Summary |
GC Services LP, one of North America’s “oldest and largest privately held” providers of accounts receivable management and business process outsourcing, is an indirect subsidiary of the debtor |
Prepackaged plan is based on RSA entered into with 100% of existing secured term lenders |
Existing term lender Goldman Sachs has agreed to provide $6 million in DIP financing |
Houston-based ORG GC Midco LLC, a non-operating intermediate holding company whose primary revenue source is derived from its second-tier subsidiary and operating company,
GC Services, which provides business process outsourcing services in the United States, filed for chapter 11 protection yesterday, Monday, Nov. 8, in the Bankruptcy Court for the Southern District of Texas, based on an RSA entered into with 100% of its secured term lenders (including Benefit Street Partners, or BSP, and Goldman Sachs, or GS). Through a prepackaged plan of reorganization, the secured term lenders would become the new indirect owners of the company. The debtor’s shareholders also support the plan, according to a press release that the company issued in connection with the filing.
Solicitation commenced prepetition on Oct. 16, with a voting deadline of Nov. 1, and 100% of existing term lenders voted to accept the plan, according to the debtor’s
voting tabulation. According to the first day declaration, the debtor and its direct and indirect subsidiaries, or GCS parties, and consenting existing term loan lenders entered into a settlement and release agreement with the company’s sponsor (Austin-based private equity firm Owner Resource Group, or ORG) and minority equityholder - the Katz parties - pursuant to which the sponsor and the Katz parties agreed to support the plan and restructuring, in exchange for the payment of the sponsor’s professional fees up to $100,000. GC Services LP and ORG have also agreed to terminate a 2017 consulting agreement and ORG has agreed to waive any claims under the agreement.
Further, pursuant to a Nov. 7 forbearance agreement, existing ABL lenders have agreed to support the restructuring by continuing to provide the debtor’s operating subsidiary, GC Services, with access to the existing ABL facility during the case. The debtor has agreed not to borrow under the existing ABL facility and that no funds made available to GC Services under the facility would be made available to, or otherwise used by, the debtor during the case.
ORG GC Midco “is the only anticipated debtor in the Chapter 11 Case,” the DS says, adding that “none of Midco’s subsidiaries (collectively, the ‘Non-Debtor GCS Parties’), including the Company’s primary operating entity, GC Services, contemplate filing for chapter 11 protection.”
The debtor requests approval of a $6 million DIP term loan facility from one of the existing term lenders, Goldman Sachs Bank USA.
According to the DS, the company contemplates a restructuring of “the Company’s funded indebtedness through a prepackaged plan of reorganization that will substantially de-lever the Company by reducing its funded indebtedness from approximately $210.3 million to approximately $130.5 million [including notional size $30 million exit ABL facility, which may be increased to $40 million subject to ongoing negotiations] upon emergence.” Existing term loans of approximately $210.3 million would be cancelled and discharged in exchange for (a) take-back first lien term loans of $71 million, (b) take-back second lien term loans of $29 million, and (c) preferred and common equity of the reorganized company, with GS-owned and BSP-owned claims receiving different forms of equity treatment.
The proposed distributions are as follows:
- Holders of allowed existing term loan claims affiliated with BSP would receive (a) pro rata share of initial new 1L loans, (b) pro rata share of new 2L loans, (c) pro rata share of new holdco junior preferred equity, and (d) 100% of the new holdco common equity;
- Holders of allowed existing term loan claims affiliated with GS, would receive (a) pro rata share of initial new 1L loans (less the amount of term DIP claims outstanding immediately prior to the effective date rolled into initial new 1L loans), (b) pro rata share of new 2L loans, (c) 100% of the new Midco equity, and (d) as a result of receiving 100% of the new Midco equity, GS would acquire an indirect interest in (i) 100% of the new holdco senior preferred equity and (ii) pro rata share of new holdco junior preferred equity;
- Holders of existing ABL facility claims would be treated as follows: (a) all outstanding amounts under the existing ABL facility would be converted into the exit ABL facility, which would be assumed by new holdco or (b) such other treatment to render the claim unimpaired;
- Holders of GUCs would be paid in full in the ordinary course of business; and
- Existing equity would be canceled.
The debtors contemplate $130 million in reorganized funded debt which consist of a $71 million new 1L facility, $29 million new 2L facility and $30 million exit ABL facility. The treatment for the ABL facility holders is that all outstanding amounts under the existing ABL facility would be converted, on a dollar-for-dollar basis, into amounts outstanding under the exit ABL facility and all of the debtor’s obligations under the existing ABL facility would be assumed by new holdco. The restructuring would be effectuated as follows:
The organizational chart at exit would be as follows:
The first day hearing has been scheduled for today, Tuesday, Nov. 9, at 5 p.m. ET.
The company reports $100 million to $500 million in both assets and liabilities. The company’s prepetition capital structure includes:
According to the first day declaration, borrowings under the ABL facility fluctuate monthly and as noted above totaled $13.1 million, including $5.2 million in drawn letters of credit at petition. As of the Oct. 16 disclosure statement, $7.5 million was outstanding, including $5.5 million in drawn letters of credit.
