California Pizza Kitchen
Exit Financing Coverage: Restrictions Under California Pizza Kitchen’s 2L Exit Facility May Prohibit Voluntary Prepayments Under 1L Exit Facility; Facilities Include 1.50% LIBOR Floor, Maximum Capex Limitation
Tue 11/24/2020 09:35 AM
Relevant Items:
First Lien, Second Lien Exit Facilities Covenants Overview
Third Amended Plan Supplement
California Pizza Kitchen announced on Monday that, after confirmation of the debtors’ joint plan of reorganization on Oct. 29, it had emerged from chapter 11. The company had filed for chapter 11 in the Bankruptcy Court for the Southern District of Texas on July 30.
The company emerged from chapter 11 with the following exit financing facilities:
In its press release, the company noted that:
In this article, we provide an overview of the terms and conditions under the company’s exit facilities.
Not surprisingly, as illustrated below, the exit facilities provide the company with limited flexibility to incur debt and liens, pay dividends, make investments, especially in nonguarantors, and prepay outstanding debt. The first and second lien facilities are substantially similar, although capacities under the second lien facility are 30% higher than they are under the first lien facility. Our discussion below focuses on the more restrictive negative covenants under the first lien exit facility.
Similar to direct lending financings, the exit facilities do not distinguish between restricted and unrestricted subsidiaries, and the facilities’ negative covenants restrict California Pizza Kitchen and all of its subsidiaries. Given this, the company is unable to transfer assets to subsidiaries that are not subject to the exit facilities’ negative covenants.
California Pizza Kitchen may incur $1 million of additional first lien debt and $100,000 of capital lease obligations and can assume up to $500,000 of debt related to acquisitions. Although the first lien exit facility also includes a $500,000 general liens basket, because the $1 million general debt basket has a corresponding liens basket, there is no additional permitted debt to which the general liens can attach.
California Pizza Kitchen may make $1 million of general purpose restricted payments and can buy back up to $300,000 of equity from employees annually, with unused amounts carried forward (subject to a $600,000 annual cap).
California Pizza Kitchen can make $1 million of general purpose investments and can make unlimited investments in the subsidiary guarantors (including acquisitions of guarantors).
The exit facilities’ prepayment covenants restrict the company from voluntarily prepaying any payment subordinated debt and, as illustrated in the table above, under the first lien exit facility, debt under the second lien exit facility and, under the second lien exit facility, debt under the first lien exit facility.
The restriction under the second lien exit facility on voluntary prepayments of debt under the first lien exit facility seems like a drafting error, as it is all but unheard of for a borrower to be restricted from voluntarily prepaying debt under its first lien credit agreement.
In addition, prepayment covenants under bank debt almost always permit borrowers to refinance restricted debt with the proceeds of permitted refinancing debt. Under California Pizza Kitchen’s exit facilities, while the prepayment covenant allows the company to convert restricted debt into equity, it does not explicitly permit the company to refinance any restricted debt.
Taken together, the company may be unable to prepay or refinance debt under its exit facilities.
The first lien exit facility requires California Pizza Kitchen to:
The company is also subject to a maximum capex requirement that includes sublimits on new store capital expenditures.
The exit facilities do not require California Pizza Kitchen to pay a call premium in connection with any voluntary prepayments.
They do, however, include a standard asset sale sweep, and only the first lien exit facility also includes an excess cash flow sweep (which sweeps 100% of excess cash flow). Although we have not reviewed a copy of the intercreditor agreement, we assume that, under the second lien exit facility, the company is not required to use asset sale proceeds (other than, perhaps, declined proceeds) to prepay the second lien term loans until the first lien facility has been fully repaid.
On and prior to Jan. 1, 2022, all voluntary and mandatory prepayments under the first lien exit facility will be applied toward the prepayment of the priority first lien rollup loans rolled into the DIP facility and converted into new first lien term loans and, once fully repaid, on a pro rata basis among the other first lien tranches.
Notably, however, as discussed, under the second lien exit facility, the company does not appear to be permitted to prepay outstanding debt under the first lien exit facility.
Other notable issues under the exit facilities include:
First Lien, Second Lien Exit Facilities Covenants Overview
Third Amended Plan Supplement
California Pizza Kitchen announced on Monday that, after confirmation of the debtors’ joint plan of reorganization on Oct. 29, it had emerged from chapter 11. The company had filed for chapter 11 in the Bankruptcy Court for the Southern District of Texas on July 30.
The company emerged from chapter 11 with the following exit financing facilities:
- A new four-year first lien senior secured term loan exit facility in the amount of about $127.3 million, consisting of $18.75 million of new-money term loans and rolled-over DIP facility claims;
- A $12.5 million four-year letter of credit facility that is pari with the new first lien term loan exit facility; and
- A four-and-a-half-year $50 million second lien term loan facility, consisting of converted prepetition first lien credit agreement claims.
