💥Make Way for Creative Deals💥
At Home Group Inc., Shutterfly Inc., Kidde-Fenwal Inc. & Athenex Inc. ($ATNX)
All eyes this week were on the epic collapse of Envision Healthcare into bankruptcy — don’t worry, we’ll have some words to spew on that horror show — but while everyone was busy naval gazing at KKR’s exposed bloated midriff, other deals have been getting cut left and right that will buy companies some time.
Take, for instance, At Home Group Inc., the Dallas-based and Hellman & Friedman-owned retailer of over 45k “on-trend home products” that purportedly fit every room, style, budget or season blah blah blah. The retailer has 262 stores in 40 states and it is — we can confirm — indeed “on-trend,” becoming the latest, in the face of suffering earnings and intense cash burn, to implement a liability management exchange!
But that’s where the “on-trend” bit screeches to a halt. Putting the LME aspect aside, the company didn’t actually strip assets and dump them (“dropdown”) into an unrestricted subsidiary and screw over, on a non-pro-rata basis, non-participating lenders. 🤯, we know.
Instead, the company utilized a newly-created non-guarantor subsidiary to privately place $200mm in ‘28 11.5% senior secured notes with Redwood Capital Management. Per LevFin Insights:
Simultaneously, the company circumvented credit doc prohibitions on new super-priority secured debt and took advantage of incremental secured debt capacity by implementing a — 🥁wait for it🥁 … pro rata 🤯 — transaction that exchanged $447mm worth of existing ‘29 7.125% senior unsecured notes (thus far … out of $500mm, rated Caa3 and CCC-) for $412mm of new ‘28 7.125%/8.625% Cash/PIK Toggle senior secured notes (representing an exchange at 90c on the dollar). The accelerated maturity on the new exchange notes aligns timing across the capital structure as the company also has (i) a $600mm ‘28 L+425 term loan (which, as of 5/15/23, was quoted at 73.5c on the dollar) and (ii) $300mm of ‘28 4.875% first-lien notes (rated Caa1 and CCC+). The 29s jumped on the news …
… while the 28s dipped meaningfully on account of its newfound collateral dilution:
We’ll see whether this company ends up in bankruptcy a few years down the road anyway.
It was just a little less than one month ago when we discussed Shutterfly Inc’s bloated capital structure in this briefing:
As we noted then (and, yes, there was a connection between the company and David’s Bridal), the company’s capital structure — which has ties back to Apollo Capital Management’s leveraged buyout of the company back in ‘19 — looks like this:
📍$300mm ‘24 RCF;
📍$1.1b L+500 ‘26 term loan;
📍$785mm 8.5% ‘26 first-lien notes; and
📍$300mm 7% ‘27 senior unsecured notes.
It sounds very likely that it will not look like that for much longer ⬇️:
Cue another LME transaction!
Similar to At Home Group Inc., Shutterfly is using a non-guarantor sub to issue new debt — except here it will be secured by IP. We’ll spare you the sordid details about the — 🥁wait for it🥁 … pro rata 🤯 — transaction (you can read about it here) but it generally looks like this:
The upshot of it is that the company will raise $200mm in new money out of the newco non-guarantor sub. Given the level of support — JP Morgan Asset Management, Sixth Street, and other institutional investors represent approximately 74% of the aggregate principal amount of the 26s and more than 80% of the aggregate principal amount of term loans — the company seems all but assured of kicking the can across the vast majority of the cap stack as a subsequent exchange transaction involving the $1.1b of term loans is imminent. Similarly, the RCF and the unsecured 27s will be given the chance to exchange, pushing out maturities on both (and, in the case of the former, providing a 7.5% pay down out of the $200mm in proceeds).
The deal is being offered pro rata but anyone who doesn’t participate will find themselves subordinated to oblivion.
💩New Chapter 11 Bankruptcy Filing - Kidde-Fenwal Inc.💩
On May 14, 2023, MA-based Kidde-Fenwal Inc. (“KFI” or the “debtor”) filed a chapter 11 bankruptcy case in the District of Delaware (Judge Silverstein), a hybrid case joining together two recent dominant but typically segregated themes in bankruptcy: mass torts and asset sales!
