💥Celsius, Brr. Part II.💥
Plus: A Notice of Appearance
“It’s a business judgment decision that may turn out to be very wrong … we will see.” — Judge Glenn
So, like, Celsius customers are very, very angry.1 Like, borderline-get-out-the-pitchforks-and-start-impaling-or-otherwise-tarring-and-feathering-people-while-also-writing-volumes-upon-volumes-of-letters-to-the-bankruptcy-judge-and-also-appearing-for-boring-a$$-hearings kind of angry.
There are a number of reasons why.
On August 14, 2022, the Celsius debtors filed a “Budget and Coin Report” which, aside from conjuring images of Kirkland & Ellis LLP attorney Ross Kwasteniet playing the role of “Master of Coin,” showed that the company is deeply and decidedly f*cked every which way from Sunday.
Here is the monthly cash flow forecast:
And here is the “Coin Report”:
Anyone see any problems with this, LOL?
Let’s start with the former. Stated plainly: the company is incinerating heaps of cash. That “net cash flow” number of $137.2mm is an eye-popper, equating to $45.6mm a month on average. Most of that draw-dropping loss figure, e.g., capital expenditures + hosting, is attributable to the debtors’ big gamble on the crypto mining business, which, let’s be honest, is anyone’s guess as to whether that operation is worth f*ck all. (More on this momentarily.)
Some of the other line-items are also egregious. Payroll is obnoxiously high given the state of this business but the downward trend-line is indicative of Alvarez & Marsal LLC taking some costs out of the business. Even more laughable is that $33.5mm is line-itemed for “restructuring activities” which is a fancy euphemism for “professional fees.” ‘A+’ for effort there, though, y’all.
It’s important to note that here, unlike in, say, the Voyager Digital case, there is no plan of reorganization on file, no — at least as far as we’ve been made aware — indications of interest for the assets,2 and no real time table for anything particularly actionable to ensure that customers get recoveries. So to get to that point — outside of maybe the customers of the debtors’ relatively new “Custody” business getting an early payout3 — clearly this sh*t stain of a company is going to need some fresh funding: it’s gonna be flush out of cash by October at this pace. "Explore possible financing options," you bet your a$$! ⬇️
We can’t wait to see who might lend into this company and, gulp, against what assets? 🤔
We'll spare you the suspense: all roads continue to point to the debtors’ mining assets — assets that they’ve sunk a considerable amount of money into to date and will continue to sink a considerable amount of money into to build.
Which gets us to the main event in the debtors’ second day hearing presentation on the afternoon of Tuesday, August 16: their motion seeking entry of an order permitting the sale of their mined bitcoin in the ordinary course of business.
The debtors apparently have 58k mining rigs currently deployed.4 Those rigs are working hard, burning tons of energy to solve complex mathematical problems and validate blocks on the blockchain, for which they are rewarded with, say, Bitcoin (BTC). At the time of this writing, BTC is at $24k and so the debtors propose to sell the BTC they obtain through existing mining infrastructure for cash in arms-length third-party transactions in order to pay equipment providers, power suppliers, etc. to build out additional infrastructure and get another ~40k rigs online.
This, folks, will get the debtors about as close to a business plan as there is right now:
use the completed mining business to mine like hell ✅
generate a bunch of BTC ✅
hope and pray that the price of BTC is high enough to offset power costs ✅
hope and pray that there are no strange Texas weather externalities that dramatically impact power costs ✅
hope and pray that BTC goes to the moon 🚀 such that any ultimate enterprise value will clear any theoretical DIP, cover astronomical professional fees,5 hopefully plug a massive $2.8b net coin deficit (a figure that excludes "gas" and other exchange fees likely necessary for in-kind recoveries, see Coin Report ⬆️),6 reorganize around the mining business and get to a plan that pays people in kind.
So many things need to go right here, folks. It's no coincidence that debtors' counsel mentioned that the mining business was close to a supposed multi-billion dollar IPO a mere 6-8 months ago.7
Now some might call this whole … uh … “strategy” … bonkers. Or bananas. Or f*cking crazy and stupid. The United States Trustee’s Office basically called it all of those things, complained about virtually everything and made threats about an examiner and, accordingly, objected to this motion.
The UCC, however, got some oversight rights and so they didn’t oppose the motion. Nor did the Texas AG.
And so without a compelling argument against the motion, Judge Glenn ignored the UST's objection and approved the debtors' motion on the basis of the debtors’ business judgment.
