💥New Chapter 7 Bankruptcy - Chicken Soup for the Soul Entertainment Inc. ($CSSEL)💥
What. A. Sh*t. Show.
On June 28, 2024 and June 29, 2024, Chicken Soup for the Soul Entertainment Inc. ($CSSEL) and 21 affiliates (collectively, the "debtors") filed chapter 11 bankruptcy cases in the District of Delaware (Judge Horan).
The debtors operate (i) Redbox Free Live TV, a free ad-supported streaming television service with approximately 180 channels, (ii) a transaction video-on-demand service, and (iii) a network of approximately 24,000 kiosks across the United States for DVD rentals (collectively, “Redbox”). To provide original and exclusive content to their viewers, the debtors create, acquire, and distribute films and television series through debtors Screen Media Ventures, LLC (“Screen Media”), Chicken Soup for the Soul Television Group, LLC (“CSSTV”), Landmark Studio Group, LLC, and each of their subsidiaries.
Yep, CCSE is the poor entity that ended up holding the bag when Redbox was flirting with bankruptcy back in ‘21/’22. We covered the disastrous chain of events here:
The entire situation was straight out of a finance themed Looney Tunes episode that included a leveraged buyout gone wrong, a deSPAC transaction, and meme stock status. But what’s important to know for today is that CCSE, through the acquisition of Redbox, assumed ~$359.9mm of debt originally extended by HPS Investment Partners LLC (“HPS”).
Debt that, per the first day declaration, was going to be serviced by “…a partial return to pre-COVID levels in the number and cadence of theatrical releases that were available to the company for its kiosk network, as well as cost synergies”.
Someone somewhere (not on planet Earth) was banking on physical kiosk rentals to carry the company’s debt servicing needs:
“The corresponding rebound in demand for physical kiosk rentals was expected to return to approximately one-third of 2019 levels. Along with expected synergies from the Redbox Acquisition, the post-COVID rebound in demand for physical kiosk rentals was expected to generate sufficient cash flows to cover the cash needs of the combined businesses.”
LOL, what in the f*ck did they expect?
The first day declaration comes from William J. Rouhana, Jr. who has helmed the company as CEO since 2008 until June 24, 2024.* And Mr. Rouhana wasted no time in pointing fingers at the pre-petition lenders:
“The Debtors’ operating plan and budget called for the Debtors to obtain a working capital loan of up to $40 million secured by a first lien on the Debtors’ accounts receivable. A working capital loan meeting these criteria is specifically contemplated under the terms of the Pre-Petition Credit Agreement and was believed at the time to be sufficient to enable the Debtors to take advantage of the expected rebound in theatrical releases in the late spring of 2023.”
“Although CSSE was offered a loan facility by a reputable private lending fund on terms compliant with the Pre-Petition Credit Agreement, the new loan facility was not approved by the Pre-Petition Agent. Thus, as the flow of theatrical releases began to increase following COVID, the Debtors’ inability to secure the accounts receivable loan hampered their ability to pay for and secure new content, which began to strain relationships with the Debtors’ creditors, including content providers”
So no, he avers, it wasn’t a bad business plan that sunk the debtors (aka reliance on antiquated rental kiosks), it was an uncooperative lender!
And to make things worse, the debtors were trying to push through a $20mm priming DIP facility from Owlpoint IP Opportunities JVF I LP (“Owlpoint”) and a non-consensual use of cash collateral. Godd*mn! Talk about giving the middle finger to HPS.
Meanwhile HPS be like:
They objected to the DIP, pointed to the priming and laughed at the fact that the debtors even implied there was any semblance of an equity cushion to act as adequate protection. “Mythical” they called it. Here’s HPS
“Regardless, any purported equity cushion clearly does not exist. Publicly filed financial statements demonstrate the Debtors’ distressed financial condition: CSSE incurred net losses of approximately $636.6 million in 2023. See CSSE Form 10-K (April 19, 2024) at 5 (emphasis added). These loses have continued into 2024, with CSSE incurring a net loss of approximately $52.9 million for the three months ended March 31, 2024. CSSE Form 10-Q (May 20, 2024) at 8 (emphasis added). Moreover, the Debtors have been sent delisting notices on their stock that is continuing to decline, and, as of the Petition Date, the Debtors have a book value deficit of approximately $550 million. See CSSE Form 10-K (April 19, 2024).”
“Critically, pursuant to the Forbearance Agreement, the Secured Lenders agreed to take a 60% haircut on their secured loans if the Debtors could raise the new financing to pay down the balance within the time periods required by, and as provided in, the Forbearance Agreement. See CSSE Form 8-K (May 3, 2024). Specifically, the Secured Lenders were willing to walk away from their $500 million in outstanding loans for a total payment of $200 million, if the Debtors could raise new financing to pay them down within the time periods required by, and as provided in, the Forbearance Agreement. Yet, the Debtors were unable to secure new financing to effectuate this transaction. If the Debtors could not raise enough capital to pay down the loans for 40 cents on the dollar, it is nonsensical that they will somehow be able to satisfy the Secured Parties’ claims in full after taking into account the proposed priming DIP. Accordingly, the Secured Parties are not protected by any equity cushion—let alone a 30% cushion.”
