FILING ALERT: Faraday Future’s CEO Yueting Jia Files for Chapter 11 in Delaware, Pursuing Prepackaged Plan, Exchange Offer

Relevant Documents:
Voluntary Petition
Plan of Reorganization
Disclosure Statement

Yueting Jia, CEO of California-based electric vehicle company Faraday Future, has filed for Chapter 11 protection today in Delaware, reporting $500 million to $1 billion in assets and $1 billion to $10 billion in liabilities. Yueting Jia is represented by Pachulski Stang Ziehl & Jones as counsel and O’Melveny & Myers as proposed special corporate, litigation and international counsel. The case number is 19-12220 and has not been assigned a judge yet. The filing includes a prepakaged plan that would turn Jia’s stake in Faraday Future over to a creditors’ trust.

The largest unsecured claims include personal guarantees to Shenzhen Yingda Capital Management for $279.7 million, China CITIC for $233.0 million and Ping An Bank for $230.8 million (of which $24.0 million is secured) along with $111.2 million owing to Huarong from a loan, of which $23.7 million is “covered.”

Chinese conglomerate Evergrande has invested approximately $800 million into Yueting Jia’s company, Faraday Future, for a 32% stake as the real estate giant sought to diversify into the electric vehicle space. Electric vehicle manufacturers in China, including Faraday and NIO Inc., have been facing headwinds following a June 26 subsidy cut by China’s Ministry of Finance.

Yueting Jia or “YT,” who filed the case in his individual capacity, has filed a prepackaged chapter 11 plan of reorganization and related disclosure statement. The plan classifies claims into three categories, with “Debt Claims,” or class 3, the only one listed as impaired. The plan contemplates setting up a trust structure that would hold YT’s economic rights to 40.8% of the company’s equity as trust assets, among other things. In addition, the company is currently seeking $850 million of Series B equity financing in order to proceed to production of its FF91 vehicles.
 
According to the DS, Faraday Future had $341.5 million of notes payable and outstanding as of July 31, the details of which can be seen HERE. In addition, Faraday Future also has a loan with a principal amount outstanding of $10 million, provided by Evergrande as part of the restructuring agreement entered into on Dec. 31, 2018, which was drawn in January. The loan matured on June 30, and the company says it is currently in default.

Background

The DS notes that YT’s businesses have never seen positive cash flows and that troubles began in 2017 when China Merchant Bank sought a RMB 30 million interest payment from his streaming company, LeEco, and subsequently froze YT and LeEco’s assets when the payment was not made. YT sold some of his companies in early 2017 to meet debt obligations. These events had a domino effect on YT’s other companies, resulting in three creditors receiving judgments against claims against YT’s other business ventures.

According to the DS, Faraday Future subsidiary Smart King Ltd. has filed 1,322 patents, 951 in China and 342 in the U.S. and has established a supply chain along with completing several pre-production models of the FF91, the company’s first EV vehicle revealed in January 2017.

YT’s electric vehicle company has received a total of $1.7 billion in funding - $800 million from Chinese conglomerate, Evergrande, by way of its affiliate Season Smart, and $900 million from YT himself. Evergrande previously committed to another $1.2 billion over the next two years - however it reached a new agreement on Dec. 31, 2018 that effectively terminating that commitment.

Trust Structure and Distributions

Pursuant to the plan, each holder of an allowed debt claim would receive its pro rata share of the “Trust Interests,” with distributions made in accordance with Article 6.2 of the plan. The trust assets shall comprise: (i) the economic interest in 90,588,235 units of West Coast LLC, representing 100% of the West Coast outstanding units, and 30.8% of the company’s equity; (ii) 147,058,823 class B preferred shares of Smart King Ltd., representing 10% of the company’s equity; and (iii) the “Trust Expense Funded Amount,” which is to be contributed to the trust by a “Funding Source,” or postpetition lender.

Smart King Ltd. is a Cayman Islands-based entity that indirectly owns Faraday & Future Inc., which is Faraday’s main U.S. operating company. West Coast LLC is a Delaware-incorporated pass-through entity that owns the stock of the company.

An illustrative organizational chart of the company, as provided in the DS, can be seen HERE.

Yueting Jia’s contributions to the trust assets, through the West Coast units, would include a preferred distribution right in connection with 30.8% of the company's equity interest, owned through Pacific Technology and collectively beneficially owned by YT and management, according to the filings. The right “will entitle him to a priority distribution of up to US$815.7 million” after return of capital to management, a special distribution of 10% of the remaining amounts and thereafter, a normal distribution of 20% of the balance owned by Pacific Technology. The remaining equity of the company is owned by Season Smart, an affiliate of Evergrande.