In its press release, the company noted that:
“As part of its financial restructuring, CPK completed a debt-for-equity transaction, and now has a substantially reduced debt load and increased liquidity, including exit financing that provides the capital to support CPK’s business and build on the company’s current business momentum. Upon emergence, the company eliminated more than $220 million of existing funded debt from its capital structure and now faces no near-term debt maturities. Substantially all of CPK’s equity is now held by CPK’s prepetition lenders.”
In this article, we provide an overview of the terms and conditions under the company’s exit facilities.
Flexibility Under the Facilities
Not surprisingly, as illustrated below, the exit facilities provide the company with limited flexibility to incur debt and liens, pay dividends, make investments, especially in nonguarantors, and prepay outstanding debt. The first and second lien facilities are substantially similar, although capacities under the second lien facility are 30% higher than they are under the first lien facility. Our discussion below focuses on the more restrictive negative covenants under the first lien exit facility.
Similar to direct lending financings, the exit facilities do not distinguish between restricted and unrestricted subsidiaries, and the facilities’ negative covenants restrict California Pizza Kitchen and all of its subsidiaries. Given this, the company is unable to transfer assets to subsidiaries that are not subject to the exit facilities’ negative covenants.
Debt, Liens Capacity
California Pizza Kitchen may incur $1 million of additional first lien debt and $100,000 of capital lease obligations and can assume up to $500,000 of debt related to acquisitions. Although the first lien exit facility also includes a $500,000 general liens basket, because the $1 million general debt basket has a corresponding liens basket, there is no additional permitted debt to which the general liens can attach.
Dividends, Equity Buybacks
California Pizza Kitchen may make $1 million of general purpose restricted payments and can buy back up to $300,000 of equity from employees annually, with unused amounts carried forward (subject to a $600,000 annual cap).
Investments
California Pizza Kitchen can make $1 million of general purpose investments and can make unlimited investments in the subsidiary guarantors (including acquisitions of guarantors).
Prepayments
The exit facilities’ prepayment covenants restrict the company from voluntarily prepaying any payment subordinated debt and, as illustrated in the table above, under the first lien exit facility, debt under the second lien exit facility and, under the second lien exit facility, debt under the first lien exit facility.
The restriction under the second lien exit facility on voluntary prepayments of debt under the first lien exit facility seems like a drafting error, as it is all but unheard of for a borrower to be restricted from voluntarily prepaying debt under its first lien credit agreement.
In addition, prepayment covenants under bank debt almost always permit borrowers to refinance restricted debt with the proceeds of permitted refinancing debt. Under California Pizza Kitchen’s exit facilities, while the prepayment covenant allows the company to convert restricted debt into equity, it does not explicitly permit the company to refinance any restricted debt.
Taken together, the company may be unable to prepay or refinance debt under its exit facilities.
Financial Maintenance Covenants
The first lien exit facility requires California Pizza Kitchen to:
- Maintain weekly cash on hand of at least $15 million (the second lien exit facility requires $10.5 million of cash on hand) for two consecutive liquidity testing dates (defined as each Tuesday until Dec. 31, 2021, and, thereafter, on a monthly basis); and
- Comply with a total rent adjusted net leverage ratio not to exceed levels set forth in an undisclosed schedule.
The company is also subject to a maximum capex requirement that includes sublimits on new store capital expenditures.
Voluntary, Mandatory Prepayments
The exit facilities do not require California Pizza Kitchen to pay a call premium in connection with any voluntary prepayments.
They do, however, include a standard asset sale sweep, and only the first lien exit facility also includes an excess cash flow sweep (which sweeps 100% of excess cash flow). Although we have not reviewed a copy of the intercreditor agreement, we assume that, under the second lien exit facility, the company is not required to use asset sale proceeds (other than, perhaps, declined proceeds) to prepay the second lien term loans until the first lien facility has been fully repaid.
On and prior to Jan. 1, 2022, all voluntary and mandatory prepayments under the first lien exit facility will be applied toward the prepayment of the priority first lien rollup loans rolled into the DIP facility and converted into new first lien term loans and, once fully repaid, on a pro rata basis among the other first lien tranches.
Notably, however, as discussed, under the second lien exit facility, the company does not appear to be permitted to prepay outstanding debt under the first lien exit facility.
Other Notable Issues
Other notable issues under the exit facilities include:
- The first lien term loans are priced at L+10.00% (on or prior to Jan. 1, 2022, interest on the first lien rollup loans rolled into the DIP facility and converted into new first lien term loans, at the company’s option, can be 1% cash interest and LIBOR plus 11.00% PIK interest), and the second lien term loans are priced at 1% cash, plus LIBOR plus 12.50% PIK interest; both facilities include a 1.50% LIBOR floor.
- Amendments to the pro rata sharing provisions that result in lenders’ liens being subordinated require consent from all lenders.
- California Pizza Kitchen can purchase term loans pursuant to Dutch auctions and in the open market.
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