KFI is a manufacturing company that owns and operates businesses related to industrial fire detection and suppression, temperature and control products, and products to light and control gas burners; it did roughly $200mm in sales in ‘22, primarily out of two business lines, Kidde Fire Systems (“KFS”) and Fenwal Controls (“Fenwal”). KFS provides total system solutions for special hazard fire protection and its products are used by the U.S. military and various global industries (e.g., data centers, marine, power, oil and gas, manufacturing, etc.). Fenwal is an equipment manufacturer of, among other things, gas ignition and temperature controls.
The history here is a bit like a game of hot potato. KFI’s ultimate parent was incorporated (in Delaware … venue!) back in the mass torts heyday of the late ‘80s, went public, and then got taken private in ‘05 by United Technologies Corporation (now part of Raytheon Technologies Corp.)($RTX). Shortly thereafter in ‘07, KFI merged with a sister company, Kidde Fire Fighting Inc. (“KFF”), which produced and distributed aqueous film-forming foams (say that 5x fast, “AFFF”) as part of its “National Foam” line of business. AFFF appears to be nothing more than a fancy term for foam used to smother and extinguish fires. Post-merger, KFI owned and operated the National Foam business until June ‘13, when it sold that business to Lloyd’s Development Capital. Critically, under the sale agreement, the acquirer (ultimately named New National Foam and Angus Fire Limited) assumed all liabilities to defective products sold by National Foam prior to June ‘13 and agreed to indemnify KFI against such liabilities. Subsequently, some seven years later, RTX spun KFI out to Carrier Global Corporation ($CARR). Today KFI is wholly-owned by a subsidiary of CARR.
As noted above, KFI has real sales. And as of December 31, 2022, it had roughly $318mm in total assets. A majority of this related to inter-company receivables due from CARR (totaling about $232mm), of which, on May 11, 2023, CARR remitted roughly $134mm to the debtor. Other assets include, among other things, trade receivables ($42mm), inventories ($39mm), and property, plant, an equipment ($5mm). Due to CARR’s recent payment, the debtor has roughly $133mm of unrestricted cash as of the petition date.
So if liquidity is not the issue, what gives? Well, if you didn’t read the above paragraphs and think “liability, liability, liability” with each sentence, we don’t know what to tell you. The debtor is subject to 4,400 lawsuits filed by state and local governments, businesses, and individuals alleging the use of KFI’s foam contained “forever chemicals” that promote a bevy of health issues. Apparently that ‘07-vintage merger with KFF led to KFI getting KFF’d.
It turns out that AFFF(‘d) is made with flourosurfactants, which allegedly contain traces of perfluorooctanoic acid (“PFOA”) which is sexy nerd talk for “bad for human health if exposed.” The lawsuits include (i) cases from 31 water suppliers, (ii) 4,000 personal injury cases, (iii) 28 class suits, and (iv) 30 state attorney general actions, all of which have been consolidated into a multi-district litigation (“MDL”) in Charlestown, SC, with Judge Richard Gergel. The cases largely hinge on the allegation that KFI and its affiliates contributed to the contamination of various sites and the consequent health issues. New AFFF cases continue to be added to the MDL on a regular basis, and the Debtor is reporting more than $1b in potential liabilities.
But what about the agreement where New National Foam and Angus Fire Limited agreed to indemnify KFI for liabilities relating to AFFF? Well, it turns out that KFI’s counter-party lacks the financial wherewithal to satisfy its indemnification obligations.
Consequently, KFI, given its potential direct liability in the MDL, has assumed a leading role in defending claims based on the manufacture and sale of AFFF (but KFI has reserved its rights against New National Foam and Angus Fire). In 2023 alone, KFI has racked up over $6mm in litigation-related fees and that number is only going in one direction: ⬆️.
CARR assessed this situation and be like…
…”if only there were a way to create some distance between us and this seeping cesspool.”
