UPDATE: CASE SUMMARY: Dex Media Files Prepackaged Bankruptcy to Deleverage $1.8B of Funded Debt Obligations

UPDATE 7:42 p.m. EDT 7/09/2016: In advance of its joint disclosure statement approval and plan confirmation hearing scheduled for July 15 at 10 a.m. EDT, Dex Media has filed an amended plan containing several technical modifications, as well as two plan supplements. The first plan supplement document includes, among other things, a list of retained causes of action, the warrant agreement for warrants to be issued to holders of subordinated note claims (with an undisclosed exercise price) and the credit agreement governing the $600 million takeback first lien term loan. The second plan supplement document contains the guarantee and collateral agreement for the takeback first lien term loan. 

UPDATE 3:41 p.m. EDT 6/08/2016: Judge Kevin Gross has just entered an order authorizing the Dex Media debtors to assume their prepetition restructuring support agreement. This order and several other operational orders were entered without a hearing on the basis of an omnibus certification of counsel filed by Dex Media's counsel yesterday. 

UPDATE 3:07 p.m. EDT 6/03/2016: This afternoon, Epiq Bankruptcy Solutions filed a supplemental declaration setting forth the final tabulation of votes for Dex Media's class 7 subordinated notes claims. According to the ballot tabulation, which is set forth below, holders of class 7 claims voted to accept the plan with about $200.6 million, or 99.69% in amount, and 46 creditors, or 90.20% in number, voting to accept the plan. The filing also attaches a report of all ballots that were not included in the tabulation along with the reason for their exclusion.
 

 
Original Story 2:01 p.m. EDT 5/17/2016:

Relevant Documents:
Voluntary Petition
Docket
Press Release
First Day Declaration
Cash Collateral Motion
Plan of Reorganization/Disclosure Statement
RSA Motion
First Day Hearing Agenda

Dex Media, a Dallas-based marketing company, filed petitions and a joint prepackaged plan of reorganization Monday night in the Bankruptcy Court for the District of Delaware. The company attributes the filing to the “proliferation of new digital products, including internet-based directory products, search engines, and social media, as well as increased competition from cable television, newspapers and other sources,” resulting in “severe reduction of demand for their products.”

Earlier this month, the debtors announced that they had entered into a restructuring support agreement with certain lenders and noteholders. According to the filings, the restructuring transactions would deleverage the debtors’ funded debt obligations by approximately $1.8 billion, pursuant to a prepackaged plan that provides for claims under the debtors’ prepetition secured credit agreements to receive their pro rata share of 100% of (a) the equity of the top-tier holding company of the reorganized debtors subject to dilution by management equity and/or warrants, (b) a takeback first lien term loan in an aggregate principal amount of $600 million and (c) their remaining cash collateral. Holders of the subordinated notes would receive their pro rata share of $5 million in cash and warrants. Administrative claims, other priority claims and general unsecured claims would be paid in full.

A hearing on the first day motions has been scheduled in front of Judge Kevin Gross for tomorrow, Wednesday, May 18, at 9 a.m. EDT.

The disclosure statement contains Moelis’ analysis of the company, which estimates that Dex Media’s enterprise value as of an assumed effective date (June 30) would range between $1.45 billion and $1.65 billion. The midpoint of $1.55 billion plus the estimated excess cash balance at the effective date of $51 million equals $1.601 billion.

According to the debtors’ proposed chapter 11 schedule, the restructuring will proceed on the following timeline:
 

• Petition date (May 16): Voting deadline for classes 3-6
• May 31: Voting deadline for class 7
• June 17: Objection deadline
• July 15: Confirmation hearing

In a press release, Dex Media noted that its solicitation process, which began on May 2, resulted in “more than 90% of the Company’s senior secured lenders voting in favor of the Plan.” A preliminary declaration submitted by Jane Sullivan of Epiq, dated May 16, reports the voting results from voting creditors, showing 100% acceptance of the plan in amount and number of votes in classes 3 through 6. Creditors in class 7 have until May 31 to submit votes.

The debtors are represented by Kirkland & Ellis and Young Conaway as counsel and Moelis as investment banker and financial advisor. The case number is 16-11200.

Background

The company submitted the declaration of Andrew Hede, CRO of Dex Media, in support of the first day motions and chapter 11 cases. Hede notes that the company in its current form is a result of the two dual-track chapter 11 cases of Dex One and SuperMedia that were filed and confirmed in the spring of 2013, also presided over by Judge Gross, pursuant to which the companies merged. However, after the merger, “many of the same macro challenges” continued to affect the resulting company, and the debtors were not able to realize benefits from the merger as quickly as they had hoped.

