⚡️"Love Really Hertz Without You" - Billy Ocean⚡️

Two Groups Continue to Wrestle for the Car Rental Business

When we last discussed Hertz Global Holdings Inc. ($HTZGQ) ten days ago, the Hertz debtors were trying to push forward with approval of their proposed (i) disclosure statement and (ii) break-up fee and expense reimbursement accommodations for their “PE Sponsors,” Centerbridge Partners LPWarburg Pincus LLC and Dundon Capital Partners LLC. But much like the “pesky kids” in Scooby-Doo, the debtors’ initial plan sponsors, Knighthead Capital Management LLC and Certares Management LLC, just had to — with the help of Apollo Global Management Inc. and active equityholders Glenview Capital Management LLC and Hein Park Capital Management LP — step in and f*ck everything up. At the 11th hour — on April 15, 2021, the night before a hearing to consider the above-noted relief — they came forward with an alternative proposal that threw the Hertz debtors’ plans for that hearing way off the tracks. And they found a sympathetic ear.

Judge Walrath was willing to play ball. Though she never heard the details of the new proposal (in fact specifically advising all parties not to delve into them), she agreed to kick the hearing — despite opposition from the Hertz debtors’ counsel — to April 21, 2021, to allow the Hertz debtors an earnest opportunity to weigh the two proposals against one another and ascertain whether the relief requested made sense under the new circumstances.

This, ladies and gentlemen, is the funny thing about bankruptcy. There are federal rules of bankruptcy; there are local rules of bankruptcy; there are judicial guidelines; there are Office of the United States Trustee guidelines; there are case procedures orders, etc. The process is chock full of rules and procedures. Sh*t. Putting aside that old federalism thing, the highest and best use case for a “local counsel” is simply having a safeguard against tripping up local jurisdictional rules. In other words, people make a lot of money just dancing around all these frikken rules.

And, yet, despite all of that — ALL … OF … THAT — if someone marches into a bankruptcy court with a massive trunk overflowing with green paper that’s backed by the full faith and credit of the United States of America, well, sh*t, all of those rules and procedures will fly out the window quicker than you can say “capitalism!” Ultimately, a debtor has an obligation — a fiduciary duty — to maximize value for the estate. Period.

And so that’s what the Hertz debtors did. In those five days, the Knighthead-Initial-Plan-Sponsor group further revised their proposal, compelling the boards of the Hertz debtors to conclude that they were for real. Indeed, they initially concluded, in furtherance of their requisite fiduciary duties, that the new proposal, maaaaaay very well constitute a superior offer.

“May” being the operative word. Someone snuck a secret camera in to capture the Board’s reaction:

After all, the Hertz debtors are represented by one of the biggest ball busters in restructuring:

There was no way White & Case LLP was going to roll out the red carpet for a last minute competing bidder without setting up a few mandatory crotch kick stations along the way.

Which is, of course, exactly what they did. The Hertz debtors leveraged the competitive process to beat down both the Initial Plan Sponsor group and the PE Sponsors. Ultimately, the Hertz debtors concluded that the PE Sponsors’ offer was better — in part because the Initial Plan Sponsor offer wasn’t fully documented and did not have committed exit financing. But also because they were able to get the PE Sponsors to agree to “certain enhancements” to the plan previously filed on April 14, 2021. These enhancements included (i) an increase in the pool for general unsecured creditor recoveries which, provided GUC claims don’t exceed $550mm, will result in an estimated 100 cent recovery (and, for some, an insane return) and (ii) new warrants to shareholders.

After Judge Walrath punted the April 16th hearing and denied the Hertz debtors’ proposed third-party releases, we wrote that it was “…a bad day for counsel to the Hertz debtors.

What a difference a few days make.