That’s the thing about bankruptcy that’s oh so beautiful. A company can be managed into the dirt and then the judgment of some of the very same managers will get deference.8 We'll likely know soon enough whether that deference was justified.
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😎Notice of Appearance: David Rush, Senior Managing Director at FTI Consulting Inc.😎
This week we welcome David Rush, a Senior Managing Director within FTI Consulting Inc’s financial advisory and corporate restructuring group. Among various other accolades, David was recently inducted into the American College of Bankruptcy’s 33rd Class of Fellows; he has more than 20 years of experience in the restructuring industry — which now even includes the recently filed Altera Infrastructure LP mandate (which filed after this interview was conducted). We figured we all might benefit from some of his insights. Enjoy.
PETITION: The bankruptcy industry has — at least until the recent crypto implosion — been relatively slow in 2022. And, yet, here you are with key roles in two of the higher profile cases of the year: ION Geophysical Corp. ($IO) and Ruby Pipeline LLC. Congratulations. Both have been … um … interesting. Let’s talk about IO first. You guys had an RSA in place that reflected an equitization of the second lien noteholders absent a sale. But, you ended up with a sale after all! Walk us through what transpired there and how you got from point A to point B. To what degree did the sale generate better results for stakeholders than the equitization scenario.
David: Before we begin, I just want to thank you for having me on NOA, and congrats on PETITION’s success over the years.
FTI has been fortunate to be on a number restructuring mandates in 2022 but we became involved with ION around August 2021 as the company began evaluating alternatives. Although commodity prices started to recover, the offshore seismic sector has been struggling for a few years and typically lags behind oil price improvement.
Since the secured creditors weren’t natural owners of this company, ION initiated a sale process a number of months prior to the filing. Although the creditors were willing to take ownership through an equitization plan, they also wanted to evaluate options through an in-court market test. We filed a toggle plan that provided for that optionality and the company’s investment banker (Perella Weinberg Partners PWP 0.00) generated additional competitive tension where the auction achieved improved results over the prepetition sale process. Overall, the toggle plan really functioned as intended by providing for an incremental in-court sales process that maximized value and eliminated potential valuation concerns for the creditors.
PETITION: Now let’s turn to Ruby Pipeline LLC. This one is unique in that the company didn’t initially have a restructuring advisor, let alone a CRO. But then there was David Rush, parachuting in post-petition. That’s not something we see every day. What happened there? Why were you brought in so late in the game? This would be a great opportunity to describe a hypothetical😉 restructuring scenario that could’ve benefited from the earlier appointment of independent directors. 😉😉
David: Since this is an active case, I am limited as to what can be discussed. However, the CRO role developed shortly after the case was filed. As noted in our hearings and filings, this is a situation where the sponsors (two very sophisticated midstream companies) and the bondholders could not come to a resolution prior to the Ch.11 filing.
The independent directors were hired shortly before the filing and the CRO role provides for an additional level of independence. We have three very qualified independent directors and outstanding professionals in this case, but we’ll have to touch base after the case ends.
PETITION: You’ve got a ton of experience working with distressed exploration and production companies. EP Energy is one example. Halcón Resources, another. There’s a lot of debate about what more can be done domestically to combat global price pressures on oil and gas. As someone who understands these (upstream) businesses — and who happens to live in Houston — give us the lay of the land of where things stand with US oil and gas production. Is stigma from the free-wheeling money-spending days the biggest culprit here? Work force limitations? Refining capacity? ESG? Something else?
David: This is a subject that we could spend some time discussing but I’ll try to cover it at a high level. If we exclude the global oil supply and demand dynamics and just focus on the US, domestic production has been increasing since the COVID slump after peaking just prior to the pandemic.
US daily oil production peaked in January 2020 at 12.8 million bbl./day, dropping to 9.7 million bbl./d by August 2020 but steadily recovering to about 12.0 million bbl./d in July – so although still off the peak, the US is approaching pre-pandemic production levels. As your team has covered this sector, the industry has been dealing with headwinds and financial distress since 2015. E&P companies are still facing a number of factors which have contributed to the slower production growth.
First, the current administration has been open about its views to support growth in renewables to help reduce hydrocarbon consumption. Second, capital availability has decreased as financial institutions and private capital have shifted away from oil & gas. Third, the industry is facing increased pressures from state governments, environmentalists and shareholder activists. Fourth, labor and equipment shortages and increased supply prices have resulted in elevated costs to drill and develop properties. And finally, there is more capital discipline as investors expect energy companies to not outspend cash flow and focus on shareholder returns. This last point is a distinct break from the mindset that prevailed prior to the 2015 collapse in energy prices, when E&Ps were primarily focused on acquiring new acreage and increasing production even if it meant borrowing aggressively to do so.