Oh, also HPS filed this (the “reconstitution motion”):
In the reconstitution motion, HPS lays out a series of allegations against Mr. Rouhana who, among other things, on June 11, 2024, fired all the company’s directors and disbanded the strategic review committee to, allegedly, assert his control over the company.** HPS was so concerned about governance that they are willing to throw all of this into the hands of a chapter 7 trustee.
The rest of the reconstitution motion drags Mr. Rouhana’s tenure at CCSE through the dirt with multiple allegations of gross mismanagement. We found this part especially amusing:
“The misconduct described above—including making transfers to insiders while the Company was bleeding cash, firing the Company’s directors in breach of both contract and corporate governance documents, failing to pay thousands of employees and allowing their medical benefits to be cancelled, and failing to pay millions of dollars in payroll taxes—is the tip of the iceberg. Rather than work with its creditors, the Company, under Mr. Rouhana’s leadership, preferred dishonesty and gamesmanship. As just one example, earlier this year, the Company purported to make an interest payment on the loans issued by the Agent by having a Company representative drop a company check in an abandoned building that had not been occupied by the Agent for many years and was not the address that the Agent listed in the Credit Agreement.”
LOL Mr. Rouhana is using some elementary level subterfuge here.
So given a non-consensual priming DIP, a non-consensual use of cash collateral, and HPS’ reconstitution motion, how did the first day hearing on July 1, 2024, go?
Something like this:
Here’s Judge Horan:
“I'm frankly highly reluctant to go forward this morning, given the seriousness of the allegations that I've read. And as a practical matter, I'm just not sure how we are able to accomplish much today.”
So yes, the hearing was rescheduled, but not before we became acquainted with some other secured claimants who had not been represented in any of the previous debtor disclosures including the Directors Guild of America Inc, Screen Actors Guild-American Federation of Television and Radio Artists, Writers Guild of America, West (collectively, the “guilds”), MidCap Financial Trust (“MidCap”), Apollo Overseas Partners (“Apollo”), and Cedar Advance LLC (“Cedar Advance”). Every one of these claimants expressed concerns about the DIP/cash collateral motion and said that the debtors failed to contact them at all about the motion beforehand.
Fast forward one day and on July 2, 2024, we had day two of our first day hearing.
It didn’t go any better.
Here’s Paul Hasting LLP’s Frank Merola, on behalf of MidCap, expressing some concern at the current standing of the cases:
“You've heard the secured creditor say they would prefer a chapter seven trustee to the continued management. That's a pretty strong statement on the first day of the case. HPS in many ways is the tail wagging the dog. We have a security interest in a film library that we want to be repaid on, but the creditors in this case may not be as fortunately positioned as MidCap to represent themselves. There are hundreds of creditors in this case that are being dragged along in this soap opera through no fault of their own.”
And slightly calling HPS’ chapter 7 bluff, here’s Reed Smith LLP’s Michael Cooley on behalf of the debtors:
‘I note [HPS] did not ask the court to dismiss the case outright and simply let them proceed with their foreclosure - simply take the libraries and go. And I imagine that's because whatever their questions may be about the present condition of the company, there is a belief that it is better to stabilize this business and see what can be done to maximize its value as a going concern rather than to simply have the secured lender pluck the film libraries out of the smoldering pile of ash and see what it can get for those film libraries in isolation.”
And he wasn’t wrong. HPS indicated a willingness to provide financing to cover necessary employee wages, including a payroll that was already past due. The hearing was adjourned for ~5 hours while the parties hashed out the details.
And here’s Mr. Cooley with the results:
“We have been able to arrive at terms with the lenders - with HPS - for a proposed consensual post petition financing arrangement to be provided by HPS to the debtors on the terms set forth in a dip term sheet, which is essentially a document that is the same document that we started with under the forbearance agreement that was, and then has been since modified in part to accommodate certain of the new terms and agreements reached.”
That’s some tasty word salad. Bottom line: disaster averted and employee payroll and health insurance get paid right?
Surprise! It’s another priming DIP! Only this time it’s HPS trying to prime the other secured lenders. MidCap and the other secured claimants weren’t having it. And even after Judge Horan gave the parties another night to discuss, day 3 of the “first day hearing” rolled around on July 3, 2024 and the issues still persisted.
At this point, this case devolved into a fight over an $8mm DIP that was meant to cover overdue payroll and health insurance. When HPS, a holder of over $500mm in prepetition secured claims, is concerned about possibly losing an $8mm DIP, you know all parties are sitting there like:
But ultimately, after another recess, the parties came together and drafted up a consensual $8mm DIP package from HPS. It’s only an interim order and it had to include a negative marshaling concept that allows HPS to only be paid from their collateral first before any of the other secured claimants’ collateral, but hey, compromises had to be made.