The company has recently taken steps to implement a better business plan, including accelerating the reduction of costs, taking additional steps to reduce the print product decline and launching “a series of products designed to help small businesses compete with their larger competitors and thrive using today’s sophisticated digital marketing tools.” However, to properly execute this business plan, the debtors say they “must first right-size their balance sheet.”

In September 2015, the company elected not to make a subordinated notes coupon payment and used the grace period under its subordinated notes to continue negotiations with an ad hoc lender group holding debt under the company’s four secured credit facilities. The company also began negotiations with an ad hoc noteholder group, even though the debtors’ secured lenders are undersecured and the noteholders are entitled to little if any recovery, according to the debtors. The company then chose not to cure the subordinated notes payment by the end of the grace period, and this resulted in an event of default under the note indenture on Oct. 30. The company then entered into a forbearance agreement with its credit lenders relating to that event of default, although the noteholders had declared the senior subordinated notes to be immediately due and payable.

After several extensions of the forbearance agreement, the company recently reached a restructuring support agreement with its stakeholders for “a consensual balance-sheet restructuring transaction that would also address the Debtors’ overly complicated organizational structure in a tax-efficient manner.” Accordingly, the debtors filed for chapter 11 to effectuate the RSA, and they say they intend to emerge from bankruptcy within three to four months.

The debtors’ corporate structure is as follows:
 
The debtors report $1.26 billion in assets and $2.65 billion in liabilities.

The debtors’ largest unsecured creditors are listed below:
 
The case representatives are as follows:
 
The debtors filed the following summary of votes on the prepackaged plan:
 
Plan of Reorganization/Disclosure Statement/Motion to Assume RSA

According to the disclosure statement, the debtors entered into an RSA with parties holding about 69% in aggregate of claims under the credit agreements and approximately 80% of claims under the subordinated notes. The plan mirrors the restructuring terms set out in the RSA. The RSA parties include Wingspan, Silver Point Capital, Ares, Mudrick, GoldenTree, Paulson Credit Opportunities Master Ltd., Ramat Securities and Bennett.

Under the RSA, the company is also obliged to pay the fees and expenses of Milbank Tweed, Houlihan Lokey Capital, Wachtell Lipton, PJT Partners and Simpson Thacher & Bartlett, and pay the fees and expenses of Akin Gump and Ducera Partners up to $500,000 in the aggregate, pursuant to the terms of the subordinated noteholder term sheet.

The RSA sets out the following case milestones:
 

• Within five business days of receipt of signature pages to the RSA from supporting lenders holding at least 60% in amount of claims in respect of each loan: commence solicitation of the approved plan;
• 14th day following the solicitation date: commencement of the chapter 11 cases following the receipt of ballots from holders of more than 66.67% of claims under each of the loans, and more than 50% of the holders who timely submit valid ballots under each of the loans;
• Petition date: filing of a motion seeking interim and final approval of a cash collateral order acceptable to the required supporting lenders;
• May 21 (five days after petition date): interim approval of a cash collateral order that is acceptable to the required supporting lenders;
• June 30 (45 days after petition date): final approval of a cash collateral order that is acceptable to the required supporting lenders;
• Sept. 13 (120 days after petition date): approval of the disclosure statement and confirmation of the approved plan acceptable to the required supporting lenders; and
• Sept. 13 (120 days after petition date): plan effective date.

In broad strokes, the plan provides for claims under the debtors’ prepetition secured credit agreements to receive their pro rata share of 100% of (a) the equity of the top-tiered holding company of the reorganized debtors (subject to dilution by management equity and/or warrants), (b) a takeback first lien term loan in an aggregate principal amount of $600 million and (c) their remaining cash collateral.

Holders of the subordinated notes would receive, from proceeds of the collateral of the term loan lenders, their pro rata share of $5 million in cash and warrants. Administrative claims, other priority claims and priority tax claims would be paid in full upon the debtors’ emergence (or, in the case of priority tax claims, treated in accordance with section 1129(a)(9)(C) of the Bankruptcy Code). General unsecured claimholders will receive, from proceeds of the collateral of the term loan lenders, payment in full on the later of the effective date or the ordinary course of business. Claims relating to the purchase and/or sale of debt and securities, as well as existing equity interests in Dex Media Inc., will be canceled without any distribution.

Specifically, the plan provides for the following treatment of claims:
 

• Class 1 - other priority claims: unimpaired, not entitled to vote and presumed to accept, to receive cash payment in full on the effective date or as soon thereafter as reasonably practicable.
   
