Cypress Environmental Partners LP
CASE SUMMARY: Cypress Environmental Prepack Provides 100% of New Equity to Prepetition and DIP Lender Argonaut Private Equity
Mon 05/09/2022 14:11 PM
Relevant Documents:
Voluntary Petition
Press Release
First Day Declaration
Shah Plan Declaration
DIP Financing Motion
Plan of Reorganization
Disclosure Statement
DS Approval Motion
First Day Hearing Agenda
Cypress Environmental Partners Restructuring Update:
Cypress Environmental Partners, a Tulsa, Okla.-based inspection services and water and environmental services business, filed for chapter 11 protection on Sunday, May 8, in the Bankruptcy Court for the Southern District of Texas. The company primarily serves the energy and municipal water industries
According to the first day declaration of Peter Boylan III, the debtors’ chairman and chief executive officer, the debtors commenced chapter 11 to implement the terms of an RSA, which “contemplates eliminating nearly $60 million in prepetition secured debt, paying substantially all of the unsecured creditors in full, and is supported by the Debtors’ prepetition lender.”
As outlined by Boylan, the debtors were unable to refinance their sole funded debt obligation, a credit agreement with $58.9 million owed as of the petition date and Deutsche Bank as agent. Deutsche Bank and six other lenders sold their interests in the loan to Argonaut Private Equity on April 22. “Immediately” after the loan sale, Argonaut and the debtors began negotiations on a reorganization, and they entered into their RSA on Friday, May 6.
The RSA with Argonaut provides for a debt-to-equity recapitalization transaction, pursuant to which Argonaut would receive 100% of the new equity of the reorganized company, subject to dilution by a management incentive plan. The company’s press release adds that “the Plan provides for the payment in full of priority and trade claims and an equity commitment from Argonaut to provide working capital to the Reorganized Company upon emergence.” Argonaut has also agreed to provide $5 million in DIP financing.
Pursuant to the prepackaged plan, the prepetition first lien lenders and DIP lender would receive a pro rata allocation of 100% of the new equity (subject to potential dilution by a management incentive plan) in full satisfaction of the prepetition loan and DIP loan. The allocation of new equity between DIP claims and loan claims is governed by the plan’s “Pro Rata New Interest Allocation.” Upon emergence, APE V Cypress LLC (the DIP agent and an affiliate of Argonaut) would provide post-effective-date funding to the reorganized company “necessary to fund the operations of the Reorganized Debtors through (i) an equity investment or (ii) debt financing.” The plan supplement will include a funding commitment letter for this post-effective funding.
Trade claims (estimated at $250,048) would be reinstated or paid in full in cash to the extent the claimants agree to continue doing business with the debtors; other general unsecured claims (estimated at $74,000) would be discharged with no distribution. Existing equity interests in Cypress Environmental Partners would be extinguished.
Cypress’ press release adds that the company’s outstanding common units preferred units will have “no value” after the reorganization.
The first day hearing is set for today, Monday, May 9, at 2:30 p.m. ET.
The company reports $97 million in assets and $62.4 million in liabilities. The company’s prepetition capital structure includes:
According to the first day declaration, the company’s credit agreement is secured by a first priority lien on substantially of the borrower's assets. The borrowers under the credit agreement are Cypress Environmental Partners LP, or CELP, as well as Tulsa Inspection Resources - Canada ULC, and “certain wholly-owned subsidiaries of CELP.” The declaration notes that the company failed to make a scheduled interest payment on April 15.
In its May 2020 investor presentation, the company wrote that “out of an abundance of caution [it] drew down the credit facility line to maximize liquidity,” though it did not give exact timing of the draw.
As shown in the organizational chart below, which was provided in the declaration, substantially all of the debtors’ subsidiaries are listed as guarantors, with the exception of five nondebtor subsidiaries. It is unclear what assets are located at the nondebtor subsidiaries. The Canadian entity named above is a co-borrower, along with CELP, while all other entities are guarantors;the structure of the Canadian entity is detailed below.
The company has one series of preferred equity outstanding, which is owned by Charles Stephenson. Stephenson provided a $43.5 million preferred equity investment in May 2018 as part of a renewal of the company’s credit agreement with its lenders at the time.
The debtors have $3.6 million in cash on hand as of the petition date.
A declaration by Sanjiv Shah of Piper Sandler, the debtors’ investment banker, provides an estimate of the debtors’ current total enterprise valuation at approximately $15 million, an amount that he observes is “significantly less than the aggregate amount owed to the prepetition secured lender.”
The debtors are represented by Paul Hastings as counsel, FTI Consulting as financial advisor and Piper Sandler as investment banker. KCC is the claims agent. The case has been assigned to Judge Marvin Isgur (the jointly administered case number is 22-90039).
Events Leading to the Bankruptcy Filing
The company attributes its filing in part to litigation arising in connection with the Fair Labor Standards Act, or FLSA, which it says had a “material adverse impact,” as well as market downturn and the onset of the Covid-19 pandemic. The debtors point to “back-to-back energy downturns” beginning with an OPEC price war from 2015 to 2017, and a Saudi Arabia-initiated price war on oil with Russia in 2020, which along with the pandemic and the litigation created the “perfect storm” requiring the chapter 11 filing.
