We previously covered Invitae Corporation ($NVTA) back around Valentine’s Day when it and five affiliates (collectively, the “debtors”) filed chapter 11 bankruptcy cases in the District of New Jersey (Judge Kaplan). You can revisit the coverage here:
We noted that the medical genetics company had nearly $1.5b of debt…
…and that the senior secured 28s were the product of a not-even-one-year-old uptiering transaction with Deerfield Partners LP (“Deerfield”) that primed a whole bunch of non-participating senior unsecured 28s (and didn’t actually provide the debtors with all-too-much fresh liquidity). In addition to jumping on the LME bandwagon, these particular debtors also followed another prevalent theme these days: a support agreement backing a proposed sale sans stalking horse purchaser. In this case, ~78% of the secured 28s signed on to a transaction support agreement that (i) allowed for the consensual use of cash collateral (there was $142mm of cash on hand as of the petition date) and (ii) consented to the continuation of a pre-petition marketing and sale process with a target auction date of 62 days after the petition date. On February 16, 2024, Judge Kaplan entered an order approved the debtors’ proposed bidding procedures and bid protections in furtherance of that process. The debtors subsequently amended the deadline by which non-binding proposals from acceptable bidders must be received (which was the middle of March).
A few weeks later effective March 1, 2024, the office of the united states trustee appointed a three-member official committee of unsecured creditors comprised of indenture trustee Wilmington Savings Fund Society, unsecured noteholder Chimtech Holding Ltd., and vendor Workday Inc. (the “UCC”). The UCC went on to hire White & Case LLP (J. Christopher Shore, Harrison Denman, Andrew Zatz, Samuel Hershey, Ashley Chase, Brett Bakemeyer, Aaron Colodny) — which had represented an ad hoc group of unsecured noteholders — and Porzio Bromberg & Newman PC (Warren Martin Jr., John Mairo, Christopher Mazza) as legal counsel, Province LLC (Adam Rosen) as financial advisor, and Ducera Partners LLC (Michael Genereux) as investment banker. White & Case being White & Case and brands being brands, the UCC wasted no time and immediately started throwing bombs starting with an objection to the debtors’ proposed use of cash collateral. At issue were, among other things, various provisions in the proposed cash collateral order that, in the view of the UCC, insulated Deerfield and limited the UCC’s ability to investigate the uptier. Specifically, the UCC didn’t like that Deerfield would get adequate protection claims and liens on proceeds of avoidance actions and commercial tort claims for which they could be defendants; they also didn’t like how the order provided for very little budget (only $50k!) and very little time (merely 60 days from the date of the UCC appointment) to investigate the uptier and do the work necessary to pursue claims that might benefit the general unsecured creditors.
In a response to the UCC’s objection, the debtors were like:
They noted that they’d offered more money and more time; they argued that the UCC’s proposed challenge to the ‘23-vintage uptier was laughable because “[u]nlike other recent liability management exercises at other companies, there were no asset drop downs, no pre-existing secured debt at that time, and no other complex transactions … the 2023 transactions did not result in prepetition litigation … [a]nd rightfully so, given that the transactions were accretive to the [d]ebtors’ business and complied with the relevant debt documents in all respects.” They added that the transactions were subsequently investigated by the special committee of the debtors’ board and blessed. And they cited recent NJ precedent that allows for liens on avoidance actions. Basically:
Deerfield and US Bank Trust, as trustee for the secured 28s lobbed in support for the debtors.
In the end, the debtors prevailed and the UCC got 75 days and $125k to proceed. The UCC did get some prophylactic language added to the order about avoidance actions that said “…that Adequate Protection Liens with respect to proceeds of Avoidance Actions and proceeds of commercial tort claims shall only arise with respect to Prepetition Liens that are not avoided, subordinated, invalidated or deemed unenforceable.” This left the UCC with a itsy bitsy opening through which they might be able to create some chaos.
At this point, let’s take a break from the UCC drama to note that this is yet another case where there’s a party disputing the right of a debtor to sell assets (see, e.g., DeCurtis and Lordstown Motors). Here, a company called Natera Inc. inserted itself into the bankruptcy case with an objection to the debtors’ proposed bid procedures motion, arguing that it is the beneficiary of a permanent injunction against the debtors that stops the debtors from using certain patented tech the debtors have apparently included as part of the assets up for sale. A hearing on the motion and this objection is currently scheduled for May 6, 2024.
Okay, back to our regularly scheduled programming and guess what? The UCC be like:
Ok, sure. Is this the challenge to the uptier transaction that was foreshadowed back at the cash collateral stage?
On April 5, 2024, the UCC filed a “limited objection” — with an accompanied motion to file its objection under seal — to the retention of Kirkland & Ellis LLP LOLOLOLOLOLOLOLOL.
