Thu 02/03/2022 10:21 AM
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Restructuring Analysis:

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Link to the Restructuring Dataset on Reorg

An analysis of equity rights offerings dating back to 2020 implies significantly higher returns on committed capital than is reported in court filings, including plans and backstop commitment agreements. Reorg calculates average and median stated commitment fees of 7.6% and 8.5%, respectively. When adjusting commitment fees to the plan value of equity-equivalent and adding in the net value of additional rights, however, Reorg calculates average and median returns on committed capital of 34.5% and 21%, respectively.

The data and list of companies that relied on equity rights offerings as part of their plan of reorganizations can be found in a restructuring dataset, which includes bankruptcies since 2020, compiled by Reorg. The restructuring dataset below will soon be incorporated into Credit Cloud. The portal can be found HERE.

A number of chapter 11 cases rely on new money to allow debtors to emerge from bankruptcy. However, to maintain equitable treatment, rights to fund new money are offered to entire classes, creating funding uncertainty. To ensure the raise of necessary cash as provided in the plan, debtors will agree with certain parties to backstop these amounts. In exchange, backstop parties charge double and even triple-digit returns on their money, including a commitment fee. These commitment fees are often payable in rights or discounted equity along with reserved carve-outs of the total rights. The true value of the fees associated with these rights, however, are often hidden by debtors by reporting such fees on a percentage basis, which increase after applying discounts and the returns on cash driven by rights that are carved out and reserved for the backstop parties.

Restructuring Dataset

Reorg has compiled a list of equity rights offerings from chapter 11 cases dating back to 2020. The restructuring dataset is summarized in the table below. The full dataset, which can be found HERE, includes data on equity offerings’ size, class participation eligibility, backstop, potential discounts, recoveries and fees, including all rights holders and backstop parties. The cases cited include those in which prepetition stakeholders and plan sponsors committed capital.

(Click HERE to enlarge.)

Reorg has also collected similar information for exit notes offerings, including cases in which stakeholders or sponsors contributed capital in exchange for exit notes. A search for those cases can be found HERE.

Comparison of Stated Fees to Realized

For plans in which rights to fund new money to purchase equity of reorganized companies are given to certain claimholders, debtors will seek certain parties to backstop these rights to assure the funds are fully raised regardless of nonbackstop claimholders’ participation. Backstop parties will negotiate a fee which is typically shown as a percentage of the overall rights amount. As part of the bankruptcy process, the debtors typically disclose these fees in a backstop commitment agreement. The fees are shown in the table above.

Backstop fees can be paid in cash but are more frequently paid in equity at a valuation equal to the valuation of rights holders. In the cases that Reorg analyzed, this rights offering-related equity was transferred to backstop parties at a significant discount to plan value. In other words, when backstop parties receive new equity as a fee for providing a backstop, the implied dollar fees convert to a greater equity stake than the equity given to other stakeholders in exchange for their claims.

Additionally, as a form of further compensation, a certain percentage of rights are often carved out of the total rights and reserved for backstop parties. These rights are in addition to the rights the parties would receive for their pro rata ownership of the claims within a certain class.

In the equity rights offerings that Reorg analyzed, stated commitment fees ranged from 0% to 10% of the total rights amount. Though, most of the fees were 10% and the median for all the fees that Reorg analyzed was 8.5%. However, when Reorg applied the value that backstop parties received in equity, at plan value, and included the net value of the carved-out subscription rights, the median of effective commitment fees increased to 21%, with a range of 5.5% to 134.8%.

The results of the analysis are below:

(Click HERE to enlarge.)

Reorg also analyzes the return if the backstop parties are not required to fund any portion of the backstop, other than the rights reserved - in other words, the amount the backstop parties would fund if every member of the class that received subscription rights funded their pro rata portion. This should be thought of as the minimum amount the backstop parties commit and therefore would represent the maximum return that backstop parties could receive, on the basis of plan value.

Equity values are based on plan equity values disclosed in debtors’ disclosure statements.