Here is CARR’s telling of what happened next:
Oh, wait! There’s this thing called B.A.N.K.R.U.P.T.C.Y!
“The KFI Board informed Carrier…” LO-effing-L!! What a surprise! 🙄
Another surprise: “In connection with their review of strategic alternatives, the KFI Board directed its advisors to begin contingency planning for a potential chapter 11 filing in order to effectuate a sale of KFI free and clear of the AFFF liabilities or consummate an alternative restructuring transaction.” Emphasis ours.
For those of you who are keeping score, this would be YET ANOTHER chapter 11 sale case sans stalking horse purchaser.
The debtors are represented by Sullivan & Cromwell LLP (Andrew Dietderich, Brian Glueckstein, Alexa Kranzley, Julie Kapoor) and Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Daniel Butz, Tamara Mann) as legal counsel, AlixPartners LLP (James Mesterharm, Carrianne Basler) as financial advisor and Guggenheim Partners LLC as investment banker. The special committee of the Board has Schulte Roth & Zabel LLP (Adam Harris, Gayle Klein, Peter Amend, McKenzie Haynes, Reuben Dizengoff) as counsel and CARR is represented by Simpson Thatcher & Bartlett LLP (Sandeep Qusba, Sunny Singh, Alan Turner, Nicholas Baker) and Richards Layton & Finger PA (Paul Heath, Zachary Shapiro, Cory Kandestin).
💊New Chapter 11 Bankruptcy Filing - Athenex Inc. ($ATNX)💊
On May 14, 2023, NY-based and publicly-traded Athenex Inc. (“Athenex,” $ATNX) and five affiliates (the “debtors”) filed chapter 11 bankruptcy cases in the Southern District of Texas (Judge Jones).
The debtors are a global oncology-focused biopharma company with one drug in the market (Klisyri); in early ‘21, the debtors had a new drug application Heisman’d by the US Food and Drug Administration, which indicated that the debtors needed to undertake additional clinical trials. New clinical trials require capital and the capital markets have been largely unforgiving of late (in case you were unaware). This created a kind of death spiral for Athenex and the debtors have been in a state of triage ever since.
What does that look like exactly? Well, the company was forced to (i) sell its interest in a NY-based manufacturing facility in early ‘22, (ii) monetize future revenue streams from Klisyri, (iii) divest equity interests in its Chinese manufacturing operations, (iv) sh*tcan employees in a string of RIFs, and (v) lol, raise $30mm in a public securities offering in August ‘22.
These efforts weren’t enough. The debtors are party to a 11% ‘26 credit agreement with Oaktree Capital Management LP (“Oaktree”) and have approximately $41.9mm of funded indebtedness remaining after various paydowns (behind which there’s approximately $30mm of general unsecured debt and a bunch of public equity bagholders).
Oaktree has been working with the debtors for some time now to figure out a restructuring — permitting a series of consents, waivers and covenant extensions under the credit agreement while the debtors explored strategic alternatives. No out-of-court alternative, however, emerged.
And so here we are with YET ANOTHER chapter 11 bankruptcy filing to effectuate a super-expedited sale process (45 days) without the benefit of a stalking horse purchaser. Oaktree has consented to the use of its cash collateral to further the process and to move things along the debtors already have a bid procedures motion on file ($250k expense reimbursement and 3% break-up fee proposed).
The debtors are represented by Pachulski Stang Ziehl & Jones LLP (Richard Pachulski, Debra Grassgreen, Shirley Cho, Michael Warner, Maxim Litvak, James O’Neill) as legal counsel and Meru LLC as financial advisor and CRO (Nicholas Campbell). Oaktree is represented by the seemingly omnipresent Sullivan & Cromwell LLP (Ari Blaut, Daniel Loeser, Benjamin Beller) and its local counsel, Bracewell LLP (Mark Dendinger, Jonathan Lozano).
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
Looking for quality people? PETITION lands in the inbox of 1000s of bankers, advisors, lawyers, investors and others every week. Email us at firstname.lastname@example.org to learn about posting your opportunities with us.