Cypress had its “best year in history” in 2019 after a rebound in the energy market in 2018 and 2019, but that rebound proved to be “short-lived” when commodity prices declined in 2020. The company took cost-cutting measures in 2020 and 2021. Despite crude oil price increases in 2020 and 2021, Cypress says that its customers have not increased new projects sufficient to offset the prior downturn. The debtors add that their business development efforts have been unfruitful so far in 2022.
The debtors have also spent millions of dollars defending lawsuits under the FLSA, including $1.9 in legal fees in 2021. Early this year, the debtors agreed to settle 64 of the FLSA claims for $1 million, representing most of the known claims asserted directly against the debtors. These claims are generally not covered by the debtors’ insurance. The issue in the FLSA lawsuits is that the debtors, their customers and their competitors have historically paid inspectors on a day rate instead of an hourly basis on the basis that the inspectors worked remotely on customer sites, making it difficult to verify the hours worked, and also provided a variable schedule based on weather, time of year and the contractors’ schedules. However, during the 2015 to 2017 downturn in the industry, inspectors began litigation against the debtors and others, alleging that they were entitled to hourly wages with overtime under the FLSA. Inspectors have also sued the debtors’ customers, asserting that the customers were co-employers under the FLSA, and the customers have asserted indemnification claims against the debtors. The debtors say that many of their competitors are experiencing similar litigation claims, and “several” have shut down.
The first day declaration notes that the U.S. Supreme Court has decided to hear a case on a petition from Helix Energy Solutions Group Inc. to review a Fifth Circuit decision under the FLSA “regarding whether an oil rig worker earning six figures is entitled to overtime pay under the Fair Labor Standards Act, teeing up a fight on a foundational principle of wage and hour law.” The debtors say that this case will not resolve the issues that the debtors have already settled, but they say that it “highlights the negative impact this litigation can have for businesses in this industry” and that the case has “resonated” in the industry.
Because of the FLSA litigation, the debtors switched to hourly rates in January 2022, resulting in 20% of their inspectors resigning, including critical employees that could not be adequately replaced by other staff, one of whom ultimately sued the debtors after he was laid off
The company explored strategic alternatives beginning in 2018, with the retention of Evercore as investment banker, but “no viable options materialized.” Cypress was left with “very few options,” with its secured loan maturing in 2018, after already cutting distribution to equity investors by 50% in 2017 and selling its water treatment facilities in West Texas to pay down debt. In May 2018, Stephenson, whose family controlled the general partner of CELP - nondebtor Cypress Environmental Partners GP LLC - agreed to provide a $43.5 million preferred equity investment as part of the negotiations with the secured lenders on a three-year renewal on the loan. In summer 2018, the debtors signed a letter of intent with a private equity group to recapitalize the debtors and acquire control of the general partner, but the FLSA litigation led to a loss of this opportunity. After a favorable FLSA ruling, the private equity investor signed a new letter of intent on substantially similar terms but ultimately terminated the letter of intent when energy prices collapsed and the pandemic hit in early 2020.
Cypress was also harmed by the chapter 11 filings of PG&E (when Cypress was exposed to approximately $12 million in unpaid accounts receivable from PG&E, one of the debtors’ most “significant” customers), and of Sanchez Energy Corp (the result of which the Cypress wrote off a balance of $500,000, the “largest loss in the Debtors’ history and more profit than they ever made from Sanchez”).
The loan agreement was extended for one year in March 2021. The debtors requested a covenant waiver for the period ending June 2021, and ultimately the lenders agreed to a waiver, with conditions including the retention of FTI Consulting as financial advisor to create a business plan and to assist with “extensive” additional reporting requirements. The debtors say that despite the debtors and FTI engaging with the lenders on various proposals, there was “no material progress.” In early 2022, the lenders hired Riveron Consulting, after which the parties continued to negotiate a potential one-year renewal term sheet. However, citing the need for unanimous consent from all seven lenders, the debtors’ board determined by March 2022 that such a solution was not possible.
The debtors commenced a “robust” marketing process for their business in March in addition to exploring a capital raise for a potential restructuring. After executing confidentiality agreements with 23 groups, the debtors investment banker received three written indications of interest: one for the purchase of the assets associated with the environmental services segment, one for substantially all of the debtors’ assets but contingent on additional due diligence, and one from Argonaut which included an offer to purchase all of the assets of the debtors or, in the alternative, an offer to purchase the debtors’ existing loan obligations.
According to Piper Sandler’s Shah, on the basis of the IOIs, a 363 sale process “would have provided little to no residual value” to the former lenders and could have subjected the former lenders and the debtors’ business to “substantial execution risk.” Ultimately, the debtors decided to pursue the loan sale to Argonaut and subsequent RSA.
