Fusion Connect, Inc. – Court Approves Disclosure Statement, Schedules November 14th Confirmation Hearing

October 8, 2019 – The Court hearing the Fusion Connect cases issued an order approving (i) the Debtors’ Disclosure Statement, (ii) proposed Plan solicitation and voting procedures and (iii) a Plan confirmation hearing for November 14, 2019  [Docket No. 457].

On October 7, 2019, the Debtors filed their Second Amended Joint Chapter 11 Plan and a related Disclosure Statement, with each document attaching a blackline marked against the previous version filed and a cumulative blackline [Docket Nos. 455 and 456, respectively].

Overview of the Amended Plan

The Disclosure Statement [Docket No. 456] states: “Upon consummation of the Reorganization Transaction, on the Effective Date, pursuant to an in accordance with the Second Amended Plan, the Reorganized Debtors will, among other things: 

1. issue one hundred percent (100%) of the issued and outstanding New Equity Interests to be issued on the Effective Date to the holders of Allowed First Lien Claims (subject to dilution by the Special Warrants and Management Incentive Plan) in accordance with the Equity Allocation Mechanism and the Special Warrant Agreement, including a distribution of the Special Warrants to the holders of Allowed First Lien Claims in an amount such that, after the exercise of all Special Warrants issued on the Effective Date, holders of Allowed First Lien Claims would hold ninety-seven and one-half percent (97.5%) of the issued and outstanding New Equity Interests (subject to dilution by the Management Incentive Plan), 
2. issue the Special Warrants to the holders of Allowed Second Lien Claims in an amount such that, after the exercise of all Special Warrants issued on the Effective Date, holders of Allowed Second Lien Claims would hold two and one-half percent (2.5%) of the issued and outstanding New Equity Interests (subject to dilution by the Management Incentive Plan), 
3. enter into the New Exit Facility Credit Agreement, which is currently estimated to consist of loans and undrawn revolving commitments in an aggregate amount of $125 million, the proceeds of which would provide for the payment of the DIP Facility and provide liquidity for the Company’s working capital purposes, and 
4. enter into the New First Lien Credit Agreement of up to $225 million to be issued to holders of Allowed First Lien Claims.

Generally, the Second Amended Plan contemplates the following treatment for creditors or interest holders under the Reorganization Transaction. 

• As part of the restructuring contemplated by the Restructuring Support Agreement, the First Lien Lender Group backstopped a debtor-in-possession financing in the aggregate amount of $59.5 million (the “DIP Facility”) to support the Company’s operations during the Chapter 11 Cases. On the Effective Date, the DIP Facility will be paid in full in cash or refinanced in full in cash from borrowing under the Exit Financing Facility. 
• First Lien Claims. On the Effective Date, the holders of First Lien Claims will receive their Pro Rata share of (i) the First Lien Lender Equity Distribution (consisting of one hundred percent (100%) of the New Equity Interests issued and outstanding on the Effective Date and Special Warrants that, when all Special Warrants are exercised on a fully distributed basis, will cause holders of First Lien Claims to hold ninety-seven and one-half percent (97.5%) of the New Equity Interests (subject to dilution by the Management Incentive Plan)); provided, that, notwithstanding anything herein or in the Second Amended Plan to the contrary, the distribution of the First Lien Lender Equity Distribution shall be made pursuant to, and subject to the terms and conditions of, the Equity Allocation Mechanism attached as Exhibit A to the Second Amended Plan; (ii) the loans under the New First Lien Credit Facility in the aggregate amount of up to $225.0 million (the “New First Lien Term Loans”); and (iii) cash or other proceeds, if any, from the sale of the Debtors’ Canadian Business unless otherwise agreed to by the Requisite First Lien Lenders. 
• Second Lien Claims. On the Effective Date, the holders of Second Lien Claims will receive their Pro Rata share of the Second Lien Lender Special Warrant Distribution (consisting of Special Warrants that, when all Special Warrants are exercised on a fully distributed basis, will cause holders of Second Lien Claims to hold two and one-half percent (2.5%) of the New Equity Interests (subject to dilution by the Management Incentive Plan). 
• General Unsecured Claims. On the Effective Date, the holders of General Unsecured Claims will receive their Pro Rata share of the Litigation Trust Interests. 
• Parent Equity Interests. On the Effective Date, the Parent Equity Interests will be extinguished and shall be of no further force and effect, whether surrendered for cancellation or otherwise. 
• All Priority Non-Tax Claims, Other Secured Claims, Intercompany Claims, and Intercompany Interests are Unimpaired under the Second Amended Plan. §Following the Effective Date, Reorganized FCI will adopt a post-emergence management incentive plan (the “Management Incentive Plan”), under which up to ten percent (10%) of the New Equity Interests (after taking into account the shares to be issued under the Management Incentive Plan) will be reserved for issuance as awards on terms and conditions as agreed to by the New Board.”