We’ll let their words speak for themselves:
As previously addressed with this Court, the validity of Invitae’s 2023 Exchange, whereby one unsecured creditor - Deerfield Management Company L.P. (“Deerfield”) - vaulted ahead of all other unsecured creditors of the Debtors for virtually no consideration, will likely be a central issue in these Cases. If successfully challenged, there could be hundreds of millions of dollars of additional recovery to unsecured creditors. From the perspective of all unsecured creditors then, any evaluation, prosecution, or settlement of matters related to the 2023 Exchange should be transparent, comprehensive, and perhaps most important, performed by unconflicted, independent counsel and fiduciaries.
Buckle up, b*tches.
By the Retention Application, Kirkland & Ellis LLP and Kirkland & Ellis International LLP (together “K&E”) seek Court authority to continue to simultaneously represent – to the exclusion of everyone else – five parties in that transaction and investigate three of its current clients. Specifically, K&E seeks to represent (1) the Debtors, including with respect to all matters related to the 2023 Exchange, (2) Jill Frizzley as an independent director, including with respect to her investigation of all matters related to the 2023 Exchange, (3) the Special Committee (the majority of whose members approved the 2023 Exchange) on all matters related to the 2023 Exchange, (4) the full Board of the Company on all matters related to the 2023 Exchange, and (5) Deerfield on [REDACTED] currently open matters.
Is White & Case actually making the argument that … ⚡️gulp⚡️ … conflicts exist in bankruptcy…?!
K&E’s proposed concurrent representation of all of these parties is not permitted under section 327(a) of the Bankruptcy Code. The Committee has therefore formally requested that K&E recuse itself from matters related to the 2023 Exchange (and any other matter in which the Debtors are materially adverse to Deerfield). To date, however K&E has insisted that it be able to stand on all sides of the transaction and represent everyone involved in connection with its investigation into the 2023 Exchange. The Committee disagrees and, to the extent that K&E refuses to restrict the scope of its representations, the Committee respectfully requests that this Court deny the Retention Application.
This thing is a riot. White & Case is telling on K&E, arguing that:
📍Kirkland steals clients from, like, everyone. In this case it was Latham & Watkins LLP.
📍Kirkland loves doing the old “drop down” from the sponsor level to the company level, deploying broad conflict waivers in the process. This, some might argue, infuses some K&E mojo on both sides of a table.
📍Kirkland then stacks boards of directors with “independent directors” who just happen to get a lot of his/her assignments from … well … Kirkland. Given how a number of independent directors in the RX space these days are career directors making their entire livelihood off of these gigs, the implication is that these people are, consciously or subconsciously, beholden to Kirkland (and, by extension, Kirkland’s sponsor clients). In this case, White & Case underscores how the independent director appointed to the board and charged with an investigation into the uptier transaction “…has been appointed as a director or an independent director of nine companies in which K&E was debtor’s counsel in the last four years.” (PETITION Note: to be clear, this argument has been made to besmirch the credibility of directors in the past to limited or no effect. Given the redactions, it’s hard for us to opine as to whether White & Case’s arguments here are any stronger than previous precedent). They further stress that the company, the director, and the beneficiary of the transaction the director investigated were all represented by Kirkland, LOL!
📍Kirkland negotiates a transaction support agreement on behalf of the company, and blessed by the Kirkland-appointed director, that provides a broad release to its PE sponsor client.
It’s almost like White & Case is insinuating that there’s a playbook. 🤔
White & Case goes on to argue that (i) K&E has an actual conflict of interest that is materially adverse to the debtors’ estates (citing a ‘94 New York case where Weil Gotshal & Manges LLP ran into a conflict buzzsaw) and (ii) the conflict cannot be waived. They conclude:
…the Committee attempted to get K&E to do the right thing and restrict its current cornucopia of representations. It has, to date, refused. Thus, the Committee respectfully requests that the Court (i) require as a condition for K&E’s engagement as the Debtors’ counsel under section 327(a) that it be precluded from representing the Debtors in any matters (a) related to the 2023 Exchange, including but not limited to any estate claims or causes of action related thereto and (b) in which the Debtors are otherwise adverse to Deerfield and (ii) grant such other and further relief as the Court deems just and proper.
A hearing is scheduled for April 29, 2024.
