November 5, 2019 – The Debtors notified the Court that their Amended Joint Chapter 11 Plan of Reorganization had become effective as of November 5, 2019. [Docket No. 447] The Plan was confirmed on October 24, 2019 [Docket No. 432].
On July 9, 2019, Stearns Holdings, LLC and six affiliated Debtors (together, “Stearns” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 19-12226. In their lead Petition, the Debtors, a leading provider of residential mortgage lending services in Wholesale, Retail and Strategic Alliances sectors (controlled pre-petition by Blackstone’s private equity group with a 70% holding), noted between 200 and 1,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn.
In a press release announcing the Plan's confirmation, the Debtors stated: "Upon emergence, Stearns will reduce its debt by more than $150 million and Blackstone ('Blackstone,' NYSE: BX), as the owner of the reorganized Company, will contribute substantial new capital to fund payments to creditors made on the effective date of the Plan. Blackstone’s contribution includes $65 million to be paid to holders of Stearns’ prepetition notes and additional funds to satisfy certain unsecured claims."
Plan Overview
The Debtors' memorandum in support of Plan confirmation [Docket No. 409] provides the following Plan overview: "The Plan provides for a comprehensive restructuring of significant indebtedness by eliminating the Debtors’ Notes, which have a principal outstanding amount of approximately $183 million. Under the Plan, Noteholders will receive total consideration of:
(i) $65 million in Cash funded by the increased New Money Investment;
(ii) warrants to purchase non-voting Class B units in the Reorganized Debtors worth 15% of the aggregate value appreciation of the Reorganized Debtors above the New Money Investment in accordance with the RSA (the “Warrants”); and
(iii) 5% senior unsecured notes due 2024 issued by the Reorganized Debtors on the Effective Date in the aggregate principal amount of (x) $15 million, less (y) 90% of payments to be made on the Effective Date from the New Money Investment to holders of General Unsecured Claims (with such payments to be deemed capped at $12.5 million for purposes of calculating the reduction of the principal amount such notes) (the “New Notes”) on account of their Notes Secured Claims.
Significantly, under the Plan as amended to reflect the Global Settlement, the recovery to Unsecured Claims in Class 4 has increased from 95% to 100% and the recovery to Unsecured Claims in Class 5 has increased from 0% to 100%. Pursuant to the RSA, the 100% recovery to Claims in Class 5 is the result of the Plan Sponsor’s agreement to fund all Effective Date payments for Class 5 Claims, which funding is incremental to the New Money Investment. Therefore, both Classes of Unsecured Claims under the Plan will receive full recoveries and are rendered Unimpaired. In exchange for the New Money Investment and other consideration (and not on account of existing Interests), the Plan Sponsor will be issued the Reorganized Stearns Holdings Interests. All Existing Stearns Holdings Interests will be cancelled.
The Plan also provides for the implementation of a Cash Flow Exit Facility and Exit Repo Facilities. The Cash Flow Exit Facility will satisfy the Debtors’ obligations under the Cash Flow DIP Facility. Similarly, the Exit Repo Facilities will satisfy the Debtors’ obligations under the DIP Repo Facilities, while also providing the Debtors with the financing capacity to operate their mortgage origination business following the Effective Date.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as in the Plan and/or Disclosure Statement):
- Class 1 (“Priority Non-Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $31,000 and the estimated recovery is 100%.
- Class 2 (“Notes Secured Claim”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $189.8mn and the estimated recovery is 41%. Pursuant to the RSA, Noteholders will receive their pro rata share of (a) $65.0mn in cash; (b) warrants to purchase nonvoting Class B units in the Reorganized Debtors worth 15% of the aggregate value appreciation of the Reorganized Debtors above the New Money Investment; and (c) the New Notes in the aggregate principal amount of (x) $15.0mn, less (y) 90% of payments to be made on the Effective Date from the New Money Investment to holders of General Unsecured Claims (with such payments to be deemed capped at $12.5mn for purposes of calculating the reduction of the principal amount of the New Notes). The value of the New Notes will be dependent upon the amount of payments made to Class 5 (General Unsecured Claims) on the Effective Date. The Debtors estimate that the value of the New Notes may range from approximately $3.75mn to $7.53mn.
- Class 3 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $58,000 and the estimated recovery is 100%.
