Fri 04/16/2021 14:29 PM
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A hearing this morning to consider approval of the Hertz debtors’ disclosure statement and a related equity purchase and commitment agreement, or EPCA, was quickly sidetracked after the debtors acknowledged that they received an alternative plan proposal Thursday evening from Certares and Knighthead. Tom Lauria of White and Case, counsel to the debtors, said the finance committee of the Hertz board of directors held an emergency meeting Thursday night and deemed the proposal “bona fide” but “not enough to delay” approval of the disclosure statement and existing deal while the company’s advisors and full board conducted further due diligence of the proposal. Continue reading as our Americas Core Credit team analyzes and reviews the Hertz disclosure statement and Request a Trial for access to the linked documents as well as our analysis and reporting on hundreds of other stressed, distressed and performing credits.

Ultimately, Judge Mary Walrath stopped the debtors from providing testimony regarding the disclosure statement and EPCA, saying instead that a “short continuance” was the best course of action for the estate. The court continued the disclosure statement hearing to Wednesday, April 21, at 11:30 a.m. ET in order to allow the debtors and their advisors time to evaluate the new bid and to continue to exercise their fiduciary duties.

Sources have confirmed to Reorg outside of this morning’s hearing that the alternative plan proposal would give Hertz a total enterprise value of $6.2 billion and includes $2.5 billion of preferred equity financing from Apollo Global Management and $2.9 billion in new equity financing, including $750 million from existing shareholders. Of that $750 million, approximately $400 million of equity financing would come from the Glenn Agre ad hoc shareholder group and an additional $350 million would be available to qualified shareholders and backstopped by the Glenn Agre ad hoc group, the sources said. In addition, the proposal would allow for up to $1 billion of the preferred equity financing to be replaced by an up to $1 billion additional investment by Hertz shareholders, in the event of additional demand.

Reorg’s live blog of this morning’s hearing is available for review HERE.

Judge Walrath precluded detailed discussion of the alternative proposal at today’s hearing. However, Lauria told the court that he received a three-page deck from Knighthead and Certares containing the alternative proposal on Thursday at 5 p.m. ET. The deck itself contained no documentation or evidence of funding, said Lauria, but additional documentation for the alternative proposal was provided early this morning.

Lauria told the court that the Hertz finance committee met on an emergency basis to evaluate the proposal and concluded that it was a “bona fide” expression of interest. Lauria said that nonetheless the proposal faces “significant skepticism.” The debtors have not received “a single” communication from anyone in the equity group and the proposal “certainly isn’t intended to deliver equity value to the company’s shareholders,” Lauria asserted.

Andrew Glenn of Glenn Agre, counsel to an ad hoc shareholder group, and Stephen Hessler of Kirkland & Ellis, counsel to Knighthead and Certares, each defended the merits of the new bid, saying that a pause in proceedings to allow for its evaluation was necessary and would not prejudice the debtors.

Glenn told the court that his group has been “working tirelessly” with Knighthead and Certares to bring the proposal to the court, adding that the proposal would pay unsecured creditors in full. The proposal includes $2.5 billion in committed capital from Apollo, he added.

Hessler told the court that his clients, as the initial plan sponsors, were not newcomers to the case that “showed up” late Thursday. Hessler said there is “meaningful participation by” the ad hoc equity group in the new counterproposal. Ultimately, he said, the fact that an “active auction has broken out” is good for the debtors’ estates.

Amy Caton of Kramer Levin, for the UCC, said the new proposal includes a “full cash-out of the unsecured notes” so “on its face” it does contain a “materially” better recovery. The UCC needs time to evaluate whether it is truly a “superior” proposal, Caton said, ultimately supporting a week’s delay, which she said should not affect solicitation nor, in the UCC’s view, affect its joinder to the plan support agreement.

Lauria pushed back against pleas for a continuation, saying failure to approve a disclosure statement today would “slow down the process” and risk the debtors’ June 30 target emergence date. This emergence date is crucial to preserving business value, he asserted, pointing to the need to improve relations with original equipment manufacturers before the 2022 fleet buildup in this fall and end the high cost of chapter 11 administration. Lauria also questioned whether permitting a new, last-minute bid without approving the EPCA would “really undermine[] the process” that plan sponsors rely on when making large funding commitments.

Lauria added that “what has not been mentioned by anybody” was the current plan sponsors’ commitment to fund the European business’ vehicle purchases with an interim debt facility. Lauria said these funds are needed imminently and the money was slated to arrive by Monday or Tuesday of next week. “If we delay, we’re putting that financing … and that business at risk,” he added.

“We have worked so hard” to keep that business out of foreign insolvency proceedings or shoehorn it into chapter 11, Lauria remarked, alluding to prior strategies for the European restructuring. After Judge Walrath indicated her preference for a continuance, Lauria requested that the next hearing be held on Wednesday rather than Thursday of next week, in the hope that the interim European financing could be in place as soon as possible.

Counsel to the ad hoc group holding approximately 87% of the unsecured bonds, Rachel Strickland of Willkie Farr, expressed support for the debtors’ reasons for continuing with the current plan and their stated need to emerge during the second quarter. The group supports the plan and is an active participant in the proposed new equity commitment. Strickland told the court that the debtors gave everyone in the competing plan sponsorship proposal process “the same set of rules,” noting that her clients had initially been outbid, and suggested that if the new counterproposal is serious, those parties should not be dissuaded from bidding by the breakup fee in the EPCA, contested by the ad hoc equity group. As noted above, Judge Walrath ultimately did not rule on the EPCA motion today.

Judge Walrath also today guided the debtors to change the plan’s third-party release to an opt-in rather than opt-out construct for parties entitled to vote but who do not vote. The court expressed skepticism that a creditor’s silence after receiving solicitation materials with an opt-out election could be sufficient to make the third-party releases consensual. She said that contract law principles of “affirmative agreement” may be the relevant way to justify such releases, rather than the Bankruptcy Code. Judge Walrath said “now’s the time to change it and you do need to change it.”
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