The DIP carries a base rate+9%/SOFR+10% interest rate, a closing fee of 3%, and an undrawn fee of 1%. But, most importantly, the strategic review committee has been reinstated and a new CEO will be appointed which means HPS’ reconstitution motion was no longer an issue.
But guess what, y’all. All of that ⬆️ was just the warm-up. This is where the true f*ckery begins.
The climax came at a status conference on July 10, 2024, a week after we had the $8mm DIP. We won’t leave y’all on a cliff hanger here: the cases were converted to chapter 7.
Two days before the status conference, Reed Smith LLP withdrew as debtors counsel and ceded the podium to Pachulski Stang Ziehl & Jones LLP. So here’s poor Richard Pachulski to break the news during the status conference:
“HPS, I think, must have made a determination that [converting to chapter 7] is a risk they're willing to take, and if there's no value to them at the end of the day, then there's no value.”
He continues:
“I don't know what else to tell you, your honor.”
“I don't recall ever having to tell a judge this in what I consider a significant case, and probably about a billion dollars of collective debt, and so I feel terrible. The employees - forget about any of the professionals, we're big boys and girls who move through this - but the employees are not getting paid, particularly for two weeks that they've worked extremely hard.”
Soooo who are we blaming for the new CSSE unemployed? Is it HPS’ fault for not wanting to fund anymore?
Nope, the entire conference was a haranguing of Mr. Rouhana and his mismanagement. It became so bad that HPS was not comfortable to fund a dime more — even with the reconstituted strategic review committee. One of these transgressions apparently included selling licenses on CCSE’s film library during the lead up to the petition date, a film library that is HPS’ collateral.
So when the debtors came to HPS asking for $26mm+ in additional DIP funding, HPS be like:
We don’t blame them. Mismanagement was apparently so bad that nobody knew what was going on leading up to the petition. Not HPS, not the board, not the strategic review committee. So with value being a giant f*cking question mark, any further DIP funding must’ve felt like flushing additional money down the toilet for HPS.
Here’s Mr. Pachulski once more:
“I will tell you, the massive mismanagement — and I've seen a lot of it — this is beyond the pale of anything I've seen. This is a train wreck like nothing I've seen.”
“But to say that this is one of the most horrific experiences of my career is a massive understatement.”
Mr. Pachulski has had a LOOOOOOOOOOONG career for those who are wondering. 😜
And thus, a thousand employees are now suddenly out of a job and medical insurance. What amounts to a “horrific experience” for Mr. Palchulski might very well be catastrophic and life altering for others.
But jeez, aren’t we glad to close the book on Redbox. A poignant end to a rollercoaster of a saga.
The debtors are were represented by Reed Smith LLP (Mark Eckard, Michael Cooley, Luke Sizemore, Jordan Siev, Ian Turetsky), Pachulski Stang Ziehl & Jones LLP (Steven Golden, Richard Pachulski) and Ashby & Geddes PA (Richard Palacio, Gregory Taylor) as legal counsel, and Solomon Partners as investment banker. HPS is represented by Milbank LLP (Dennis Dunne, Matthew Brod, Andrew Leblanc, Brett Lowe, S. Robert Marsters Jr., Danielle Sauer) and Richards Layton & Finger PA (Mark Collins, Russell Silberglied, Emily Mathews, Alexander Steiger) as legal counsel. MidCap is represented by Paul Hastings LLP (Frank Merola, Matthew Friedrick) as legal counsel.
*Paragraphs 10 and 11 are written almost as if someone forgot that William Rouhana Jr. is the declarant, referring to himself as Mr. Rouhana. Ok, Rickey Henderson.
**Mr. Rouhana brought on Womble Bond Dickinson LLP as counsel to defend himself.
Company Professionals:
Legal: Reed Smith LLP (Mark Eckard, Michael Cooley, Luke Sizemore, Jordan Siev, Ian Turetsky) Ashby & Geddes PA (Richard Palacio, Gregory Taylor) Pachulski Stang Ziehl & Jones LLP (Steven Golden, Richard Pachulski)
Investment Banker: Solomon Partners
Claims Agent: Kroll (Click here for free docket access)
Other Parties in Interest:
Pre-petition Agent and DIP Lender: HPS Investment Partners LLC
Legal: Milbank LLP (Dennis Dunne, Matthew Brod, Andrew Leblanc, Brett Lowe, S. Robert Marsters Jr., Danielle Sauer) and Richards Layton & Finger PA (Mark Collins, Russell Silberglied, Emily Mathews, Alexander Steiger)
Secured Lender: MidCap Financial Trust
Legal: Paul Hastings LLP (Frank Merola, Matthew Friedrick)
Owlpoint IP Opportunities JVF I LP
Legal: Barnes & Thornburg LLP (Paul Laurin, Kevin Collins)
Factor Counterparty: Cedar Advance LLC
Legal: A.M. Saccullo Legal LLC (Mark Hurford, Mary Augustine) and Kaminski Law PLLC (Shanna Kaminski)
Indenture Trustee: US Bank NA