💰New Chapter 11 Bankruptcy Filing -- Alpha Latam Management LLC💰
On August 1, 2021, Alpha Latam Management LLC and four Colombian affiliates, one Panamanian holdco affiliate and one Mexican holdco affiliate (together, the “debtors”) filed for chapter 11 bankruptcy in the District of Delaware (Judge Stickles). The debtors’ operating affiliates in Mexico, including Alpha Holding S.A. de C.V., are not included in the chapter 11 filing — even though the debtors’ troubles really started due to the Mexican segment of their business.
Founded in 2011, the debtors are a specialty finance business that initially provided consumer and small and midsize business lending services to underserved communities in Mexico by way of payroll deduction loans. The company subsequently expanded in 2015 to service Colombia before launching additional initiatives like leasing and factoring services, a mobile app that offered instant loans to customers, and a new digitized credit platform for small and midsize enterprises.
Here’s the thing: when you run a credit business you kinda need to keep your numbers straight. The debtors — or at least their operating affiliates in Mexico — failed to do so.
In May 2020, a new Controller — ironically hired to improve internal audit and accounting processes — discovered material errors relating to the company’s Mexican affiliates’ derivative positions, provisions for non-performing loans, provisions related to A/R, and amortization of capitalized expenses. These “errors” necessitated a restatement of financial statements for fiscal years ‘18 and ‘19 and an investigation into past practices, helmed by a newly appointed independent manager represented by his own counsel.
Now may be a good time to mention that the business has quite a bit of funded debt on it.* $768.4mm to be exact, including some hefty note issuances agented by The Bank of New York Mellon (featured prominently on the list of top unsecured creditors with $400mm ‘25 in unsecured notes and another $300mm ‘22 in unsecured notes). Lenders tend to negotiate information rights when they dole out huge wads of cash like that and one low hanging fruit bit of information they typically like to see are audited financials. With the “errors,” however, the debtors were unable to deliver, among other things, ‘20 financials. This triggered various defaults under the company’s debt docs. It’s kinda hard to get access to credit to underwrite loans when your own house ain’t in order.
Indeed, the debt doc defaults prevented the company from obtaining access to the capital and liquidity it needed to issue new loans. Originations ground to a halt. Attempts to secure waivers and forbearances from creditors proved unsuccessful and certain lenders began accelerating their debt, among other things. One creditor, IDB, is owed $24mm and initiated an action against the debtors in Colombia on July 26, 2021.
So, uh, obviously sh*t was melting quickly. Luckily, the debtors have some unencumbered assets — specifically, their Colombian loan portfolio. This is where we got a chuckle: the First Day Declaration filed contemporaneously with the bankruptcy petition talks about the company’s mission “…of improving the quality of life of individuals in the low-income segment of the population and promoting the growth of small and midsize enterprises … by offering these populations greater access to credit.” That sounds noble and all until you see the usurious interest rates these opportunists were charging. Here is how they market/describe the Colombian loan portfolio:
The Debtors’ target borrowers have a monthly gross income ranging from COP 700,000 to COP 10,000,000 ($181 to $2,591 USD) and ages ranging from 31 to 84. On average, a PDL has an initial term of approximately 108.9 months and an initial principal amount of COP 18.03 million or $4,900 USD. The average interest rates for PDLs is 24.40% per annum, which complies with Colombian interest rate regulations. As of May 31, 2021, the Debtors had approximately 36,800 PDLs outstanding with an aggregate principal amount of COPs 647.8 billion or $174.4 million USD.
Now THAT is yield, baby, yield!!!
The debtors intend to use the bankruptcy process to sell these assets. To do so, they’ve obtained a commitment for a $45mm DIP credit facility ($17.5mm interim requested), which will be secured by first priority senior liens on substantially all of the debtors’ unencumbered assets and junior liens on previously liened-up assets. The proposed DIP lenders intend to charge the debtors 10% interest which, as compared to 24.40%, looks like quite a frikken bargain!! The facility also carries a 2% commitment fee and separate 2% exit fee.
The DIP — as the standard these days — imposes pretty rigid milestones upon the debtors to get this sale done as quickly as possible. A bidding procedures motion, for instance, needs to be filed within 20 days of the entry of the interim DIP order and “ordered” within 45 days. An auction is required within 90 days of the petition date.
*Trade debt, on the other hand, looks rather minimal which is to be expected given the nature of the business.
Date: August 1, 2021
Jurisdiction: D. of Delaware (Judge Stickles)
Capital Structure: $400mm ‘25 unsecured notes, $300mm ‘22 unsecured notes, $23mm unsecured loan, $16.9mm unsecured note
Legal: White & Case LLP (John Cunningham, Richard Kebrdle, Amanda Parra Criste, Philip Abelson, John Ramirez, Breett Bakemeyer, Ashley Bowron, Lilian Maria de Freitas Souza Marques, Devin Rivero, Andrew Zatz) & Richards Layton & Finger PA (Mark Collins, John Henry Knight, Brendan Schlauch)
Independent Manager: Alan M. Cohen
Legal: Skadden Arps Slate Meagher & Flom LLP (Paul Leake, George Panagakis, Evan Hill, Carl Tullson)
Financial Advisor: AlixPartners LLP (John Castellano)
Investment Banker: Rothschild & Co. (Marcelo Messer)
Claims Agent: Prime Clerk LLC (Click here for free docket access)
Other Parties in Interest:
10% ‘22 Senior Notes & 9% ‘25 Senior Notes Trustee: The Bank of New York Mellon
Legal: Reed Smith LLP (Kurt Gwynne, Mark Eckard, Jason Angelo)
DIP Note Purchasers
Legal: Cleary Gottlieb Steen & Hamilton LLP (Richard Cooper, Adam Brenneman, Jane VanLare, John Veraja) & Young Conaway Stargatt & Taylor LLP
Financial Advisor: Houlihan Lokey