Background
The company provides inspection, water treatment and other environmental services primarily to the energy and municipal water industries. Inspection services is the debtors primary business segment, providing “essential environmental services,” including visual inspection, non-destructive testing and examination, and inspection support services for pipeline and other operators. Under its environmental services segment, the company owns and operates water treatment facilities in North Dakota for the service of oil and gas companies.
In its most recent investor presentation, the company said that its pipeline services business had “80+ customers” in North America, which were primarily publicly traded companies. Its water and environmental services, or WES, business serviced “80+ customers” in North Dakota. In 2019, the company said its WES gross margin was 71% and had “excellent free cash flow.” The company also noted that in 2020, it was challenged by customers that “requested price concessions, deferred new construction projects … and reduced non essential spending.”
Revenue from the inspection services segment (i) decreased from $372 million in 2019 to $181.5 million in 2020, a decrease of 51%, with gross margins in this segment decreasing from $40.5 million in 2019 to $19.8 million in 2020, a decrease of 51%; and (ii) decreased from $181.5 million during 2020 to $113 million during 2021, a decrease of 38%, with gross margins in this segment decreasing from $19.8 million during 2020 to $13 million during 2021, a decrease of 34%. “This extraordinary decline in revenues and gross margins left CELP with too much debt despite the material cost reductions,” the debtors say.
Revenue from CELP’s environmental services segment (i) decreased from $10.3 million in 2019 to $5.8 million in 2020, a decrease of 44%, with gross margins in this segment decreasing from $7.3 million in 2019 to $3.7 million in 2020, a decrease of 49%; and (ii) decreased from $5.8 million in 2020 to $4.3 million in 2021, a decrease of 25%, with gross margins in this segment decreasing from $3.7 million in 2020 to $2.6 million in 2021, a decrease of 32%.
The debtors also have a joint venture with CF Inspection Management LLC which allows the company to offer various services to clients that require the services of an approved Women’s Business Enterprise. The debtors own 49% of CF Inspection, and Cynthia Field, an affiliate of Holdings, Cypress Environmental Partners’ largest common unit holder, and a director of Cypress Environmental Partners GP (the general partner of Cypress Environmental Partners) owns the remaining 51% of CF Inspection. For 2021, 2020 and 2019, CF Inspection, which is part of the inspection services segment, represented 9%, 6% and 3% of Cypress’ consolidated revenue, respectively.
The company's Canadian subsidiary Tulsa Inspection Resources - Canada ULC is designated as an unlimited liability corporation. According to Canadian law firm Miller Thomson, one of the primary reasons for a U.S. parent to designate its Canadian subsidiary as a ULC is to achieve favorable tax treatment when the US company is the sole shareholder of the ULC. However, “shareholders of a ULC … will be liable for the ULC’s debts and liabilities if the ULC liquidates or dissolves and cannot pay such debts and liabilities.”
Since the ULC sole owner is Tulsa Inspection Resources LLC, according to the organization chart, which is also a guarantor to the credit agreement, the immediate implications are unclear without knowing the exact assets existing at the Canadian entity.
The company’s general partner is Cypress Environmental Partners GP LLC. All of the equity interests in the GP are owned indirectly by Cypress Environmental Holdings LLC, a company that is controlled by Charles Stephenson, as well as various family members and affiliates, and CEP Capital Partners, an entity “controlled by me,” referring to Peter Boylan, the first day declarant.
The debtors' largest unsecured creditors are listed below:
The case representatives are as follows:
DS Approval Motion / Confirmation Timeline
The debtors’ disclosure statement approval motion proposes the following confirmation-related timeline:
Plan of Reorganization / Disclosure Statement
A chart of the plan’s classes, along with their impairment status and voting rights, is shown below:
The only class of claims entitled to vote is Class 3 - prepetition first lien credit agreement claims, which has voted to accept the plan.
Treatment of Claims and Interests
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
Plan Milestones
The RSA provides for the following milestones:
Management Incentive Plan
The plan contemplates a management incentive plan to be implemented by the reorganized debtors that would reserve a certain percentage of new interests as determined by the reorganized debtors and the prepetition first lien lenders on a fully diluted, fully distributed basis.
Liquidation Analysis
The debtors’ hypothetical liquidation analysis is shown below:
Financial Projections
The debtors envision revenue growth in each of the two years post-filing, with revenue rising from $109.2 million in 2023 to $138.1 million in 2025. The company also forecasts its adjusted EBITDA growing from $5.2 million in 2024 to $7.7 million in 2025.
However, by 2025 this would remain below the high water mark for the company. As noted in the first day declaration, the company’s best financial year was in 2019 when it “generat[ed] over $400 million in revenue and $31.4 million in Adjusted EBITDA.”
Other Plan Provisions
The plan provides for releases of: the debtors; the reorganized debtors; the prepetition first lien lenders; the prepetition first lien agent; the DIP lender; the DIP agent; Argonaut; and related parties. A party would not be a released party or a releasing party if it elects to opt out of the third-party release contained in the plan or timely objects to the third-party release contained in the plan and such objection is not resolved before plan confirmation.