The trust expense funded amount represents the initial trust expenses, which will not be more than $1.2 million, and an additional $0.2 million for any necessary extension expenses, according to the plan.

According to the plan, on or after the completion of an initial public offering of Smart King’s capital stock, the proceeds received by the trust from (i) any disposition of Smart King shares or (ii) dividends or distributions with respect to the Smart King shares or the interest in West Coast “will be distributed in accordance with the Distribution Waterfall upon the earlier of (i) sixty (60) days following the occurrence of such Distribution Event, and (ii) the termination of the Trust.”

YT provides this creditor recovery scenario analysis based on the company’s ability to IPO:
 
The above recovery scenarios are based on the following assumptions:
 

• Series B equity financing will dilute equity interests by 33%;
• Company's IPO will dilute equity interests by 25%;
• Company's IPO will take place in the first quarter of 2021;
• Total amount of claims for distribution purposes is $2.33 billion; and
• The 2019 Equity Incentive Plan will be distributed in full.

The trust assets will be distributed to the funding source, holders of eligible claims, holders of the trust interests and YT as follows:
 

• First, pro rata from the creditor trust and the late filed debt claims reserve, to the funding source, an amount equal to the amount contributed by the funding source;
• Second, pro rata from the creditor trust and the late filed debt claims reserve, to each holder of trust interests, in an amount equal to such holder's pro rata share of any additional trust expenses;
• Third, pro rata from the creditor trust and the late filed debt claims reserve, to each holder of an administrative expense claim, priority tax claim, priority non-tax claim, or U.S. secured claim that has made a trust election, equal to the allowed amount of such claim;
• Fourth, the remaining trust assets of the late filed debt claims reserve, to holders of late filed debt claims, in an amount equal to such holder's pro rata share of the remaining trust assets held in the late filed reserve, after accounting for the distributions pursuant to clauses (i) through (iii) above;
• Fifth, to the creditor trust, 100% of the remaining trust assets held in the late filed debt claims reserve, after accounting for the distributions in clauses (i) through (iv);
• Sixth, the trust assets remaining in the creditor trust, to holders of allowed debt claims, in an amount equal to such holder's pro rata share of the remaining proceeds held in the creditor trust, if any, until such holder has received aggregate distributions equal to the amount of such holder’s allowed debt claim distribution amount; and
• Seventh, to the debtor YT, 100% of the amount of any remaining proceeds after accounting for the previous clauses.

The following parties, upon the effective date, benefit from releases under the plan:
 

• YT and his estate;
• YT's wife, Wei Gan;
• All persons engaged or retained by YT in connection with the chapter 11 (including in connection with the preparation of and analyses relating to the DS and the plan); and
• Any and all advisors, attorneys, actuaries, financial advisors, accountants, investment banker's, agents, professionals, and representatives of each of the foregoing persons and entities.

The current share ownership structure of the company is shown below.
The pro forma ownership after implementing the proposed restructuring is shown below.
 
Alongside the bankruptcy filing, Yueting Jia is also conducting an exchange offer included in the prepackaged plan, which expires on Nov. 8 at 5 p.m. Beijing time. The threshold for the exchange offer is 90%. Yueting Jia warns, “If, as a result of not being able to consummate the Restructuring in a timely manner, the Company's business is not able to once again pursue its business plan, it is likely that it will not be able to continue as a going concern, it may be forced to liquidate its remaining assets and/or initiate bankruptcy proceedings, and the value of YT’s interest in the Company will be greatly reduced or eliminated.”

Smart King Ltd., is the indirect, owner of Faraday & Future Inc. As part of the prepack, the company, Smart King, would enter into the 2019 Equity Incentive Plan with Yueting Jia and certain key members of management, conditioned on the effectiveness of the Restructuring. The 2019 Equity Incentive Plan would provide equity consideration to YT based on the company’s valuation.

In addition, the company is currently seeking Series B equity financing in the amount of $850 million in order to proceed to production of FF91. In order to finance the restructuring, Yueting Jia obtained a secured loan from Pacific Technology, an affiliate, totaling $2.1 million. According to the DS, the company has engaged Stifel Nicolaus to assist in raising the equity financing.

Reorg First Day will not provide further coverage of this case.