The following is summary of classes, claims, voting rights and expected recoveries showing no changes to (Defined terms are as defined in the Plan and/or Disclosure Statement):

• Class 1 (“Priority Non-Tax Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is 100.0%.
• Class 2 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is 100.0%. 
• Class 3 (“First Lien Claims”) is impaired and entitled to vote on the Plan. Aggregated allowed claims are $585.5mn and the estimated recovery is 60.0%–76.1%. Each holder will receive its pro rata share of (a) the First Lien Lender Equity Distribution; provided, that notwithstanding anything in the Second Amended Plan to the contrary, the distribution of the First Lien Lender Equity Distribution shall be made pursuant to, and subject to the terms and conditions of, the Equity Allocation Mechanism; (b) the loans under the New First Lien Credit Facility; and (c) cash or other proceeds, if any, from the sale of the Debtors’ Canadian business unless otherwise agreed to by the Requisite First Lien Lenders. According to the liquidation analysis: "The estimated recovery for Holders of First Lien Claims under the Plan is based on the valuation conclusions of the Debtors’ investment banker, PJT Partners, which estimated an enterprise value of $450 million to $550 million and a value of plan consideration to the First Lien lenders aggregating from $364 million to $462 million. The Debtors estimate that, using this valuation, Holders of First Lien Claims will receive a recovery ranging from 60% to 76% under the Plan. Under a chapter 7 liquidation it is estimated that Holders of First Lien Claims will receive a recovery ranging from 2% to 6%."
• Class 4 (“Second Lien Claims”) is impaired and entitled to vote on the Plan.  Aggregated allowed claims are $85.0mn and the estimated recovery is 4.0%–6.9%. Each such holder shall receive on the Effective Date such holder’s Pro Rata share of the Second Lien Lender Special Warrant Distribution. According to the liquidation analysis: "The estimated recovery for Holders of Second Lien Claims under the Plan is based on the valuation conclusions of the Debtors’ investment banker, PJT Partners, which estimated an enterprise value of $450 million to $550 million and a value of plan consideration to the Second Lien lenders aggregating from $3.6 million to $6.1 million. The Debtors estimate that, using this valuation, Holders of Second Lien Claims will receive a recovery ranging from 4% to 7% under the Plan. Under a chapter 7 liquidation, Holders of Second Lien Claims are expected to receive no recovery."
• Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is NA. According to the liquidation analysis: "Holders of General Unsecured Claims will realize a recovery through interests in the Litigation Trust received under the Plan. The amount and percentage recovery of the interests in the Litigation Trust cannot be estimated because the outcome and the amount and allocation of net proceeds cannot be predicted at this time. The estimated recovery for Holders of General Unsecured Claims under a hypothetical chapter 7 liquidation is 0%."
• Class 6 (“Intercompany Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is NA.
• Class 7 (“Intercompany Interests”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is NA
• Class 8 (“Parent Equity Interests”) is impaired, presumed to reject and not entitled to vote on the Plan. The estimated recovery is 0.0%.
• Class 9 (“Subordinated Securities Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0.0%.

Please note that the revised liquidation analysis is attached to the Disclosure Statement as Exhibit D.

The Disclosure Statement attached the following documents:

• Exhibit A: Amended Joint Plan of Reorganization
• Exhibit B: Restructuring Support Agreement
• Exhibit C: Financial Projections
• Exhibit D: Liquidation Analysis
• Exhibit E: Valuation Analysis

Key Dates:

• Voting deadline: November 4, 2019
• Confirmation objection deadline: November 4, 2019
• Confirmation hearing: November 14, 2019

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