In addition, the plan includes an exculpation provision in favor of the debtors; the reorganized debtors; Argonaut; the official committee of unsecured creditors, if any, and its members in their capacities as members; and related parties.
Under the plan, the number and identity of the members of the new board for the reorganized company would be selected and approved by Argonaut, to be included in a plan supplement.
DIP Financing Motion
The debtors seek approval of a new-money multidraw term loan facility in an aggregate principal amount of $5 million, with $3 million available on an interim basis. Debtor Cypress Environmental Partners LP would serve as borrower with its subsidiary debtors serving as guarantors. The DIP lender and DIP agent would be APE V Cypress LLC, an affiliate of Argonaut Private Equity, which purchased all the debtors’ loan obligations under its prepetition secured credit agreement on April 22.
The DIP financing bears interest at 9%, with 11% for the default rate, and matures on the earlier of (i) three months from the petition date, (ii) consummation of a sale of substantially all the debtors’ assets or (iii) confirmation of a plan.
The DIP proceeds may be used for ongoing business operations, paying administrative costs associated with the chapter 11 cases and satisfying working capital needs in the ordinary course of business. Cash collateral would also be used for the same purposes, including the payment of any required fees under the DIP credit agreement.
To secure the DIP financing, the debtors propose to grant first-priority senior priming security liens upon all prepetition and postpetition property of the debtors, junior liens on all prepetition and postpetition property and superpriority administrative expense claims. The debtors also propose granting first-priority liens on any unencumbered assets, including the proceeds of avoidance actions (but not on avoidance actions themselves).
The facility also includes an upfront fee equal to 1% of the DIP loans or $50,000.
In support of the DIP financing, the debtors submitted the declaration of Shah of Piper Sandler, who states that the debtors would “suffer immediate and irreparable harm” if the interim DIP order is not entered on an emergency basis in order for the debtors to continue operating and “working towards a value-maximizing restructuring.”
The company proposes following adequate protection package to the prepetition secured parties: replacement liens on the DIP collateral and allowed superpriority administrative expense claims, both subordinate to the DIP liens and DIP superpriority administrative expense claims; financial reporting; payment of the prepetition secured lenders’ prepetition and postpetition professionals’ fees and expenses and prepetition interest and postpetition interest payments at the applicable nondefault rate under the prepetition first lien credit agreement.
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).
The carve-out for professional fees is $60,000.
The proposed budget for the use of the DIP facility is HERE.
The lien challenge deadline is 60 days after the date of the notice of the formation of an official committee of unsecured creditors. In the case of other parties in interest, the challenge deadline is 60 days after the date of entry of the interim DIP order.
The UCC lien investigation budget is $35,000.
The DIP milestones are consistent with the plan and RSA milestones.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
Press Release
First Day Declaration
Shah Plan Declaration
DIP Financing Motion
Plan of Reorganization
Disclosure Statement
DS Approval Motion
First Day Hearing Agenda
Cypress Environmental Partners Restructuring Update:
| Summary |
| Cypress Environmental Partners is an inspection services and water and environmental services business |
| Enters chapter 11 with RSA with prepetition secured lender Argonaut Private Equity, which purchased the company’s secured debt on April 22 |
| Prepackaged plan provides for a debt-to-equity recapitalization, pursuant to which Argonaut, as prepetition secured lender and DIP lender, would receive 100% of the new equity |
| Argonaut has also agreed to provide $5 million in DIP financing |
Cypress Environmental Partners, a Tulsa, Okla.-based inspection services and water and environmental services business, filed for chapter 11 protection on Sunday, May 8, in the Bankruptcy Court for the Southern District of Texas. The company primarily serves the energy and municipal water industries
According to the first day declaration of Peter Boylan III, the debtors’ chairman and chief executive officer, the debtors commenced chapter 11 to implement the terms of an RSA, which “contemplates eliminating nearly $60 million in prepetition secured debt, paying substantially all of the unsecured creditors in full, and is supported by the Debtors’ prepetition lender.”
As outlined by Boylan, the debtors were unable to refinance their sole funded debt obligation, a credit agreement with $58.9 million owed as of the petition date and Deutsche Bank as agent. Deutsche Bank and six other lenders sold their interests in the loan to Argonaut Private Equity on April 22. “Immediately” after the loan sale, Argonaut and the debtors began negotiations on a reorganization, and they entered into their RSA on Friday, May 6.
The RSA with Argonaut provides for a debt-to-equity recapitalization transaction, pursuant to which Argonaut would receive 100% of the new equity of the reorganized company, subject to dilution by a management incentive plan. The company’s press release adds that “the Plan provides for the payment in full of priority and trade claims and an equity commitment from Argonaut to provide working capital to the Reorganized Company upon emergence.” Argonaut has also agreed to provide $5 million in DIP financing.
