March 16, 2020 – Internap Technology Solutions Inc. and six affiliated Debtors (dba Internap Corporation; NASDAQ: INAP, “INAP” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 20-22393. The Debtors, a provider of high-performance data center and cloud solutions, are represented by Dennis F. Dunne of Milbank LLP. Further board-authorized engagements include (i) Jenner & Block LLP as special corporate counsel, (ii) Moelis & Company as investment banker, (iii) FTI Consulting, Inc as financial advisors and (iv) Prime Clerk LLC as claims agent.
The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets between $0.0 and $50.0k; and estimated liabilities between $100.0mn and $500.0mn. The Debtors' 10-Q for the quarter ending September 30, 2019 noted total assets of $724.7mn ($46.2mn of current assets) and liabilities of $784.9mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Burr Computer Environments, Inc ($3.1mn trade debt), (ii) Trace3 Inc ($970k trade debt) and (iii) Zayo Group ($850k trade debt).
In a press release announcing their prepackaged Chapter 11 filing, the Debtors advised that it had taken “definitive steps through which it expects to significantly reduce debt and extend maturities, equipping INAP to generate the cash flows needed to grow the business and reinvest in its products and customers. To support this strengthening of its capital structure, INAP entered into a Restructuring Support Agreement (the ‘RSA’) with an ad hoc lender group (the ‘Ad Hoc Lender Group’) holding approximately 77% of its outstanding term loans.
INAP’s non-U.S. subsidiaries, including iWeb Technologies, Internap Network Services U.K. Limited, Internap Network Services B.V., SingleHop B.V. and INAP Japan, are not part of the Company’s Chapter 11 cases.”
Overview of the Prepackaged Plan
The Disclosure Statement provides: "INAP does not presently have the resources to pay all of its existing long-term debt obligations in full and in cash. However, INAP has entered into a Restructuring Support Agreement [see Exhibit B of the disclosure Statement] with the Consenting Lenders in order to effectuate a balance sheet recapitalization of INAP pursuant to the terms of the Plan. The proposed restructuring will eliminate approximately $293.2 million in debt from INAP’s balance sheet and thereby improve INAP’s financial condition and overall creditworthiness and help ensure INAP’s continued operations. INAP is commencing solicitation of the Plan prior to the commencement of ‘prepackaged’ chapter 11 cases, which INAP believes will minimize disruption to its day-to- day operations, reduce the cost of the proposed restructuring, and ultimately be in the best interests of all of its stakeholders.
As a result of the Restructuring provided in the Plan:
- In full satisfaction of each Allowed Existing Loan Claim, each holder thereof will receive its Pro Rata share of: (i) commitments under the New Term Loan Facility, in the aggregate principal amount equal to the New Term Loan Facility Principal Amount; and (ii) 100% of New Common Equity, subject to dilution by the Management Incentive Plan and New Common Equity Warrants;
- Holders of General Unsecured Claims will receive: (i) payment in Cash in an amount equal to such Allowed General Unsecured Claim in the ordinary course of business in accordance with the terms and conditions of the particular transaction giving rise to such Claim, or (ii) such other treatment so as to render such Claim unimpaired; and
- All Existing Equity Interests will be cancelled, released, and extinguished as of the Effective Date, and holders of Existing Equity Interests shall not receive or retain any property under the Plan on account of such Existing Equity Interests, provided, however, that notwithstanding the foregoing, each holder of Existing Equity Interests that (i) is a beneficial holder of INAP’s common stock as of the Effective Date and (ii) has executed an Existing Equity Release pursuant to the Existing Equity Notice Materials, will receive its Pro Rata share 100% of the New Common Equity Warrants (subject to the Fractional Warrant Distribution Provision), which shall come from amounts that holders of Existing Term Loan Claims would otherwise be entitled to receive under the Plan.
Restructuring Support Agreement
On March 13, 2020, the Debtors entered into a Restructuring Support Agreement (the “RSA”) with holders (the “Consenting Lenders”) of approximately 77% of the Company’s outstanding term loans. The RSA and attached term sheet provide, in pertinent part, as follows:
- The Company’s general unsecured creditors will be paid in full in the ordinary course of business.