- Class 4 (“Go-Forward Trade Claims”) is unimpaired and not entitled to vote on the Plan. The estimated aggregate amount of claims is $4,291,000 and the estimated recovery is 100%. At the sole option of the Debtors, or the Reorganized Debtors, as applicable: (A) each such holder shall receive cash in an amount equal to such Go-Forward Trade Claim; (B) such holder’s allowed Go-Forward Trade Claim shall be Reinstated; or (C) such holder shall receive such other treatment so as to render such holder’s allowed Go-Forward Trade Claim unimpaired.
- Class 5 (“General Unsecured Claims”) is unimpaired and not entitled to vote on the Plan. The estimated aggregate amount of claims is $9,944,000 and the estimated recovery is 100%. At the sole option of the Debtors, or the Reorganized Debtors, as applicable: (A) each such holder shall receive cash in an amount equal to such General Unsecured Claim; (B) such holder’s allowed General Unsecured Claim shall be Reinstated; or (C) such holder shall receive such other treatment so as to render such holder’s allowed General Unsecured Claim unimpaired.
- Class 6 (“Artemis Note Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
- Class 7 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.
- Class 8 (“Existing Stearns Holdings Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
- Class 9 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.
- Class 10 (“Protos Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.
Restructuring Support Agreement
The Disclosure Statement provides: Following negotiations by and among the Debtors, Blackstone, and PIMCO, the parties agreed to a good faith compromise of all Claims and causes of action against the Debtors (the ‘Global Settlement’). The Global Settlement is set forth in the Restructuring Support Agreement (the ‘RSA’), dated as of September 5, 2019, by and among the Debtors, Blackstone (together with other equity holders that are party to the RSA, the ‘Consenting Equity Holders’), and PIMCO (together with other Noteholders that are party to the RSA, the ‘Consenting Noteholders’).
The commitments under the RSA represent a significant step forward in these Chapter 11 Cases. Indeed, the RSA ensures that PIMCO, as the Debtors’ most significant prepetition creditor holding approximately 65.84% of the aggregate principal amount of the Notes, will support the terms of a consensual restructuring with the Debtors and Blackstone. Therefore, the RSA removes the specter of potential value-destructive litigation with PIMCO, including with respect to Confirmation of the Plan. Further, as a result of the Global Settlement, the auction process relating to the Original Blackstone Investment Agreement was terminated. In accordance with the Global Settlement, the Plan Sponsor has agreed to, among other things, (a) pursuant to the Amended Investment Agreement, provide the sum of (i) $65 million in cash; and (ii) cash in an amount sufficient to fund all payments to Claims in Class 5 to be made on the Effective Date (the ‘New Money Investment’), in exchange for 100% of the interests in Stearns Holdings, LLC, as reorganized; and (b) release each Noteholder from any Claims and causes of action pursuant to Section 9.3 of the Plan, except for any Noteholder that (i) opts out of the releases contained in Section 9.3 by checking the box on its timely submitted applicable Ballot or (ii) votes to reject the Plan.
The Global Settlement will fully and finally satisfy all Claims held by the Consenting Noteholders. In connection with the Global Settlement and in full and final satisfaction of their Claims and causes of action, the Consenting Noteholders have obtained significant value for holders of the Notes Secured Claims, as these holders will receive a pro rata distribution of (a) $65 million; (b) warrants to purchase non-voting Class B units in the Reorganized Debtors worth 15% of the aggregate value appreciation of the Reorganized Debtors above the New Money Investment (the ‘Warrants’); and (c) 5% senior unsecured notes due 2024 issued by the Reorganized Debtors on the Effective Date (the ‘New Notes’). This represents a substantial improvement as compared to the distribution that such holders would have received prior to the execution of the RSA and implementation of the Global Settlement. The Noteholders shall also receive releases from the Debtors and the Releasing Parties. Accordingly, the Global Settlement ends potentially expensive, extensive, and time-consuming litigation over Confirmation and provides for an expedited and efficient conclusion to these Chapter 11 Cases for the benefit of all stakeholders. The Global Settlement also provides a substantial benefit to holders of Go-Forward Trade Claims and General Unsecured Claims. Because the Consenting Noteholders have agreed to waive any portion of a Notes Claim that is unsecured, if any, pursuant to section 506(a) of the Bankruptcy Code, the Debtors are able to provide treatment to holders of Go-Forward Trade Claims and other holders of General Unsecured Claims such that those holders’ Claims are unimpaired.
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