On April 21st, Judge Walrath approved the Hertz debtors’ newly revised proposed disclosure statement with the above-noted “enhancements” even though the Hertz debtors expressly acknowledge that negotiations with the competing groups are continuing and that, ultimately, the Hertz debtors may seek confirmation of a modified plan. So not only did the Hertz debtors extract more value at this juncture, they preserved their timeline (to expeditiously exit chapter 11 by June 30 and take advantage of market forces), AND maintained optionality to pivot yet again!

And this is a small victory for equity too! The (six-year) warrants may ultimately amount to 4% of the reorganized equity (accounting for the new preferred stock but still subject to dilution from the management incentive plan). “The Debtors have estimated the value of the New Warrants using a Black-Scholes valuation and a volatility range of 50-65%. Based on that analysis, the value of the New Warrants is estimated at $83 million to $107 million, with a midpoint of $95 million.” This equates to ~$0.60/share (and that’s if you buy into the projected valuation). Wait. Isn’t that less than where Hertz stock trades today? Why, yes. Yes it is. #markets. 🖕🚀🤷‍♀️

So what now? On Monday, the Hertz debtors followed up the filing of their new plan and disclosure statement with a motion (on shortened notice) to establish bidding and auction procedures, emphasizing along the way that time is of the essence:

…it remains critical that the Debtors continue to move their plan process forward, and expeditiously on the timetable currently set by the Court in the Disclosure Statement Order. The equity and debt markets which have provided the billions of committed financing needed to fund the Debtors’ restructuring may deteriorate with the passage of time. Furthermore, the Debtors must continue to progress towards an exit from chapter 11 during the busy summer season and avoid a potential loss in value that could occur through the extension of these Chapter 11 Cases. Any delays in emergence may negatively impact the Debtors’ bookings, harm the Debtors’ customer and vendor relationships, and interfere with the Company’s ability to build its fleet for 2022. The Debtors therefore remain focused on a targeted June exit from chapter 11. (emphasis added)

With a confirmation hearing set for June 10, 2021, the Hertz debtors are putting the pedal to the metal. Later today, the bankruptcy court will rule on the Hertz debtors’ motion to set a May 2 (5pm) “deadline” for the Initial Plan Sponsors to submit a new qualified proposal. Assuming the court agrees, that doesn’t leave a whole lot of time for the Initial Plan Sponsors to come up with something compelling.

But if they do, the Hertz debtors will evaluate their offer and provide the PE Sponsors with an opportunity to counter. If the PE Sponsors remain interested and submit a counter, there’ll ultimately be an auction on May 10.

By then, we’ll know which of the two groups will be licking their wounds singing Billy Ocean.


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🚨New Chapter 11 Bankruptcy Filing - Secure Home Holdings LLC🚨

The market continues to puke out companies that were in trouble prior to COVID-19. Here we have Pennsylvania-based Secure Home Holdings LLC (and four affiliates, the “debtors”). The debtors are behind My Alarm Center, a national provider of, among other things, residential and commercial security systems, home automation systems, and smoke and carbon monoxide detectors.Revenues stem primarily from alarm monitoring contracts in addition to services and installations. In 2020, revenues from the former came to ~$88mm while the latter drummed up ~$7mm.

So? What gives? The debtors struggled with projected covenant defaults as far back as late 2019. Those “projected” defaults ultimately became “actual” defaults and the debtors hired Raymond James & Associates Inc. ($RJF) to pursue either a sale or refinancing transaction. But then … Covid.

We’ve obviously talked a lot about how the pandemic has affected businesses that require customers to come to them. Relatively speaking, we’ve paid short shrift to businesses that rely upon employees to visit and interact with customers. Mostly because we haven’t seen that many of them file even though it stands to reason that there’s probably a meaningful amount of distress there. Or, as we pointed out on Sunday, there would have been were it not for the CARES Act (indeed, the debtors obtained $6.8mm from the PPP program).

Here though:

Historically, a significant portion of the Debtors’ customer contracts resulted from door-to-door sales activity and in-home installations, but these activities came to an abrupt halt with the onset of the pandemic and mandatory state-wide stay-at-home orders. Although restrictions have partially eased in many locales, the Debtors’ door-to-door sales and in-home installations continue to be lower than pre-pandemic levels.