So it’s a combination of factors as well as uncertainty for industry participants that’s contributed to a slower, more measured production recovery.
PETITION: Btw, we love how you just drop Enron Corp. into your declarations like it’s no big thang. Care to comment on your experience with Enron?!
David: I had the opportunity to work on the Enron case early in my restructuring career and it was a great learning experience. By the time Enron filed for bankruptcy, it was a large, complex organization that spanned well beyond its legacy natural gas and pipeline business into a global energy company with trading operations, retail energy, broadband and international investments. Since the bankruptcy occurred relatively fast and was highly complex, there were floors at Enron’s headquarters dedicated for the professionals representing various stakeholder groups.
FTI Consulting (previously PwC’s restructuring practice) advised the company and I was able to see numerous asset sales being led by various company deal teams. So I really tried to absorb as much as possible throughout the bankruptcy. Seeing the complexity of the transaction structures and wide range of business lines was an educational experience.
PETITION: You were the Treasurer/CFO of Hostess Brands and oversaw its chapter 11 process. How much weight did you gain during that case, LOL? Jokes aside: you have to have some good stories from that one…?
David: Hostess was definitely one of my more challenging interim management engagements, as the company had over 19,000 employees (mostly unionized), operated throughout 48 states, and constantly dealt with tight liquidity. What made the situation more stressful was that we were dealing with the threat of union strikes for months, which ultimately happened and forced a nationwide operational shutdown. Then, the primary union that forced the nationwide shutdown tried to immediately convert the case to Ch.7, which we had to fight off to allow for an orderly sales process.
So I probably had way more Red Bulls than Hostess cupcakes and Wonder Bread products. But seriously, this was one of my first major interim officer positions and it gave me the opportunity to testify numerous times, learn a new industry, deal with union-related issues and work with a number of great professionals. Plus, nothing like walking around the corporate headquarters with pictures of Ricky Bobby (Will Ferrell) from Talladega Nights as a key corporate advertisement (see below).
PETITION: When’s the last time you crushed a Twinkie?
David: Surprisingly, I did not eat one Twinkie during that two-plus year project, nor have I eaten one since. However, I had plenty of powered mini donuts and those continue to be a favorite for my kids to this day.
PETITION: Talk to us briefly about FTI’s approach to the market. Most longstanding restructuring professionals think of FTI as a creditor-side shop but, unbeknownst to those who aren’t completely paying attention, y’all are actually racking up debtor-side mandates. What do you attribute that to?
David: Since I’ve spent most of my restructuring career representing companies, I’m glad FTI Consulting is getting increased recognition for its company-side representations. I think the view of us primarily being a creditor-focused advisor is a misconception -- through the end of June, we had more company-side mandates of than any other FA so far this year, according to Debtwire. Over the last few years, we’ve been involved in some of the largest company-side mandates including, Hertz, LATAM, Peabody, SAS Airlines, OSG Group, Avianca, EP Energy and 24 Hour Fitness, just to name a few.
PETITION: We’re now more than halfway through ‘22. What would you say were the biggest developments of the first six months of the year and what do you anticipate for the second half? What are some trends you’re keeping an eye on going forward?
David: One of the few positive developments for our industry in 2022 is that restructuring mandates and opportunities have increased in recent months compared to low activity levels of the last year. However, restructuring activity remains average even with the pickup in 2Q22. The size of large corporate debtors filing since early 2021 has also been considerably smaller than historical averages but that too has improved in recent months. Prior to 2021, we saw a few industries dominate the distressed landscape, but the current activity seems to be more diversified and spread across additional sectors. Also, it’s been surprising to see a number of free fall filings this first half vs. the pre-packs and pre-negotiated filings in prior periods.
Overall, I think restructuring professionals are cautiously optimistic that activity will continue to increase as credit markets tighten and spending contracts due to recessionary concerns. But we don’t expect a surge in restructuring activity in the months ahead that some may be expecting.
PETITION: What is your favorite thing about the bankruptcy code? On the flip side, as a Fellow, you must have some thoughts about inefficiencies in bankruptcy. What is f*cked and needs fixing? Is there one subject that not enough people are talking about? If you could implore Congress to take action about one thing, what would it be?
David: I believe the most beneficial aspect about the US bankruptcy process is that it is structured and it has been proven to work. We’ve seen foreign jurisdictions adopt insolvency laws which permit reorganizations and restructurings closer to the US process than to creditor-sympathetic regimes of many nations.