• Class 2 - other secured claims: unimpaired, not entitled to vote and presumed to accept, to receive (i) cash payment in full on the effective date or as soon as reasonably practicable, (ii) reinstatement pursuant to section 1124 of the Bankruptcy Code, (iii) the collateral securing the claim or (iv) such other recovery necessary to satisfy section 1129 of the Bankruptcy Code.
   
• Class 3 - Dex East credit facility claims: impaired, entitled to vote, to be allowed in an aggregate amount not less than $300,419,117.58 plus accrued but unpaid interest and fees through the petition date, to receive:
   
  • 14.965456566% of new common stock, subject to dilution for warrants and issuances under the management incentive plan and the holder’s exercise of the equity put option;
  • 13.465456566% of loans arising under the takeback first lien term loan, subject to the holder’s exercise of the equity put option; and
  • 100% of the remaining cash balance in Dex East, less intercompany payables owed to Dex One Service Inc., Dex East minimum operating cash contribution and Dex East closing expenses.
     
• Class 4 - Dex West credit facility claims: impaired, entitled to vote, to be allowed in an aggregate amount not less than $274,507,025.17 plus accrued but unpaid interest and fees through the petition date, to receive:
   
  • 18.024949065% of the new common stock, subject to dilution for warrants and issuances under the management incentive plan and the holder’s exercise of the equity put option;
  • 14.724949065% of loans arising under the takeback first lien term loan, subject to the holder’s exercise of the equity put option; and
  • 100% remaining cash balance in Dex West, less intercompany payables owed to Dex One Service Inc., Dex West Minimum Operating Cash Contribution and Dex West Closing Expenses.
     
• Class 5 - RHDI credit facility claims: impaired, entitled to vote, to be allowed in an aggregate amount not less than $ 567,690,116.17, plus accrued but unpaid interest and fees through the petition date, to receive:
   
  • 21.652435636% of new common stock, subject to dilution for warrants and issuances under the management incentive plan and the holder’s exercise of the equity put option;
  • 23.152435636% of loans arising under the takeback first lien term loan, subject to the holder’s exercise of the equity put option; and
  • 100% of the remaining cash balance in RHDI, less intercompany payables to Dex One Service Inc., RHDI Minimum Operating Cash Contribution and RHDI Closing Expenses.
     
• Class 6 - SuperMedia credit facility claims: impaired, entitled to vote, to be allowed in an aggregate amount not less than $966,784,000.15 plus accrued but unpaid interest and fees through the petition date, to receive:
   
  • 45.357158733% of new common stock, subject to dilution for warrants and issuances under the management incentive plan and the holder’s exercise of the equity put option;
  • 48.657158733% of loans arising under the takeback first lien term loan, subject to the holder’s exercise of the equity put option; and
  • 100% of the remaining cash balance in SuperMedia, less intercompany payables to Dex One Service Inc., SuperMedia minimum operating cash contribution and SuperMedia closing expenses.
     
• Class 7 - subordinated notes claims: impaired, entitled to vote, to be allowed in an aggregate amount of $270 million plus accrued but unpaid interest as of the petition date, to receive a pro rata share of $5 million in cash, as well as the warrants.
   
• Class 8 - general  unsecured claims: unimpaired, not entitled to vote and presumed to accept, to receive full payment in cash on the later of the effective date or in the ordinary course of business.
   
• Class 9 - claims relating to the purchase and/or sale of debt and securities: impaired, not entitled to vote and deemed to reject, canceled without any distribution.
   
• Class 10 - intercompany claims: unimpaired, not entitled to vote and presumed to accept, either reinstated as fo the effective date, or canceled without distribution at the debtors’ or reorganized debtors’ option.
   
• Class 11 - intercompany interests: unimpaired, not entitled to vote and presumed to accept, either reinstated as of the effective date, or canceled without distribution at the debtors’ or reorganized debtors’ option.
   
• Class 12 - interests in parent: impaired, not entitled to vote and deemed to reject, canceled and extinguished without distribution on the effective date.

The disclosure statement summarizes the voting rights, estimated recovery under the plan, and estimated recovery under a chapter 7 liquidation in the following chart:
 
Under the plan, the takeback first lien term loan would be a five-year, $600 million term loan converted from the outstanding prepetition credit agreements. The loan would be secured by a first priority perfected senior lien on substantially all assets of the borrower, Dex Media, and guarantors, other than 35% of the voting equity of any first tier foreign subsidiaries and certain other customary exceptions. Interest is cash pay at LIBOR+10%, plus an additional 2% in the event of a default. The term loan includes provisions relating to a quarterly excess cash flow sweep to prepay the term loan at par, and it is also subject to mandatory prepayments, including 100% of the proceeds of certain debt incurrences and 100% of the proceeds of equity issuances. The term sheet provides for a 5x debt-to-EBITDA covenant, with a maximum capital expenditure covenant of $40 million per fiscal year, as well as a minimum liquidity amount of $35 million.  

