportunities |
New York | Bank Debt | 1,750,081 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Counsel | Robert A. Weber | Chipman
Brown Cicero & Cole |
Wilmington, Del. |
| Mark D. Olivere | |||
| William E. Chipman Jr. | |||
| Mark L. Desgrosseilliers | |||
| Debtors' Special
Bankruptcy Counsel |
Van C. Durrer II | Skadden, Arps,
Slate, Meagher & Flom |
Los Angeles |
| Destiny N. Almogue | |||
| Debtors' Financial
Advisor |
Mohsin Meghji (co-CRO) | M3 | New York |
| Keshav Lall (co-CRO) | |||
| Debtors' Investment
Banker |
Geoffrey Richards | Raymond
James |
St. Petersburg, Fla. |
| Counsel to the
First Lien Agents and DIP Agents |
Gregg M. Galardi | Ropes & Gray | New York |
| Robb Tretter | |||
| Co-Counsel to
Goldman Sachs Specialty Lending Group |
Gabriel A. Morgan | Weil, Gotshal
& Manges |
New York |
| Daphne S. Papadatos | |||
| Co-Counsel to
Goldman Sachs Specialty Lending Group |
Zachary I. Shapiro | Richards,
Layton & Finger |
Wilmington, Del. |
| Debtors' Claims
Agent |
Evan Gershbein | Kurtzman
Carson Consultants |
El Segundo, Calif. |
DIP Financing Motion
The debtors request a $45 DIP facility, including $15 million of new-money term loans on an interim basis, and a rollup of $30 million of prepetition first lien obligations upon entry of the final order, with a majority of prepetition first lien lenders serving as DIP lenders, prepetition agents Seaport Loan Products and Acquiom Agency Services serving as co-administrative agents and Acquiom Agency Services as serving as collateral agent.
According to the DIP credit agreement, the debtors would be permitted (a) to draw up to $10 million of new-money loans during the interim period, plus an additional $5 million subject to a minimum liquidity amount of “[$1,500,000],” and (b) if during the interim period, the debtors have not borrowed more than $10 million, then they may request an additional $5 million during the final period, subject to the minimum liquidity amount.
The DIP financing bears interest at the eurodollar rate plus 5% or the base rate plus 4% with respect to new-money term loans, and the eurodollar rate plus 4.25% or the base rate plus 3.25% with respect to rollup loans (plus 2% for the default interest rate in any instance). The DIP financing matures on the earliest of (i) 90 days after closing, (ii) 23 days after the petition date if the final DIP order has yet to be entered, (iii) 35 days after the petition date if the final DIP hearing is at the confirmation hearing, (iv) the effective date of any plan of reorganization, (v) the date that is the earlier of (a) the date of a sale of all or substantially all of the debtors’ assets under section 363 and (b) 15 days after entry of any order approving a sale of all or substantially all of the debtors’ assets, and (vi) other customary events.
To secure the DIP financing, the debtors propose to grant priming liens, with the consent of the first lien and second lien lenders, on all of DIP collateral constituting prepetition collateral, subject only to the carve-out and “Permitted Prior Liens.” Upon entry of the final order, the DIP liens would encumber avoidance action proceeds and the proceeds from any disposition of leaseholds.
In support of the proposed DIP financing, the debtors filed the declaration of Raymond James managing director Geoffrey Richards, who states that Raymond James conducted a market check by seeking competing DIP financing offers from the debtors’ second lien lenders and 12 other prospective lenders. No other proposals were received. The primary reasons for the lack of competing proposals were because (i) the first lien lenders are unwilling to permit a priming lien in favor of a third party and (ii) the other potential lenders are unwilling to provide a DIP facility junior to the first lien lenders.
The facility includes various fees, including a 1% upfront fee, agent fees pursuant to an agency fee letter and the payment of (i) all reasonable and documented out-of-pocket expenses incurred by each agent and its related parties, (ii) all reasonable and documented out-of-pocket expenses, up to $10,000, incurred by CIT and its related parties, and (iii) all reasonable and documented out-of-pocket expenses, up to $10,000, incurred by First Midwest and its related parties.