- The Company will enter into debtor-in-possession financing structured as a delayed draw term loan (the "DIP Facility”) providing for a limit of $75.0mn (including the $5.0mn refinancing of the "New Incremental Loans").
- The DIP Facility will convert into a priority exit facility (the “Priority Exit Facility”) upon the Company’s emergence from the Chapter 11 Cases. The Priority Exit Facility will have a 3-year maturity and bear interest at a rate of LIBOR + 1000 basis points payable in cash.
- The Company will enter into a new term loan facility (the “New Term Loan Facility”) on the Effective Date. The New Term Loan Facility will provide for term loans in the principal amount of $225.0mn, mature 5 years after the Effective Date and bear interest at a rate of LIBOR + 650 basis points, 300 basis points of which will be paid in cash and 350 basis points will be paid in kind; provided that, at the election of the INAP board of directors post-Effective Date, 200 basis points of the LIBOR + 300 basis points cash interest may be payment in kind.
- The Company will use its commercially reasonable efforts to enter into a new $15.0mn senior secured first out working capital facility on the Effective Date.
- The lenders under the Credit Agreement dated April 6, 2017 by and among INAP, as borrower, certain of its subsidiaries as guarantors, Jefferies Finance LLC as administrative and collateral agent and the other lenders thereto (as amended, the “Credit Agreement”) will receive 100% of the new common stock initially issued by reorganized INAP post-Effective Date.
- Holders of existing INAP common stock will receive warrants to purchase 10% of the new common stock of reorganized INAP (the “Warrants”); provided that such holders provide releases. The Warrants will have a strike price calculated to imply an equity value at which the holders of claims under the Credit Agreement recover their principal amount of indebtedness under the Credit Agreement plus prepetition interest on their allowed loan claims (plus amounts outstanding under the New Term Loan Facility).
- On the Effective Date, up to 10% of the fully diluted common stock of reorganized INAP, in the form of restricted stock grants and/or options, shall be reserved for issuance pursuant to a management incentive plan, on terms to be determined by the INAP board of directors post-Effective Date.
The following is a summary of classes, claims, voting right and estimated recoveries (defined terms are as defined 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. Estimated recovery is 100%.
- Class 2 ("Other Secured Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated recovery is 100%.
- Class 3 ("Existing Loan Claims") is impaired and entitled to vote on the Plan. Estimated recovery is 54.6%-81.5%.
- Class 4 ("General Unsecured Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated recovery is 100%.
- Class 5 ("Intercompany Claims") is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Estimated recovery is 100%/0%.
- Class 6 ("Intercompany Interests") is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Estimated recovery is 100%/0%.
- Class 7 ("Subordinated Claims") is impaired, deemed to reject and not entitled to vote on the Plan. Estimated recovery is 0%.
- Class 8 ("Existing Equity Claims") is impaired, deemed to reject and not entitled to vote on the Plan. Estimated recovery is NA.
The Ad Hoc Lender Group has committed to providing the Debtors with debtor-in-possession (“DIP”) financing of $75.0mn.
Prepetition Indebtedness and Capital Structure
- Existing Credit Facility. The Debtors are party to an April 2017 credit agreement (the “Existing Credit Agreement”) which consists of a term loan (the “Existing Term Loan” maturing April 6, 2022) and a revolving loan (the “Existing Revolving Loan” maturing October 6, 2021 and together with the Existing Term Loan, the “Existing Loans”). The Existing Credit Agreement originally provided for a $300.omn Existing Term Loan and a $25.0mn Existing Revolving Loan. The Existing Term Loan and Existing Revolving Loan are secured by liens on substantially all of the Debtors’ assets, subject to certain exclusions, on a pari passu basis. As of the date of the Disclosure Statement, the aggregate outstanding principal balance under the Existing Term Loan is approximately $426.4mn plus fees and interest at the applicable rate. As of the date of this Disclosure Statement, the aggregate outstanding principal balance under the Existing Revolving Loan is approximately $30.0mn plus fees and interest.