Valuation Analysis

Under Moelis’ valuation analysis, upon an assumed effective date of June 30, the going concern enterprise value would be in a range between $1.45 billion and $1.65 billion. The midpoint of the enterprise valuation range of $1.55 billion plus the excess cash balance that management has estimated the reorganized debtors will have at the assumed effective date equals $1.601 billion.

Financial Projections

The debtors submitted consolidated financial projections for calendar years 2016 through 2020:
 
The DS contains separate projections for Supermedia, RHDI, Dex East and Dex West, as well as separate projections for various corporate operating costs. These projections can be downloaded HERE.

Key assumptions include:
 

• Consolidated revenue is expected to decline at a decreasing rate in 2016 through 2019 “as the business continues to transition from print directories to digital-based marketing solutions” (emphasis added). This transition would lead to consolidated revenue growth in 2020 of 0.4%.
   
  • Digital revenue, after declining 11% in 2016 year over year, is expected to return to growth during the projection period through “increased adoption of the debtors’ newly introduced Beyond Leads products: DexLnk and DexHub.”
  • Print revenue is expected to decline from 67% of revenue in 2015 to 32% in 2020.
     
• Sales expense, which includes sales and non-sales salaries and overhead, is expected to decline from $241 million to $196 million from 2016 to 2020, “driven by the reduction in the total sales workforce to align with the decline in overall revenue generated by the Debtors over the period, as well as a reductions in commissions associated with the expected decline of the Print Segment.” As a percentage of revenue, sales expense is projected to decline from 19.5% to 18.4% “as the Debtors transition to more recurring revenue based products.”
   
• Operations expense, which includes salaries and overhead for print and digital products (i.e., distribution, publishing and paper costs for print products), is expected to decline as a percentage of sales from 9.8% to 7.7% from 2016 to 2020. The decline is expected to be driven by a “transition to a majority digital offering with less required distribution, publishing and paper costs.”
   
• Information technology expense, which includes salaries and overhead for IT related to print and digital products as well as corporate information technology expenses, is expected to decline because of a reduction in the scale of the business but remain constant as a percentage of sales.
   
• Core marketing expense is expected decline because of the reduction of the print segment.
   
• Direct digital expense is expected to decline as a percentage of sales “as Management expects that there will be operating leverage in certain expense components and the Debtors’ mix of products will transition away from SEM and SEO to presence-based and Beyond Leads products ..., which carry lower traffic costs.”
   
• Other general and administrative expenses are expected to remain stable as a percentage of sales through 2020.

As for the post-emergence debt assumptions, the model assumes a LIBOR+10% $600 million new first lien term loan. As consistent with the plan, the projections assume a 100% cash flow sweep for the entire projection period.

Turning to cash flow, capex represents between 1.5% and 2% of annual operating revenue, or approximately $20 million per year.

Debt Structure/Cash Collateral Motion

The company’s prepetition capital structure includes:
 

• Secured debt: $2.4 billion in obligations consisting of (a) $300 million of obligations under the Dex East facility, (b) $275 million of obligations under the Dex West facility, (c) $568 million of obligations under the RHDI facility and (d) $967 million of obligations under the SuperMedia facility. These facilities are each secured term loan facilities requiring quarterly payments principal and interest and maturing on Dec. 31, 2016.
   
• Unsecured debt: $270 million in outstanding principal amount of 12%/14% subordinated notes due 2017, issued by DMI with the Bank of New York Mellon as trustee.
   
• Equity: Approximately 80% of the equity interests in DMI are held by Paulson & Co. Inc., with the remainder owned by certain current and former directors and officers and other public shareholders.

The debtors’ prepetition debt obligations are summarized below:
 
DMI, DMHI, Dex Digital, Service, RHDC, JPMorgan, and Deutsche are parties to a collateral agency and intercreditor agreement dated as of Jan. 29, 2010. The intercreditor agreement governs certain of the rights and interests of the lenders including, in the event of a bankruptcy, related enforcement and turnover provisions.

DMI, DMHI, Dex Digital, Service, RHDC, Dex East, Dex East, RHDI, and SuperMedia are parties to a shared guarantee and collateral agreement providing for certain secured and unsecured guarantees for each of the secured credit facilities.