The first day declaration states GC Services maintains a revolving line of credit under the credit
agreement and that the company’s obligations under the existing ABL facility are secured by a first priority lien on the ABL priority collateral and a second priority lien on the term priority collateral.
In addition, obligations under the existing term loan facility are secured by a first priority lien on the term priority collateral and a second priority lien on the ABL priority collateral. BSP Agency LLC is the existing term agent and JPMorgan Chase Bank is the existing ABL agent.
An existing intercreditor agreement governs the rights and obligations of the existing term lenders and the existing ABL lenders with respect to, among other things, collateral priority, matters of DIP financing, the use of cash collateral, and adequate protection.
As previously disclosed, Midco is the only anticipated debtor in the chapter 11 case, and none of Midco’s subsidiaries, including the company’s primary operating entity, GC Services, contemplate filing for chapter 11 protection. Based on the debtor’s organizational chart, Midco is a borrower of both the ABL facility and term loan facility, even though GC Services maintains the revolving line of credit, according to the DS.
The debtor is represented by Weil Gotshal & Manges as counsel and Riveron Management Services LLC, fka Conway MacKenzie Management Services LLC, as interim management services provider. The case has been assigned to Judge Marvin Isgur (case No. 21-90015).
Events Leading to the Chapter 11 Filing / Prepetition Restructuring Efforts
The debtor says that, though its business is operationally sound, ORG is “significantly over-levered.” For fiscal 2020, the company reported approximately $15 million of adjusted EBITDA (on a consolidated 52-week basis) versus approximately $218 million of total funded debt, including accrued and unpaid interest - implying leverage of approximately 14.5x EBITDA, the DS explains.
In the fall of 2019, ORG struggled to comply with certain of its financial covenants under the prepetition term loan agreement, leading to the debtor evaluating strategic options to right-size its balance sheet and provide financial and operational leadership to the company as it embarked on a restructuring process. In September 2020, the prepetition term loan agent delivered to the debtor a notice of exercise of rights and remedies after default, including to exercise rights under the proxy and power of attorney. The prepetition term loan agent then executed and delivered a written consent pursuant to which each Midco board member was removed and replaced by three independent managers.
On Nov. 30, 2020, the debtor and certain of the other nondebtor GCS parties entered into forbearance agreements with the prepetition term lenders and the prepetition ABL agent. Since then, the company has been operating under a series of extensions to those forbearance agreements as the company assessed its strategic options and attempted to negotiate a consensual resolution of its capital structure concerns.
The debtor says that its “precarious financial position” compared with its competitors, many of which the debtor says have already undergone their own balance sheet restructurings in the past 12 to 18 months. The debtor’s financial position has begun to hurt the company’s ability to attract and retain customers and has prevented the company from making certain technology and/or system upgrades necessary to ensure the company is in compliance with requirements imposed by certain regulatory and licensing authorities.
“After several months of good faith, arm’s length negotiations with the Consenting Lenders,” on Oct. 16, the debtor, the nondebtor GCS parties and the consenting lenders entered into the RSA. The company’s existing ABL lenders have agreed to allow GC Services to continue to access the existing ABL facility through the consummation of the restructuring through the chapter 11 case, at which point the prepetition ABL facility would either be refinanced or converted into the exit ABL facility, the DS says.
Background
Midco, the debtor entity, is a non-operating intermediate holding company. Its primary source of revenue is its second-tier subsidiary and operating company, GC Services. GC Services was launched in October 1957 as a business process outsourcing, or BPO, agency providing third-party accounts receivable management services. GC Services evolved and expanded in the 1980s to offer first-party AR collection services. Soon after, GC Services further expanded its service offerings by creating a separate teleservices division that could meet a full range of customer care needs, eventually became a privately owned business process outsourcing provider with about 6,000 employees and numerous call centers across the United States and in Manila, Philippines.
In late 2015, investment funds managed by Austin-based private equity firm Owner Resource Group, and collectively with its affiliates who own interests, directly or indirectly, in the debtor, including ORG GC Holdings, the sponsor, acquired a controlling interest in the company from the Katz family. The company is indirectly controlled by the sponsor through ORG GC Holdings, or Holdings, which owns 100% of the equity interests of Midco. Midco, in turn, directly or indirectly owns each of the other GCS parties. The company’s corporate organizational structure is shown below:
In the first day declaration, the debtor provides a capital structure following the restructuring, where a new holdco will be created as a subsidiary under ORG GC Midco and a new holdco sub will be created as a subsidiary under the new holdco. The new holdco sub will be the borrower for the 1L and 2L loans, and a guarantor for the exit ABL facility. The new holdco will be a guarantor for the 1L and 2L loans, and exit ABL facility. Senior and junior preferred shares will also be issued out of the reorganized company, as shown below:
The debtor's largest unsecured creditors are listed below: