Clover Technologies Group, LLC – Court Confirms Plan, Paving Way for Debtors to Exit Bankruptcy Minus $360mn of Debt

January 22, 2020 – The Court hearing the Clover Technologies Group cases approved the Debtors’ Prepackaged Chapter 11 Plan of Reorganization, paving the way for the Debtors to emerge deleveraged by more than $360.0mn and with holders of the Debtors' $644.1mn of pre-petition term loans owning 100% of the emerged Debtors' common stock [Docket No. 143] .

On December 16, 2019, Clover Technologies Group, LLC (a/k/a 4L Holdings Corporation) and six affiliated Debtors (“Clover” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12680. In their lead Petition, the Debtors, the world’s largest collector and recycler of imaging supplies, noted estimated assets between $100.0mn and $500.0mn and estimated liabilities between $500.0mn and $1.0bn. 

In a press release heralding the Plan's confirmation, Clover stated: "[We have] received Court approval of its prepackaged Chapter 11 Plan of Reorganization (the "Plan") paving the way for the reorganized company to successfully emerge from Chapter 11 in the coming days. 

The confirmed Plan will provide 4L a significantly stronger balance sheet and increased financial flexibility, putting the Company on strong financial footing as it enters its next chapter. With the recent acquisition of Teleplan, the Company will now possess the financial strength and operational capabilities to offer cost-effective, innovative supply chain solutions for customers worldwide, reaching over 120 countries across Europe, the Americas and Asia Pacific."

Plan Overview

The Debtors' memorandum in support of Plan confirmation [Docket No. 117] provides the following: "The Plan is the product of months of good-faith, arm’s-length negotiations among the Debtors, their Term Loan Lenders, and other key constituents, who all worked towards a consensual, value-maximizing restructuring. The Plan is the final step of the Debtors’ three-part process to deleverage their balance sheet and create a stronger go-forward business. In late 2019, the Debtors completed the first two steps: (1) a $50 million acquisition of Teleplan International N.V. (‘Teleplan’); and (2) a $215 million sale of their Imaging Business. These value-maximizing transactions and hard-fought negotiations resulted in the execution of a restructuring support agreement (together with all exhibits thereto, and as amended, restated, and supplemented from time to time, the ‘Restructuring Support Agreement’), which contemplated the commencement of these Chapter 11 Cases, which had the support of an overwhelming majority of the Debtors’ Term Loan Lenders and holders of Existing Equity Interests. This support is unequivocal based on the Voting Report: the Plan has been unanimously accepted by voting creditors and equityholders, and, to date, not a single party has objected to the Plan.

The Plan provides for a significant balance sheet restructuring that will substantially reduce the Debtors’ debt burden by more than $360 million, ensures the Debtors have enough capital to fund their exit and post-emergence liquidity needs through a new Take-Back Term Loan Facility and by reducing go-forward interest payments, and sends a strong message to the Debtors’ employees, vendors, and other business partners that they are well positioned for future success." 

In a declaration in support of Plan filing [the "Buck Declaration," Docket No. 18], the Debtors' CFO Andrew Buck provided more background on the two strategic transactions and posited that they deserve some respect: "More than six months of stakeholder engagement and coordination finds Clover on the brink of making the impossible the possible—landing the 'Triple Lindy'—a dive so difficult that even the great Thornton Melon had his doubts [Thornton Melon here]. With two of three 'diving boards' already in play, these cases are filed on the backs of (1) a $50 million acquisition; (2) a $215 million sale; and (3) an agreed upon prepackaged restructuring and recapitalization. Clover completed its acquisition of Teleplan International N.V. for $50 million on December 4, 2019. And, just hours before filing these cases, Clover closed the $215 million sale of its printer supply services business to NEP. The foundation for these transactions, as well as a holistic balance sheet restructuring, is a restructuring support agreement and a prepackaged plan supported by more than 70% of Clover’s secured lenders and its equity sponsors. It represents a deliberate effort by Clover and its sponsors, in the face of shifting market trends, customer contraction, and a May 2020 maturity, to proactively organize stakeholders in an effort to truly maximize value."

In a December 11th press release announcing the agreement of a restructuring support agreement and the intention to file for chapter 11 protection, the Debtors advised that: “4L Holdings ('4L' or 'the Company'), which operates as Clover Technologies Group, today announced that it, along with certain of its affiliates, has entered into a restructuring support agreement (the 'Agreement') – that will equitize all of the Company's approximately $644 million in long-term debt – with the majority of its equity holders and a group of its lenders representing over 67% of its outstanding long-term debt."   

The press release also details two steps the Debtors are taking to rationalize what has been an over-complicated and technology-challenged business model: "In addition to the restructuring, the Agreement also supports two recently announced strategic transactions: Clover Wireless' acquisition of Teleplan, which closed on December 4, 2019, and the sale of Clover Imaging to Norwest Equity Partners, which was announced on November 21, 2019, and is expected to close in mid-December 2019.  Upon consummation of the sale of Clover Imaging, the proceeds from the sale [$215.0mn subject to closing adjustments] will be used to pay down a portion of 4L's current outstanding long-term debt."

Restructuring Transactions and Restructuring Support Agreement

The Debtors have entered into a restructuring support agreement (the “RSA,” first executed on November 21st and subsequently amended on December 10th, attached at Exhibit C of the Disclosure Statement) with certain holders of term loan secured claims (the “Consenting Term Loan Lenders”) and certain holders of the Debtors’ existing equity interests (the “Consenting Sponsors”, and collectively with the Consenting Term Loan Lenders, the “Consenting Stakeholders”) that provides for a comprehensive in-court restructuring that is intended to deleverage the Company’s debt obligations and leave the Debtors in position to quickly emerge from Chapter 11 as a going concern.

The Disclosure Statement provides the following restructuring overview: “

• each Holder of an Allowed Term Loan Secured Claim shall receive its Pro Rata share of and interest in (i) 100% of the New Common Stock (subject to dilution from the Management Incentive Plan and the New Warrants); (ii) the Take-Back Term Loans; and (iii) 100% of Excess Cash, including any cash not distributed to the Term Loan Lenders in connection with the consummation of the Imaging Sale;
• each Holder of an Existing Equity Interest shall receive its Pro Rata share of and interest in the New Warrants; 
• unless otherwise set forth in the Plan or paid in full in advance thereof, General Unsecured Claims shall be Reinstated; 
• all Administrative Claims, Priority Tax Claims, and Other Secured Claims will be paid in full in Cash or receive such other treatment that renders such Claims Unimpaired; 
• the Debtors shall obtain the Exit Facility in a form and substance acceptable to the Required Consenting Term Loan Lenders prior to the Effective Date. The liens securing the Exit Facility shall be senior to the liens securing the Take-Back Term Loan Facility; and
• the parties to the Restructuring Support Agreement (including the Consenting Sponsors and the Consenting Term Loan Lenders) will grant full, mutual releases, subject to revocation as set forth in the Restructuring Support Agreement."

Summary of Classes, Claims, Voting Rights and Projected Recoveries (defined terms as defined in the Plan and/or Disclosure Statement)

• Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Projected recovery is 100%.
• Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Projected recovery is 100%.
• Class 3 (“Term Loan Secured Claims”) is impaired and entitled to vote. Projected recovery is 65%-77%.
• Class 4 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Projected recovery is 100%.
• Class 5 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Projected recovery is 100%/0%.
• Class 6 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Projected recovery is 100%/0%.
• Class 7 (“Existing Equity Interests”) is impaired and entitled to vote on the Plan. Projected recovery is 0%.

Voting Results

Pre-Petition Capital Structure

Debt

As of December 13, 2019, the Debtors has approximately $644.1mn in aggregate funded-debt obligations arising from a May 8, 2014 term loan credit agreement (the “Term Loan Credit Agreement,” and the term loans thereunder, the “Term Loans”) by and among 4L Holdings Corporation, as holdings, Clover Technologies Group, LLC and 4L Technologies Inc., as borrowers, the lenders party thereto (the “Term Loan Lenders”), and Wilmington Savings Fund Society, FSB, as administrative agent (as successor to Bank of America, N.A.).

Equity

As of December 13, 2019, the Debtors’ ultimate parent (ie 4L Technologies Inc.) has approximately 1,712,233 shares outstanding, of which approximately 68.35% is held by Golden Gate Capital and certain co-investors including JP Capital Partners, approximately 21.29% is held by current and former management including Chairman Jim Cerkleski and affiliated trusts, and approximately 10.36% is widely dispersed among legacy interest holders.

Events Leading to the Chapter 11 Filing

The Debtors were formed in 1996 around a simple, single set of products and services: They put toner into used printer cartridges. Over the ensuing decades they branched out into three increasingly competitive and technologically challenging segments, (i) the Imaging Business, evolved from their original business, (ii) the Wireless Business, acquired in 2012 and focused on the remanufacturing/refurbishment of mobile phones and (iii) the Telecom Business, which focused on sales and services relating to networking equipment and which was sold in 2018. Each of the two remaining business segments has operated in increasingly distressed markets and subject to a looming May 2020 maturity of the Debtors' almost $650.0mn of bank debt.

The Buck Declaration states: "Despite Clover’s success in the technology device industry and its competitive market share, industry-wide changes have directly and negatively affected Clover’s ability to provide services to some of its largest customers. Major OEMs [ie original equipment manufacturers] have exponentially grown or consolidated, and wield more influence than ever before. These consolidated OEMs have introduced aggressive pricing programs and imposed rigorous quality standards, reducing the demand for after-market suppliers and remanufacturers like Clover. Technical progress has also taken its toll on Clover—as a result of the dramatic improvement in the quality of mobile devices, devices remain in the market longer, resulting in decreased demand for remanufactured and remarketed devices. And in June 2019, Clover lost two major customers. In the face of these industry disruptions, Clover was also contending with a first lien term loan maturity of approximately $650 million in May 2020.

The fast pace of evolution in the technology hardware industry and macroeconomic trends in the printing supply and consumer device industries led Clover to begin exploring restructuring options as early as 2016. At the time, customers of the Imaging Business were experiencing depressed demand for printers and associated supplies at a macro level due to an increase in digital (as opposed to print) content, as well as increased competition from foreign vendors and remanufacturers that cut corners on quality and labor to decrease overhead costs. In response to this constricting market, the Imaging Business’s customers consolidated their businesses and tightened trade terms with service providers like Imaging, causing increased uncertainty in a shrinking market. 

The Wireless Business experienced similar signals of market distress. Historically, the Wireless Business was reliant on a highly concentrated customer base, many of whom were large and influential industry players in their markets. Moreover, many of the Wireless Business’s customers were subject to restrictive OEM policies that insisted on high quality standards, increasing pressure throughout the supply chain. Wielding their influence in the wireless device industry, these OEMs’ policies led to unpredictable structural changes in the wireless device market that impacted the Wireless Business’s ability to provide its remanufacturing services at efficient margins. 

In early 2016, in light of the above challenges and its outstanding indebtedness, Clover retained an investment bank to help market the entire Clover enterprise for a potential sale, including all three of the Imaging Business, Wireless Business, and Telecom Business. Clover ran a full marketing process, in which it contacted a considerable number of potential buyers and entered into advanced negotiations with a potential foreign purchaser. Negotiations were ultimately terminated due to U.S. regulatory hurdles. Over this same period, Clover explored several opportunities to refinance its Term Loans, but these efforts did not result in a definitive refinancing transaction. After terminating the sale of the whole business, Clover refocused its strategy towards optimizing efficiencies in each of its operational segments. To better address the distinct operational needs within each business, Clover separated the Imaging Business, Wireless Business, and Telecom Business into separate operating units, each with their own business plan, management teams, and operational facilities. In addition, Clover pivoted to exploring the sales of each of these business units, each on a stand-alone basis. On March 21, 2018, Clover closed a sale of the Telecom Business to a strategic purchaser. 

 In April 2019, a leading wireless service carrier and key customer of the Wireless Business announced it would shift its process for procuring after-market devices for its subscriber base. The leading wireless carrier restricted the key replacement components that could be used to repair mobile phones to those that could be proven to have been reclaimed from phones already in circulation. In May 2019, the carrier decided to sole-source all older model replacement phones from an OEM, and to split the sourcing of newer model replacement phones between the OEM and used phones purchased (as opposed to repaired) from remanufacturers like the Wireless Business."

Exit Financing: Key Terms of the Take-Back Term Loan Credit Agreement

• Borrowers: The 4L Holdings Corporation (“Holdings”), 4L Technologies Inc., an Illinois corporation, and Clover Technologies Group, LLC
• Agent: Wilmington Savings Fund Society, FSB
• Lenders:  Institutions and entities from time to time party to the Agreement 
• Commitment: $80,000,000, On the Closing Date, $[__,000,000] in principal amount of the “Loans” under, and as defined in, the Existing Credit Agreement shall be deemed to have been advanced by the Lenders to the Borrowers under this Agreement. The converted “Loans” shall be deemed to be Loans outstanding for all purposes under this Agreement owed by the Borrowers to such Lenders in the aggregate principal amount of $80,000,000 and all of the then-outstanding “Commitments” under, and as defined in, the Existing Credit Agreement shall be terminated on the Closing Date. 
• Interest Rates:  LIBOR or the Base Rate, as the case may be, plus the Applicable Margin. Where “Applicable Margin” means, at any date, with respect to each Term Loan that is a (i) Base Rate Loan, 6.50% per annum and (ii) LIBOR Rate Loan, 7.50% per annum.
• Default Interest Rate: Two percent (2%) above otherwise applicable interest rate.
• Fees and Expenses: The Borrowers shall pay to Agent, for Agent’s own account, fees in the amounts and at the times set forth in the letter agreement among Holdings and Agent dated as of January [__], 2020 (as amended from time to time, the “Fee Letter”).
• Conversion and Continuation Elections: The Borrowers shall have the option to (i) convert at any time all or any part of outstanding Loans from Base Rate Loans to LIBOR Rate Loans, (ii) convert any LIBOR Rate Loan to a Base Rate Loan if such conversion is made prior to the expiration of the Interest Period applicable thereto, or (iii) continue all or any portion of any Loan as a LIBOR Rate Loan upon the expiration of the applicable Interest Period. Any Loan or group of Loans having the same proposed Interest Period to be made or continued as, or converted into, a LIBOR Rate Loan must be in a minimum amount of $3,000,000 and multiples of $1,000,000 in excess thereof. Any such election must be made by Borrower Representative.
• Maturity Date: “Term Loan Maturity Date” means the fourth anniversary of the Closing Date.
• Scheduled Term Loan Payments: Subject to adjustment to reflect any prepayments thereof applied in accordance with Section 1.7(e), the Borrowers shall repay the outstanding Term Loans in consecutive quarterly installments, commencing on June 30, 2020, on the last Business Day of each of June, September, December and March following the Closing Date in an amount equal to (i) $80,000,000 multiplied by (ii) the multiplier set forth below, with the remaining balance thereof payable on the Term Loan Maturity Date:

Liquidation Analysis (see also Exhibit F to the Disclosure Statement for related notes)

Corporate Structure Chart (see also exhibit B to the Disclosure Statement)

About The Pre-Petition Debtors

The Disclosure Statement provides: "Clover was founded in 1996 as a printing supply company that refurbished and resold toner cartridges. Over the following decades, Clover developed proprietary skills, knowledge, and processes, and a loyal customer base that included leading technology hardware producers, OEMs, retailers, wireless service carriers, and insurance providers. Through organic growth and acquisitions, Clover grew from a printer cartridge reseller to an international, after-market supply chain manager with three main business segments: Clover Imaging Group (the “Imaging Business”), Clover Wireless Group (the “Wireless Business”), and Clover Telecom (the “Telecom Business” [sold in 2018]). Clover’s business segments provide customers with a full suite of after-market services including customized trade in and buyback programs, repair and reclamation services, and remarking and resale programs. Clover is also a major worldwide employer—as of December 2019, Clover employs approximately 9,100 employees in over 120 countries.

Read more Bankruptcy News

The post Clover Technologies Group, LLC – Court Confirms Plan, Paving Way for Debtors to Exit Bankruptcy Minus $360mn of Debt appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.