💥New Chapter 11 Bankruptcy Filing - Number Holdings Inc. (a/k/a 99 Cents Only Stores)💥
Though 99 Cents Only (the “company”) filed for chapter 11 bankruptcy in the red hot District of Delaware (Judge Stickles) on April 7, 2024,* the thing has seemingly been in the zone of stress and/or distress for, like, 99 years. Those of you who have been around the block long enough know what we’re talking about: Ares Management (“Ares”) and the Canada Pension Plan Investment Board (“CPPIB”) took this thing private in early ‘12** and it has been on RX industry “watch lists” since at least, like, ‘17, when the company embarked on the first of what would become a string of restructuring initiatives. Let’s dig in.
The company currently operates 370 “extreme value” retail stores across four states. With a major presence in California, it sells a wide variety of products from everyday household items to grocery items to seasonal and party merchandise, a lot of which the company historically priced at or below … ⚡️wait for it⚡️… 99 cents.
Now may be a good time to note that at the time of the ‘12 take-private transaction — which got done at an aggregate purchase price of $1.6b — the company had only 289 stores. The PE bros used that old PE bro playbook: lever a target into oblivion and expand at a rapid clip. Off to the races! We can only imagine what kind of management fees they took around the track.
Fast forward to late ‘17 and everyone involved with the company has an ‘oh f*ck’ moment. The company’s performance had really begun to hit the skids and the sponsors and lenders — yes the very same sponsors and lenders who thought it was a brilliant idea to load a metric f*ck ton of debt onto a crappy retailer with piss poor margins — realized that they may have to make some sacrifices for the thing to live to see another day. At this point, all kinds of balance sheet tomfoolery ensues and transactions get cut.
First, in December ‘17, the retailer consummated an exchange offer and consent solicitation with holders of $242.2mm of 11% senior notes due ‘19 that swapped in $140mm of newly-issued third lien 13% cash/PIK secured notes due in ‘22. The $242.2mm included notes swapped out by the company’s sponsors in exchange for Series A-1 participating preferred equity with a PIK dividend. Similarly, in ‘17 the sponsors also helped the company extend the maturity of its term loan by agreeing to subordinate their term loan holdings (~$130mm) into a new PIK second lien term loan. “These transactions reduced the Company’s cash interest expense and extended its debt maturity runway” but it didn’t provide the company with actual new money and, ultimately, the company required a more fulsome restructuring.
Which it got in mid ‘19. It was then that the company entered into a transaction support agreement*** with the Patagonia vest-wearers that exchanged their relatively new PIK second lien TL and third lien 13% cash/PIK secured notes due ‘22 for a mix of reorganized common and pref. The transaction eliminated approximately $300mm of net secured debt and reduced the company’s interest burden by approximately $15mm. And there was a rights offering to boot. Through the rights offering, the company generated somewhere around $34mm of fresh capital. You can buy a lot of cheap paper plates with that kind of dough!
We all know what came next. The pandemic didn’t do the company — again, heavily indexed to California — any favors. Once again, the company had to work with its sponsors and lenders. Per the company’s Chief Restructuring Officer (“CRO”):
Faced with these difficulties, the Company refinanced its debt and sought to raise new capital to shore up its balance sheet, and was successful in securing an injection of $200 million in new equity capital from third-party investors and the Company’s equity sponsors, allowing it to further reduce its debt load and improve liquidity.
Herein lies the origin of the company’s $350mm 7.5% senior secured notes due ‘26. The proceeds, together with the new equity investment (in exchange for more prefs) were used to take out the company’s then-outstanding first lien loan facility, redeem in full the company’s third lien 13% cash/PIK secured notes due in ‘22, and pay down outstanding borrowings under its first lien ABL. For those keeping track, this was restructuring #3 and it more or less set the stage for what the capital structure looks like today.
Surely everything was now on the right track, right? LOL, by Q3’21, this sucker was teetering once again. Moody’s downgraded the company to Caa2, citing “much weaker than expected operating performance….” Per RetailDive, “Despite [low credit metrics], [the company’s] owners continue[d] to pull cash out of the company. According to Moody’s, the retailer paid $20 million in annual cash dividends to its owners based on a preferred equity contribution.”
So, this company LBO’d, then expanded its footprint by 100 stores in an increasingly competitive and complex retail atmosphere, then had to undergo a series of balance sheet restructuring transactions — all while paying management fees and dividends to the sponsors — and the company would have you believe that it was primarily a whole bunch of macro factors that led to this bankruptcy filing. Indeed, the PE bros are pointing fingers all over the place — at the pandemic, at record-high inflation, at increased operating costs, at the libs for allowing theft and crime in places like California, and at the libs again for increasing the minimum wage in places like California, basically everyone other than whomever (cough: them) put all that leverage on the company in the first place. We don’t mean to be flip here: surely all of those factors contributed to the company’s current state but let’s not act like things were healthy before the pandemic occurred. That point should be abundantly clear at this point.
So what do the PE dudes do? They decide to hire (or get forced to hire) performance improvement professionals to get things back on track and develop a go-forward strategy that may actually work for the business. These geniuses come up with tried and true strategies like “let’s brighten up the four walls” and “let’s put green in our logo” but, of course, despite the excessive fees paid to said advisors, none of that nonsense worked either. The forces of too much debt, too much inflation and too much theft were too much to contain. The company attempted to pass on costs to their consumers but … uh … they had to contend with their stupid-a$$ name, lol, and a consumer with zero tolerance for price increases. Per the CRO:
The Company had no choice but to pass on to its customers some of the resulting costs, in the form of higher prices, which was met by significant customer resistance and reduced customer traffic. This resistance was exacerbated as the percentage of merchandise priced at 99.99 cents or less decreased from nearly 65% in 2020 to below 50% in 2023.
LOL. They should have changed the name to “Maybe 99 Cents Only?🤷♀️”
At this point the company literally transitioned out of Alvarez & Marsal’s Consumer and Retail Group and turned to its North American Corporate Restructuring group. Roughly around the same time (and shortly after the company levered up a bunch of its real property), the company hired Jefferies Group LLC (“Jefferies”) to advise on potential transactions to address the balance sheet. That mandate expanded mere months later to additional strategic alternatives including a potential sale. As Jefferies did its thing, the company’s situation continued to worsen. It was a perfect storm of sh*te news:
📍None of the prospective buyers that Jefferies reached out to seemed all-too-interested;
📍None of the prospective lenders that Jefferies reached out to — including the holders of the 26s — seemed all-too-interested in sinking (more) money into this cesspool;
📍Vendors tightened trade terms and shifted to cash on demand; and
📍Landlords started sending “pay or quit” default notices.
Sh*t got real. Per the CRO:
By mid-March, the Company’s liquidity became so constrained that the Company had no choice but to intensify its contingency planning efforts, as the prospects for effectuating a going concern solution (whether through a restructuring or a strategic transaction) appeared increasingly dim.
Enter Hilco Merchant Resources LLC to kickstart store closing sales. The company announced on April 4, 2024, that it was shutting all of its stores and intended to commence an orderly wind down to maximize value for its stakeholders. Contemporaneously, the company engaged two parties with respect to DIP financing, ultimately choosing an entity affiliated with Sixth Street Specialty Lending Inc. as the DIP lender. The headline DIP figure is $60.8mm, of which $35.5mm is multi-draw new money term loan ($20.5mm interim) and $25.3mm is a roll-up (upon entry of a final order) of pre-petition FILO loans on a cashless dollar-for-dollar basis. The DIP features a maturity that is, at its latest, 130 days. The rate is SOFR+7.5% with a 1% SOFR floor on the DIP TL and the roll-up amount, payable in cash. There is also a 2% commitment fee on the DIP TL in cash payable at time of the initial draw on the DIP TL. Finally, there’s also a 2% exit fee.
That’s a whole lot of financial terms and numbers. It’s important to take a moment to appreciate that there’s another significant number at play here: 10.8k. As in 10.8k employees who are about to lose their jobs.
The debtors are represented by Milbank LLP (Dennis Dunne, Lauren Doyle, Michael Price, Brian Kinney) and Morris Nichols Arsht & Tunnell LLP (Robert Dehney Sr., Matthew Talmo, Jonathan Weyand, Erin Williamson) as legal counsel, Alvarez & Marsal LLC (Christopher Wells) as financial advisor and CRO, and Jefferies (Jeffrey Finger) as investment banker. The company intends to file a sale motion with the hope that Jefferies can find a buyer under a rock somewhere. There are some people out there saying that they’re interested. The DIP lender is represented by Proskauer Rose LLP (David Hillman, Megan Volin) and Landis Rath & Cobb LLP (Adam Landis, Richard Cobb, Joshua Brooks). An ad hoc group of lenders who refused to provide financing is represented by Weil Gotshal & Manges LLP (Jeffrey Saferstein, Andriana Georgallas, Chase Bentley, Jessica Falk, Theodore Tsekerides) and Potter Anderson & Corroon LLP (M. Blake Cleary, L. Katherine Good, Brett Haywood, Levi Akkerman).
The company’s first day hearing is scheduled for later today, April 9, 2024, at 2pm ET.
*The filing of the five total debtors started on April 7, 2024, but carried over into April 8, 2024.
**The debtors had been trading on the New York Stock Exchange at the time the PE bros offered a 32% premium to the then-current stock price.
***At the time of this deal, the company’s footprint was up to 387 stores.
📚Resources📚
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We’ve recently added, “The Credit Investor's Handbook: Leveraged Loans, High Yield Bonds, and Distressed Debt,” by Michael Gatto.
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