Makes sense. Given how people were Cloroxing their fruits and vegetables, it’s no shocker that customers weren’t all-too-amenable to home visits.

Which creates a vicious cycle. To get customers more comfortable, the debtors had to make investments and, to survive, alter the way it does business:

At the same time, the Debtors have faced increased costs directly related to COVID-19, including maintaining personal protective equipment for employees, additional cleaning required for offices and vehicles, transitioning their workforce to remote working, additional communications with customers, and additional overtime costs as employees were asked to cover for others who could not continue to work.

So while there were no easy operational answers, the balance sheet remained an issue. The pandemic scared off two potential purchasers of certain assets — something that might have provided much needed liquidity and stave off debt defaults. No dice:

…as a result of the current economic environment, disruption within the home security industry, and the decision by two of the Debtors’ major lenders to exit all home security loans, the Debtors defaulted under both of their credit agreements. These defaults left the Debtors unable to draw on their revolving credit facility. The Debtors also lack significant cash reserves.

Interestingly, the debtors don’t elaborate on what they mean by “disruption within the home security industry,” but, luckily, this is ground we’ve covered before; therefore, color us unsurprised that there’s skittishness amongst the lender set.

As for the defaults, they occurred in May 2020. That’s right, nearly 12 months ago. Thereafter, the debtors engaged restructuring pros (including a lender-mandated CRO) and have been negotiating with their lenders and pursuing strategic alternatives ever since. Per the debtors:

The forbearance agreements were amended and extended multiple times to permit these processes and negotiations to continue.

That’s the pandemic in a nutshell. The lenders exercised remedies and declared a default but then … well, then … they worked with the debtors for an extremely long time to get to this juncture. During this time, the debtors obtained a letter of intent that contemplated a sale transaction but that avenue closed once the buyer was unable to obtain financing. The debtors, then, had to pivot to an alternative.

The culmination of that pivot is the debtors’ proposed plan of reorganization and DIP financing. The plan contemplates doling out equity ownership to the first lien lenders led by funds affiliated with Invesco. Invesco and the other first lien lenders (which includes First Midwest Bank and CIT Bank NA), will also provide a $30mm DIP ($15mm new money). Interestingly, the plan delineates that the first lien lenders are undersecured; the plan allows a first lien claim of not less than $95mm (of the $197mm funded), leaving, after accounting for the DIP roll-up too, a pretty hefty unsecured deficiency claim (hence why funds affiliated with Invesco are scattered throughout the debtors’ list of top unsecured creditors filed along with the petition). This also explains why the second lien creditors — represented by agent, Goldman Sachs Speciality Lending Group LP — are an impaired class recovering bupkis (PETITION Note: well, bupkis other than a $1mm fee + $200k legal expense reimbursement in connection with consent to the priming DIP); they too are deficiency claims. Upon emergence, the implied plan enterprise value will be $145mm, as follows:


📚Resources📚

We have updated our compilation of a$$-kicking resources covering restructuring, tech, finance, investing, economics and disruption. You can find the full compilation here.


📤Notice📤

David Forsh (Partner) joined Callari Partners LLC from Thompson Hine LLP.

Kevin Liang (Associate) joined Ropes & Gray LLP from Kirkland & Ellis LLP.

Jim Peters joined SierraConstellation Partners as Managing Director and Head of Performance Improvement practice.

Rachel Bravo joined SierraConstellation Partners as Learning & Development Specialist.

Thomas Califano (Partner) joined Sidley Austin LLP from DLA Piper LLP.

🙌Congratulations to:🙌

Judge Craig Goldblatt on his appointment as a United States Bankruptcy Judge for the District of Delaware.

Matthew Moss on his promotion to Managing Director at Guggenheim Securities.

The new slate of American Bankruptcy Institute officers and directors.


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