Pursuant to the prepackaged plan, the prepetition first lien lenders and DIP lender would receive a pro rata allocation of 100% of the new equity (subject to potential dilution by a management incentive plan) in full satisfaction of the prepetition loan and DIP loan. The allocation of new equity between DIP claims and loan claims is governed by the plan’s “Pro Rata New Interest Allocation.” Upon emergence, APE V Cypress LLC (the DIP agent and an affiliate of Argonaut) would provide post-effective-date funding to the reorganized company “necessary to fund the operations of the Reorganized Debtors through (i) an equity investment or (ii) debt financing.” The plan supplement will include a funding commitment letter for this post-effective funding.
Trade claims (estimated at $250,048) would be reinstated or paid in full in cash to the extent the claimants agree to continue doing business with the debtors; other general unsecured claims (estimated at $74,000) would be discharged with no distribution. Existing equity interests in Cypress Environmental Partners would be extinguished.
Cypress’ press release adds that the company’s outstanding common units preferred units will have “no value” after the reorganization.
The first day hearing is set for today, Monday, May 9, at 2:30 p.m. ET.
The company reports $97 million in assets and $62.4 million in liabilities. The company’s prepetition capital structure includes:
According to the first day declaration, the company’s credit agreement is secured by a first priority lien on substantially of the borrower's assets. The borrowers under the credit agreement are Cypress Environmental Partners LP, or CELP, as well as Tulsa Inspection Resources - Canada ULC, and “certain wholly-owned subsidiaries of CELP.” The declaration notes that the company failed to make a scheduled interest payment on April 15.
In its May 2020 investor presentation, the company wrote that “out of an abundance of caution [it] drew down the credit facility line to maximize liquidity,” though it did not give exact timing of the draw.
As shown in the organizational chart below, which was provided in the declaration, substantially all of the debtors’ subsidiaries are listed as guarantors, with the exception of five nondebtor subsidiaries. It is unclear what assets are located at the nondebtor subsidiaries. The Canadian entity named above is a co-borrower, along with CELP, while all other entities are guarantors;the structure of the Canadian entity is detailed below.
The company has one series of preferred equity outstanding, which is owned by Charles Stephenson. Stephenson provided a $43.5 million preferred equity investment in May 2018 as part of a renewal of the company’s credit agreement with its lenders at the time.
The debtors have $3.6 million in cash on hand as of the petition date.
A declaration by Sanjiv Shah of Piper Sandler, the debtors’ investment banker, provides an estimate of the debtors’ current total enterprise valuation at approximately $15 million, an amount that he observes is “significantly less than the aggregate amount owed to the prepetition secured lender.”
The debtors are represented by Paul Hastings as counsel, FTI Consulting as financial advisor and Piper Sandler as investment banker. KCC is the claims agent. The case has been assigned to Judge Marvin Isgur (the jointly administered case number is 22-90039).
Events Leading to the Bankruptcy Filing
The company attributes its filing in part to litigation arising in connection with the Fair Labor Standards Act, or FLSA, which it says had a “material adverse impact,” as well as market downturn and the onset of the Covid-19 pandemic. The debtors point to “back-to-back energy downturns” beginning with an OPEC price war from 2015 to 2017, and a Saudi Arabia-initiated price war on oil with Russia in 2020, which along with the pandemic and the litigation created the “perfect storm” requiring the chapter 11 filing.
Cypress had its “best year in history” in 2019 after a rebound in the energy market in 2018 and 2019, but that rebound proved to be “short-lived” when commodity prices declined in 2020. The company took cost-cutting measures in 2020 and 2021. Despite crude oil price increases in 2020 and 2021, Cypress says that its customers have not increased new projects sufficient to offset the prior downturn. The debtors add that their business development efforts have been unfruitful so far in 2022.
The debtors have also spent millions of dollars defending lawsuits under the FLSA, including $1.9 in legal fees in 2021. Early this year, the debtors agreed to settle 64 of the FLSA claims for $1 million, representing most of the known claims asserted directly against the debtors. These claims are generally not covered by the debtors’ insurance. The issue in the FLSA lawsuits is that the debtors, their customers and their competitors have historically paid inspectors on a day rate instead of an hourly basis on the basis that the inspectors worked remotely on customer sites, making it difficult to verify the hours worked, and also provided a variable schedule based on weather, time of year and the contractors’ schedules. However, during the 2015 to 2017 downturn in the industry, inspectors began litigation against the debtors and others, alleging that they were entitled to hourly wages with overtime under the FLSA. Inspectors have also sued the debtors’ customers, asserting that the customers were co-employers under the FLSA, and the customers have asserted indemnification claims against the debtors. The debtors say that many of their competitors are experiencing similar litigation claims, and “several” have shut down.
The first day declaration notes that the U.S. Supreme Court has decided to hear a case on a petition from Helix Energy Solutions Group Inc. to review a Fifth Circuit decision under the FLSA “regarding whether an oil rig worker earning six figures is entitled to overtime pay under the Fair Labor Standards Act, teeing up a fight on a foundational principle of wage and hour law.” The debtors say that this case will not resolve the issues that the debtors have already settled, but they say that it “highlights the negative impact this litigation can have for businesses in this industry” and that the case has “resonated” in the industry.