As for dislikes, bankruptcy generally is an expensive process and there needs to be a better solution for smaller companies that don’t meet subchapter V criteria.
PETITION: What are some of the biggest changes you’ve witnessed happen to the business of bankruptcy over the course of your career?
David: The general speed of restructurings has been a major change over the years. Although we’ve seen some recent free-fall filings this year, the last few years have been dominated by fast-tracked pre-negotiated and pre-packaged cases. With the high cost of restructurings, it makes sense to have a pre-determined and fast path but that has also resulted mostly in balance sheet fixes vs. operational restructurings.
Being a longtime Houston resident, I also have to mention the venue shift that started in 2016. Houston has become one of the most favored bankruptcy venues in the country, and I attribute that to the quality of the Houston judges, access to courts and their ability to process complex cases in an efficient manner.
PETITION: What is the best piece of professional advice that you’ve ever gotten and why? Please lay some wisdom down on our readers who may be at the initial stage of their careers.
David: Learn and absorb as much as you can from each opportunity. As young professionals embark on their careers, engagements and projects are going to range from being challenging and intellectually stimulating to somewhat routine and mundane. However, there is something to be learned from each of these opportunities and to utilize that experience in the future. Also, try to focus on an industry, service line or specialization to differentiate yourself and help you advance your career and be recognized within a certain field or discipline.
PETITION: What are some books that have helped you in your career?
David: Not sure I can specifically attribute any books that helped in my career, but a few have helped with productivity, goal setting and general self-improvement, including: The Power of Focus, The 80/20 Principle, Why We Sleep, and 7 Habits of Highly Effective People. Have to admit, I’ve preferred podcasts over books in recent years.
PETITION: Finally, you’ve likely noticed that we like to snark “Long ABC” or “Short XYZ.” What are you “long” these days? What are you “short”? Feel free to be creative here but please list one thing that’s legal/financial and one thing that’s … well … whatever.
David: I may be an outlier but have grown to really appreciate the benefits of virtual meetings (Teams, Zoom, etc.). It took a global pandemic for us to realize we really don’t need to spend one to two days of travel to participate in a two-hour meeting. For professionals that previously lived on the road each week, these platforms have been a welcome change for our industry.
As for shorts, I have never really understood the investing mania around cryptocurrencies, NFTs, and other alternative investments – partly because I’m a restructuring guy and we tend to be skeptical. I also don’t see the underlying rationale for some of these assets. But by the time this NOA gets released, BTC and Ether might have surged and I will likely be labeled “out of touch” by the crypto-enlightened crowd.
PETITION: Thanks for taking the time, David. And good luck with Ruby and Altera!
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We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. This week we’ve added a new one to our list of books to check out: California Burning: The Fall of Pacific Gas and Electric — and What It Means for America’s Power Grid by Katherine Blunt.
We’re going to assume at this point that you’ve been following the fact that on July 13, 2022, Celsius Network LLC and seven affiliates filed voluntary chapter 11 petitions in the Southern District of New York (Judge Glenn). We wrote about it here at the time of filing and again here when the official committee of unsecured creditors ramped up.
It bears repeating that everyone’s crypto savior, FTX’s Sam Bankman-Fried (SBF), took a look under the hood pre-petition and went running for the hills — notably at the exact same time he was charring $75mm by way of an unsecured loan to Voyager and a loan to BlockFi.
There are some concerns that employees/insiders transferred crypto from the Earn side of the business (which is possibly property of the estate) to the Custody accounts (which, everyone seems to agree, are likely not property of the estate). There’s likely to be an investigation into this. There is also another category of funds in a so-called “Withhold” bucket, which is where assets from customers who were denied Custody accounts apparently landed.
Based on the Coin Report. UCC counsel stated that the figure was 40k at the hearing.
The professional fee carveout in any proposed DIP is going to be a riot.
Interestingly, early bankruptcy papers appeared to indicate a hole over just $1b which did not comport with pre-petition rumors that the whole was much larger — around $2b. Which is why, it was said at the time, SBF peaced out.
Or so said a bunch of investment bankers, anyway.
Ok, ok, this is not entirely fair. There are new directors overseeing things.
What didn’t get deference? The debtors’ motion to sell de minimus assets in the ordinary course of business. Turns out this wouldn’t cover what a standard de minimus assets motion might; rather, the debtors hold notes/bonds and equity in other crypto companies. This felt like a “gimme” to the UST who otherwise spent the afternoon getting shot down.