In exchange for a waiver and consent fee of $1 million for the benefit of the prepetition second lien secured lenders and no more than $200,000 of legal fees of the prepetition second lien agent, the prepetition second lien secured lenders have agreed to consent to the DIP facility. The second lien lenders have also agreed to waive certain rights under an intercreditor agreement including a “first lien cap,” agree to support and not contest the plan, consent to the treatment of their unsecured deficiency claim in the same manner as the first lien deficiency claim and to be bound by any third-party releases in an approved plan. The debtors filed a motion to file the DIP financing fee letter under seal.
The company proposes adequate protection to its prepetition first lien lenders in the form of replacement liens, superpriority claims and payment of fees and expenses.
In addition, the debtors propose 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), in each instance subject to the final order.
The carve-out for professional fees is $150,000 plus any “Transaction Fees” if earned and payable up to $3.975 million, less all credits, as contemplated by the engagement letter between the debtors and Raymond James for the debtors’ professionals and $50,000 for UCC professionals.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
- Order approving plan and disclosure statement: June 1 (35 days after the petition date);
- Plan consummation: June 14 (50 days after the petition date)
The lien challenge deadline is the earlier of confirmation of a plan or 75 days after entry of the interim order. The UCC lien investigation budget is $25,000.
Solicitation Procedures Motion / Confirmation Timeline
The debtors’ disclosure statement approval motion proposes the following confirmation-related timeline:
Plan of Reorganization / Disclosure Statement
Treatment of Claims and Interests
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
The first lien secured claims would receive new equity remaining after issuance of the DIP equity allocation (new equity issued to the DIP lenders at at implied equity value based on an assumed plan enterprise value of $145 million after deducting the estimated funded portion of the exit facilities and any DIP take-back loans on the effective date, subject to dilution from the management incentive plan).
The second lien secured claims are fixed at $0 and the second lien deficiency claims, to be included in the class of general unsecured claims, are allowed, for purposes of the plan, at approximately $34 million.
DIP Claims
The DIP lenders would receive (a) payment in full of the amounts outstanding under the new-money DIP facility and any interest accrued under the DIP facility, payable in either cash or (with the prior written consent of the consenting secured lenders) an equal amount of DIP take-back loans and (b) payment in full of the principal amounts outstanding under the rollup DIP facility (of $30 million), payable in a pro rata share of the DIP equity allocation.
Management Incentive Plan
The plan contemplates a management incentive plan with terms to be included in a plan supplement.
Liquidation Analysis
The DS includes a hypothetical liquidation analysis assuming a chapter 7 liquidation on April 25, concluding the following recovery estimates under a chapter 11 plan and chapter 7 liquidation:
The full liquidation analysis follows:
(Click HERE to enlarge.)
Financial Projections
The DS includes financial projections for the seven-month period ended December 2021 and for fiscal years ending December 2022 through 2025.
(Click HERE to enlarge)
Valuation
The debtors’ investment banker, Raymond James & Associates, has prepared a valuation analysis assuming a reorganization on June 18, based on financial projections for fiscal years ending December 2021 to 2025.
Based on the financial projections and solely for purposes of the plan, Raymond James estimates that the enterprise value of the debtors falls is between $115 million and $175 million, with a midpoint of approximately $145 million.
Other Plan Provisions
The plan provides for releases of (a) the debtors, (b) the DIP agents, (c) the DIP lenders, (d) the first lien agents, (e) the second lien agent, (f) each prepetition secured lender, (g) the exit agent and (h) each of the exit lenders. In addition, the plan includes an exculpation provision in favor of the debtors, the reorganized debtors and the released parties.
Under the plan, the members of the new board would be designated in a plan supplement.
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. 21-10745.
- Motion to pay employee wages and benefits
- The debtors seek to pay employee obligations as follows:
- Motion to use cash management system
- The company has bank accounts with Bank of America and Signature Bank.
- Motion to maintain insurance programs
- Motion to pay taxes and fees
- The debtors seek approval to pay up to $426,003 in taxes and fees on an interim basis, with up to $566,003 in total payment sought on a final basis.
- Motion to honor customer programs
- The debtors seek to honor customer program obligations up to $2.2 million on an interim basis and up to $2.8 million on a final basis.
- Motion to provide utilities with adequate assurance
- Motion to file consolidated creditors lists
- Application to appoint Kurtzman Carson Consultants as claims agent
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