Because of the FLSA litigation, the debtors switched to hourly rates in January 2022, resulting in 20% of their inspectors resigning, including critical employees that could not be adequately replaced by other staff, one of whom ultimately sued the debtors after he was laid off
The company explored strategic alternatives beginning in 2018, with the retention of Evercore as investment banker, but “no viable options materialized.” Cypress was left with “very few options,” with its secured loan maturing in 2018, after already cutting distribution to equity investors by 50% in 2017 and selling its water treatment facilities in West Texas to pay down debt. In May 2018, Stephenson, whose family controlled the general partner of CELP - nondebtor Cypress Environmental Partners GP LLC - agreed to provide a $43.5 million preferred equity investment as part of the negotiations with the secured lenders on a three-year renewal on the loan. In summer 2018, the debtors signed a letter of intent with a private equity group to recapitalize the debtors and acquire control of the general partner, but the FLSA litigation led to a loss of this opportunity. After a favorable FLSA ruling, the private equity investor signed a new letter of intent on substantially similar terms but ultimately terminated the letter of intent when energy prices collapsed and the pandemic hit in early 2020.
Cypress was also harmed by the chapter 11 filings of PG&E (when Cypress was exposed to approximately $12 million in unpaid accounts receivable from PG&E, one of the debtors’ most “significant” customers), and of Sanchez Energy Corp (the result of which the Cypress wrote off a balance of $500,000, the “largest loss in the Debtors’ history and more profit than they ever made from Sanchez”).
The loan agreement was extended for one year in March 2021. The debtors requested a covenant waiver for the period ending June 2021, and ultimately the lenders agreed to a waiver, with conditions including the retention of FTI Consulting as financial advisor to create a business plan and to assist with “extensive” additional reporting requirements. The debtors say that despite the debtors and FTI engaging with the lenders on various proposals, there was “no material progress.” In early 2022, the lenders hired Riveron Consulting, after which the parties continued to negotiate a potential one-year renewal term sheet. However, citing the need for unanimous consent from all seven lenders, the debtors’ board determined by March 2022 that such a solution was not possible.
The debtors commenced a “robust” marketing process for their business in March in addition to exploring a capital raise for a potential restructuring. After executing confidentiality agreements with 23 groups, the debtors investment banker received three written indications of interest: one for the purchase of the assets associated with the environmental services segment, one for substantially all of the debtors’ assets but contingent on additional due diligence, and one from Argonaut which included an offer to purchase all of the assets of the debtors or, in the alternative, an offer to purchase the debtors’ existing loan obligations.
According to Piper Sandler’s Shah, on the basis of the IOIs, a 363 sale process “would have provided little to no residual value” to the former lenders and could have subjected the former lenders and the debtors’ business to “substantial execution risk.” Ultimately, the debtors decided to pursue the loan sale to Argonaut and subsequent RSA.
Background
The company provides inspection, water treatment and other environmental services primarily to the energy and municipal water industries. Inspection services is the debtors primary business segment, providing “essential environmental services,” including visual inspection, non-destructive testing and examination, and inspection support services for pipeline and other operators. Under its environmental services segment, the company owns and operates water treatment facilities in North Dakota for the service of oil and gas companies.
In its most recent investor presentation, the company said that its pipeline services business had “80+ customers” in North America, which were primarily publicly traded companies. Its water and environmental services, or WES, business serviced “80+ customers” in North Dakota. In 2019, the company said its WES gross margin was 71% and had “excellent free cash flow.” The company also noted that in 2020, it was challenged by customers that “requested price concessions, deferred new construction projects … and reduced non essential spending.”
Revenue from the inspection services segment (i) decreased from $372 million in 2019 to $181.5 million in 2020, a decrease of 51%, with gross margins in this segment decreasing from $40.5 million in 2019 to $19.8 million in 2020, a decrease of 51%; and (ii) decreased from $181.5 million during 2020 to $113 million during 2021, a decrease of 38%, with gross margins in this segment decreasing from $19.8 million during 2020 to $13 million during 2021, a decrease of 34%. “This extraordinary decline in revenues and gross margins left CELP with too much debt despite the material cost reductions,” the debtors say.
Revenue from CELP’s environmental services segment (i) decreased from $10.3 million in 2019 to $5.8 million in 2020, a decrease of 44%, with gross margins in this segment decreasing from $7.3 million in 2019 to $3.7 million in 2020, a decrease of 49%; and (ii) decreased from $5.8 million in 2020 to $4.3 million in 2021, a decrease of 25%, with gross margins in this segment decreasing from $3.7 million in 2020 to $2.6 million in 2021, a decrease of 32%.
The debtors also have a joint venture with CF Inspection Management LLC which allows the company to offer various services to clients that require the services of an approved Women’s Business Enterprise. The debtors own 49% of CF Inspection, and Cynthia Field, an affiliate of Holdings, Cypress Environmental Partners’ largest common unit holder, and a director of Cypress Environmental Partners GP (the general partner of Cypress Environmental Partners) owns the remaining 51% of CF Inspection. For 2021, 2020 and 2019, CF Inspection, which is part of the inspection services segment, represented 9%, 6% and 3% of Cypress’ consolidated revenue, respectively.