Dex East, Dex West, RHDI, SuperMedia, JPMorgan and Deutsche are parties to a subordinated guarantee agreement dated as of Jan. 29, 2010, under which each borrower under each of the secured credit facilities has guaranteed the obligations under the other three secured credit facilities on an unsecured basis.

Dex requests cash collateral use subject to a 13-week budget. The debtors propose the following adequate protection package for secured parties under the SuperMedia, Dex East, Dex West and RHDI agreements:
 

• Allowed superpriority administrative claims with priority over any and all unsecured claims and administrative expense claims.
   
• Adequate protection liens, including a junior priority replacement lien on and security interest in all of the debtors’ real and personal property, and a priming lien on and security interest in all tangible and intangible assets.
   
• Monthly cash payments, i.e., cash sweeps to the prepetition secured parties, provided that the debtors shall not be required to make such payments under the interim order if: (a) SMLLC holds less than $39 million in unrestricted cash, (b) Dex East holds less than $12.5 million in unrestricted cash, (c) Dex West holds less than $14 million in unrestricted cash or (d) RHDI holds less than $19.5 million in unrestricted cash.
   
• Payment of fees and expenses incurred by the prepetition agents, including fees of Simpson Thacher and other counsel, financial advisors and other professionals; the ad hoc group of prepetition lenders including the fees of Milbank Tweed, Houlihan Lokey and other counsel, financial advisors and other professionals; and Mudrick Capital management, including the fees and expenses of Wachtell Lipton and PJT Partners.
   
• Maintenance of cash management arrangements.
   
• Continued compliance with the financial reporting requirements set out in the credit agreements.
   
• Reasonable inspection of books and records by the prepetition credit agreement agents.

The cash collateral order provides for a carve-out for statutory fees and professional fees, including $2.5 million for debtor professionals. The proposed cash collateral orders do not provide for cross-collateralization, other than replacement liens as adequate protection. The cash collateral order provides for a challenge period of 75 days after entry of the interim order for parties other than an official committee of unsecured creditors, and 60 days for the committee following its appointment. The requested relief also includes a waiver of 506(c) claims against the prepetition collateral or adequate protection collateral and the prepetition secured parties, as well as a waiver of the section 552(b) “equities of the case” exception against the prepetition secured parties.

Other Motions

In addition to the motions described above, the debtors also filed various standard first day motions, including the following:
 

• Motion for Joint Administration
  • The cases will be jointly administered under case no. 16-11200.
• Motion to Establish Bar Dates
  • The debtors seek to establish 5 p.m. EDT on a date that is at least 21 days after service of the bar date notice as the bar date, and Nov. 14 at 5 p.m. EDT as the governmental bar date.
• Motion to Establish Trading Procedures
  • The debtors seek to establish trading procedures for its common stock, to be able to object to and prevent transfers if necessary to preserve net operating losses. The debtors have about $317 million in NOLs.
• Motion to Pay Employee Wages and Benefits
  • The debtors employ approximately 3,100 hourly and salaried employees and are party to seven collective bargaining agreements with the International Brotherhood of Electrical Workers of America and the Communication Workers of America that relate to 750 employees.
  • The debtors seek authority to pay $9.475 million on an interim basis and $22.547 million on a final basis.
• Motion to Use Cash Management System
  • The company has 31 bank accounts with Bank of America Merrill Lynch, Frost Bank, JP Morgan Chase Bank and State Street Global Advisors.
• Motion to Pay Certain Prepetition Claims
  • The debtors estimate that approximately $47.5 million of certain prepetition claims has accrued as of the petition date, of which approximately $39.85 million will come due within 21 days. The debtors note that because they seek to pay the claims in full under the plan, the relief requested seeks only to alter the timing and not the amount of the payments.
• Motion to Continue Customer Programs
  • The debtors estimate that, of the prepetition obligations under their customer programs, approximately $9.1 million constitutes accrued credits, adjustments, discounts, or other similar obligations, the vast majority of which does not entail the expenditure of cash.
• Motion to Maintain Insurance Programs
• Motion to Reject Certain Contracts and Leases
• Motion to Pay Sales and Use Tax
  • The debtors believe they are current on taxes and fees and estimate that approximately $13,138,000 in taxes and fees is accrued and remains unpaid as of the petition date.
• Motion to Provide Utilities with Adequate Assurance
  • The debtors propose to deposit $390,000 into a segregated account as adequate assurance for payment of utilities.
• Application to Appoint Epiq as Claims Agent
• Motion to Retain and Compensate Ordinary Course Professionals
• Motion to File Consolidated List of Creditors

The debtors also filed a plan and disclosure statement scheduling motion. A hearing on the motions has been scheduled for tomorrow, Thursday, May 18, at 9 a.m. EDT.