An example of the calculations is below. In the Ultra Petroleum cases, the debtors raised $85 million through an equity rights offering open to first lien lenders that was backstopped by an ad hoc group of lenders represented by Stroock. Under Ultra’s chapter 11 plan, half of the subscription rights were reserved for the backstop group, and the other half were open to all lenders.

The commitment fee provided in the backstop agreement and disclosed in other court filings was 7.5%. However, Reorg calculates an effective return of 65.9%, which is based on a plan equity value of $899 million. Rights, according to the plan, could be purchased at a value of $446 million, or an approximately 50% discount to plan value.

Returns shown in the table above comparing the various cases are significantly higher than those presented by debtors in court filings and in data presented while defending such fees at hearings. A table that Rothschild, financial advisor to Chesapeake Energy, prepared as an analysis to support the commitment fees requested as part of the backstop commitment in the Chesapeake Energy debtors’ bankruptcy cases is shown below. As noted above, Chesapeake raised $600 million from a rights offering open to first and second lien lenders.

Rothschild shows that the 10% backstop fee is in line with the average fee of 9.3% and also shows an “effective” fee, which is calculated by applying the rights’ discount to plan value to the backstop fee. The “effective” 15.4% fee is above the average of 12% but well within the range of Rothschild’s comps of between 4.3% and 36.1%.

However, Rothschild’s analysis does not take into account the subscription rights reserved just for the backstop group, which are reserved without accounting for the amount of claims these stakeholders own. Since rights are typically funded at a significant discount to plan values, Reorg includes the net value associated with these rights in its return analysis.

Insights from the Data

Market Value vs. Plan Value

The figures shown above are based on plan values. A number of motivations for debtors and stakeholders exist in chapter 11 to push for valuations that are more strategic rather than an accurate reflection on current market prices. Additionally, even if plan valuations are unbiased, market prices can still differ greatly, and backstop parties’ ultimate return will be based on market values and the timing of the sale of their securities.

As shown above, backstop parties to 24 Hour Fitness’ rights offering had the highest return at 134.8% on the amount of capital committed by parties. Alternatively, Hertz was tied with the lowest return at 5.5%. However, in comparison with the stated plan valuations in each company's disclosure statements, the market value of the post-reorg equity for these companies has diverged upon emergence from chapter 11. Hertz’s plan provided a plan equity value of $4.7 billion but instead trades at a value of $10.7 billion. 24 Hour Fitness, on the other hand, trades at more than a 50% discount to its plan valuation.

Returns vs. Claim Ranking

The Reorg data suggests that secured or priority claims group-linked backstop parties are more likely to negotiate a higher return, based on plan value, holding all else equal. This is likely not surprising, given the implications of plans in which secured parties are asked to contribute money. One can assume that these companies’ capital structures are deeply impaired and that parties willing to contribute capital are taking a greater risk. Also, if first lien debt will be the fulcrum security under the proposed plan, there is likely less competition to contribute capital from junior classes.

Of the rights offerings analyzed, the median return on secured or priority claims group-linked backstop parties’ total commitment was 41.3%. This compares with a 14.8% median return on total commitment for backstop parties consisting of unsecured claimholders and equityholders.

In the 24 Hour Fitness bankruptcy case, the backstop commitment came from DIP lenders. Those parties received a 134.8% calculated return, based on plan value, on their commitment. According to the commitment agreement and plan of reorganization, 50% of the $65 million rights offering was reserved for backstop parties, and new money from the rights offering was contributed at a 67.5% discount to plan value. However, as noted above, the recent market value of 24 Hour Fitness’ equity is significantly below its chapter 11 plan value. Additionally, the company has had to raise new money since exiting bankruptcy.

Stated Fees vs. Carve-Outs

Another observation from the data is that in three of the highlighted cases, no amount of rights were reserved for backstop parties. However, in those cases, the stated fees were all at or near 10%, which is the high end of the range of stated fees across all cases.

--Mark Fischer
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