(Click HERE to enlarge.)
The company's Canadian subsidiary Tulsa Inspection Resources - Canada ULC is designated as an unlimited liability corporation. According to Canadian law firm Miller Thomson, one of the primary reasons for a U.S. parent to designate its Canadian subsidiary as a ULC is to achieve favorable tax treatment when the US company is the sole shareholder of the ULC. However, “shareholders of a ULC … will be liable for the ULC’s debts and liabilities if the ULC liquidates or dissolves and cannot pay such debts and liabilities.”
Since the ULC sole owner is Tulsa Inspection Resources LLC, according to the organization chart, which is also a guarantor to the credit agreement, the immediate implications are unclear without knowing the exact assets existing at the Canadian entity.
The company’s general partner is Cypress Environmental Partners GP LLC. All of the equity interests in the GP are owned indirectly by Cypress Environmental Holdings LLC, a company that is controlled by Charles Stephenson, as well as various family members and affiliates, and CEP Capital Partners, an entity “controlled by me,” referring to Peter Boylan, the first day declarant.
The debtors' largest unsecured creditors are listed below:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| American Arbitration Association | Dallas | Professional | $ 158,675 |
| Philips 66 Company | Houston | Indemnity | 73,507 |
| Commissioners of the Land Office | Oklahoma City | Trade | 44,384 |
| Dell Maketing L.P. | Round Rock, Texas | Trade | 30,115 |
| Shi International Corp. | Somerset, N.J. | Trade | 24,929 |
| Geochemicals LLC | Hutchinson, Kan. | Trade | 21,726 |
| Shale Oilfield Services LLC | Williston, N.D. | Trade | 16,515 |
| Owl Inc. | Culbertson, Md. | Trade | 9,294 |
| Avery Interprises Inc. | Powers Lake, N.D. | Trade | 6,803 |
| Oracle America Inc. | Austin, Texas | Trade | 3,968 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Counsel | James Grogan | Paul Hastings | Houston |
| Scott C. Shelley | New York | ||
| Justin Rawlins | Century City, Calif. | ||
| Matthew Micheli | Chicago | ||
| Matthew Smart | |||
| Michael Jones | |||
| Angelika Glogowski | |||
| Debtors'
Financial Advisor |
NA | FTI Consulting | NA |
| Debtors' Investment
Banker |
Sanjiv Shah | Piper
Sandler & Co. |
Minneapolis |
| Debtors' Claims
Agent |
Drake D. Foster | Kurtzman
Carson Consultants |
El Segundo, Calif. |
| Evan Gershbein | |||
| Counsel to
DIP Agent and Prepetition First Lien Agent |
Samuel Ory |
Frederic
Dorwart |
Tulsa, Okla. |
| Ari Rotenberg | |||
| United States Trustee | Stephen Statham |
Office of
the U.S. Trustee |
Houston |
DS Approval Motion / Confirmation Timeline
The debtors’ disclosure statement approval motion proposes the following confirmation-related timeline:
Plan of Reorganization / Disclosure Statement
A chart of the plan’s classes, along with their impairment status and voting rights, is shown below:
The only class of claims entitled to vote is Class 3 - prepetition first lien credit agreement claims, which has voted to accept the plan.
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 priority claims: Payment in full in cash or other treatment to render the claim unimpaired, including reinstatement.
- Class 2 - Other secured claims: In the sole discretion of the reorganized debtors, either (i) payment in full in cash including interest allowed and payable under section 506(b) of the Bankruptcy Code, (ii) delivery of the collateral securing the claim or (iii) other treatment that renders the claim unimpaired, including reinstatement.
- Class 3 - Prepetition first lien credit agreement claims: 100% of the new equity on a pro rata basis subject to dilution by a management incentive plan, or MIP; claim to be allowed in the amount of $59.2 million.
- The new equity would be distributed as follows: (i) with respect to any holder of an allowed DIP claim, a percentage of new interests equal to a fraction, the numerator of which is the amount of allowed DIP claims held by such holder, and the denominator of which is the aggregate of (x) the total allowed DIP claims, plus (y) the total allowed prepetition first lien credit agreement claims, and (ii) with respect to any holder of an allowed first lien credit agreement claim, a percentage of new interests equal to a fraction, the numerator of which is the amount of allowed prepetition first lien credit agreement claims held by such holder, and the denominator of which is the aggregate of (x) the total allowed DIP claims, plus (y) the total allowed prepetition first lien credit agreement claims.
- Class 4 - Trade claims: In the sole discretion of the reorganized debtors, either reinstatement or payment in full in cash.
- Class 5 - General unsecured claims: Discharged and extinguished; no distribution.
- Class 6 - Intercompany claims: In the sole discretion of the reorganized debtors, either reinstated or released without any distribution.
- Class 7 - Intercompany interests: At the option of the reorganized debtors, either reinstated or canceled and released without any distribution.
- Class 8 - Interests in CELP: Canceled and released without any distribution.