- Lease Obligations. The Debtors lease certain data centers, office space, partner sites and equipment, and records leases as either finance leases or operating leases. The Debtors’ leases have initial lease terms ranging from 2 years to 34 years, most of which include options to extend or renew the leases for 5 to 15 years, and some of which may include options to terminate the leases within 4 to 120 months. As of the date of the Disclosure Statement, the Debtors have approximately $77.0mn in operating lease liabilities and $168.0mn in finance lease liabilities.
- Other Liabilities. As of the date of te Disclosure Statement, INAP has approximately $27.0mn in outstanding claims with respect to other various liabilities, including claims owed to various vendors, service providers, utility providers, taxing authorities and claims reflected in the Debtors’ current accounts payable or otherwise accrued and/or attributable to the period prior to the Petition Date. Additionally, the Debtors are party to various claims and legal proceedings that arise in the ordinary course of business
Events Leading to the Chapter 11 Filing
The Debtors' disclosure Statement provides the following overview of the events leading to INAP’s Chapter 11 filing, which highlights the Debtors' inability to compete against the often bundles offerings of larger, more diversified competitors and an unserviceable $608.0mn pile of debt: "The market for Internet infrastructure services is intensely competitive, remains highly fragmented and is characterized by rapid innovation, price sensitivity and consolidation. The principal factors of competition for service providers in INAP’s target markets include breadth of product offering, product features and performance, level of customer service and technical support, price and brand recognition.
Pricing for Internet connectivity, data transit and data storage services has declined in recent years, which has negatively impacted INAP’s business. By bundling their services and reducing the overall cost of their service offerings, INAP’s competitors are able to provide customers with reduced costs for their Internet connectivity, data transit and data storage services or private network services, thereby significantly increasing the pressure on INAP to decrease prices. Increased price competition, price deflation and other related competitive pressures have eroded INAP’s revenue and margins. Because INAP relies on ISPs to deliver services and has agreed with some of these providers to purchase minimum amounts of service at predetermined prices, INAP’s profitability has been adversely affected by competitive price reductions offered to its customers even if accompanied by an increased number of customers.
Many of INAP’s competitors for cloud services have substantially greater scale and financial resources, giving them the ability to adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their services. These competitors are financed in a manner which allows them to experience losses for long periods of time in order to gain market share. In addition, there has been increased competition for colocation services from wholesale data center providers, such as services from large real estate companies. Rather than leasing available space to large single tenants, many wholesale data center providers have decided to convert the space instead to smaller units designed for retail colocation use. Such competition has caused downward pricing pressure and the loss of customers, which has negatively impacted INAP’s business, financial condition and results of operations.
The most significant factor leading to the commencement of these Chapter 11 Cases is the amount of debt on the Debtors’ balance sheet….INAP currently has approximately $463.9 million of prepetition funded indebtedness. As of December 31, 2019, INAP’s total debt, including finance leases, was $608.3 million. INAP explored various restructuring alternatives but was unable to attract the capital necessary to deleverage their balance sheet and pursue growth opportunities for their businesses."
The following documents were attached to the Disclosure Statement
- Exhibit A: Joint Prepackaged Chapter 11 Plan
- Exhibit B: Restructuring Support Agreement
- Exhibit C: Projections
- Exhibit D: Liquidation Analysis
- Exhibit E: DIP/Priority Exit Facility Term Sheet
- Exhibit F: New Common Equity Warrants Term Sheet
- Exhibit G: Existing Equity Release
- Exhibit H: New Term Loan Facility Term Sheet
Liquidation Analysis (see Exhibit D to Disclosure Statement for notes)
Creditor recoveries under the Plan and under a hypothetical chapter 7 liquidation:
About the Debtors
Internap Corporation (NASDAQ: INAP) is a leading-edge provider of high-performance data center and cloud solutions with over 100 network Points of Presence worldwide. INAP’s full-spectrum portfolio of high-density colocation, managed cloud hosting and network solutions supports evolving IT infrastructure requirements for customers ranging from the Fortune 500 to emerging startups. INAP operates in 21 metropolitan markets, primarily in North America, with data centers connected by a low-latency, high-capacity fiber network. INAP has over one million gross square feet in its portfolio, with approximately 600,000 square feet of sellable data center space. For more information, visit www.INAP.com.
Organizational Structure (image quality poor as filed, see Declaration and Disclosure Statement)
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