- Class 9 - Section 510(b) claims: Discharged and extinguished.
Plan Milestones
The RSA provides for the following milestones:
- Petition date: May 16;
- Interim DIP order: Entered within four days after the petition date (May 12);
- Combined DS/plan confirmation hearing: Within 35 days after the petition date (June 13);
- Confirmation order: Entered within 40 days after the petition date (June 17); and
- Plan effective date: Within 15 days after entry of the confirmation order (Jul 2).
Management Incentive Plan
The plan contemplates a management incentive plan to be implemented by the reorganized debtors that would reserve a certain percentage of new interests as determined by the reorganized debtors and the prepetition first lien lenders on a fully diluted, fully distributed basis.
Liquidation Analysis
The debtors’ hypothetical liquidation analysis is shown below:
(Click HERE to enlarge.)
Financial Projections
(Click HERE to enlarge.)
(Click HERE to enlarge.)
The debtors envision revenue growth in each of the two years post-filing, with revenue rising from $109.2 million in 2023 to $138.1 million in 2025. The company also forecasts its adjusted EBITDA growing from $5.2 million in 2024 to $7.7 million in 2025.
However, by 2025 this would remain below the high water mark for the company. As noted in the first day declaration, the company’s best financial year was in 2019 when it “generat[ed] over $400 million in revenue and $31.4 million in Adjusted EBITDA.”
(Click HERE to enlarge.)
Other Plan Provisions
The plan provides for releases of: the debtors; the reorganized debtors; the prepetition first lien lenders; the prepetition first lien agent; the DIP lender; the DIP agent; Argonaut; and related parties. A party would not be a released party or a releasing party if it elects to opt out of the third-party release contained in the plan or timely objects to the third-party release contained in the plan and such objection is not resolved before plan confirmation.
In addition, the plan includes an exculpation provision in favor of the debtors; the reorganized debtors; Argonaut; the official committee of unsecured creditors, if any, and its members in their capacities as members; and related parties.
Under the plan, the number and identity of the members of the new board for the reorganized company would be selected and approved by Argonaut, to be included in a plan supplement.
DIP Financing Motion
The debtors seek approval of a new-money multidraw term loan facility in an aggregate principal amount of $5 million, with $3 million available on an interim basis. Debtor Cypress Environmental Partners LP would serve as borrower with its subsidiary debtors serving as guarantors. The DIP lender and DIP agent would be APE V Cypress LLC, an affiliate of Argonaut Private Equity, which purchased all the debtors’ loan obligations under its prepetition secured credit agreement on April 22.
The DIP financing bears interest at 9%, with 11% for the default rate, and matures on the earlier of (i) three months from the petition date, (ii) consummation of a sale of substantially all the debtors’ assets or (iii) confirmation of a plan.
The DIP proceeds may be used for ongoing business operations, paying administrative costs associated with the chapter 11 cases and satisfying working capital needs in the ordinary course of business. Cash collateral would also be used for the same purposes, including the payment of any required fees under the DIP credit agreement.
To secure the DIP financing, the debtors propose to grant first-priority senior priming security liens upon all prepetition and postpetition property of the debtors, junior liens on all prepetition and postpetition property and superpriority administrative expense claims. The debtors also propose granting first-priority liens on any unencumbered assets, including the proceeds of avoidance actions (but not on avoidance actions themselves).
The facility also includes an upfront fee equal to 1% of the DIP loans or $50,000.
In support of the DIP financing, the debtors submitted the declaration of Shah of Piper Sandler, who states that the debtors would “suffer immediate and irreparable harm” if the interim DIP order is not entered on an emergency basis in order for the debtors to continue operating and “working towards a value-maximizing restructuring.”
The company proposes following adequate protection package to the prepetition secured parties: replacement liens on the DIP collateral and allowed superpriority administrative expense claims, both subordinate to the DIP liens and DIP superpriority administrative expense claims; financial reporting; payment of the prepetition secured lenders’ prepetition and postpetition professionals’ fees and expenses and prepetition interest and postpetition interest payments at the applicable nondefault rate under the prepetition first lien credit agreement.
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).
The carve-out for professional fees is $60,000.
The proposed budget for the use of the DIP facility is HERE.
The lien challenge deadline is 60 days after the date of the notice of the formation of an official committee of unsecured creditors. In the case of other parties in interest, the challenge deadline is 60 days after the date of entry of the interim DIP order.
The UCC lien investigation budget is $35,000.
The DIP milestones are consistent with the plan and RSA milestones.
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. 22-90039.
- Motion to pay employee wages and benefits
- The debtors employ approximately 421 employees. The estimated aggregate amount of accrued prepetition compensation and benefits is approximately $2.7 million.
- Motion to use cash management system
- The company has bank accounts with Bank of Oklahoma and Bank7.
- Motion to maintain insurance programs
- Motion to pay taxes and fees
- The debtors estimate that they owe $70,310 in prepetition taxes.
- Motion to provide utilities with adequate assurance
- Application to appoint Kurtzman Carson Consultants LLC as claims agent
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