April 2, 2020 – The Court hearing the CraftWorks Parent cases issued an order authorizing the Debtors to (i) access an additional $4.0mn of loans under their debtor-in-possession (“DIP”) financing facility (the “Second Interim Financing”), and (ii) continue using cash collateral [Docket No. 247].
On March 5th, the Court had previously authorized the Debtors to access $12.0mn of the new money, DIP financing (“New Money DIP Loans”), provided by prepetition first lien lenders fronted by Fortress Credit Co LLC (“Fortress”), and access cash collateral. The $11.0mn balance of what is in total a $23.0mn facility (intended to help the Debtors through a marketing and sale process in respect of their restaurant assets) was to be made available upon issuance of a final DIP order that the Debtors had every reason to expect would be issued after a hearing scheduled for April 3rd.
All sound normal enough; except that these are not normal times; especially for restaurant groups who have seen under-performing assets turned into zero-performing assets by COVID-19.
On March 18th, Fortress (also in theory still a proposed stalking horse bidder with a $138.0mn credit bid, although a bidding procedures hearing scheduled for April 3rd has been indefinitely postponed) served the Debtors with a notice of default thereby terminating (a) all commitments under the DIP Credit Agreement and (b) the Debtors’ ability to use cash collateral subject to the passage of the Remedies Notice Period—which was extended to March 31, 2020.
The default notice declared "(a) an Event of Default under Section 10.1(l) of the DIP Credit Agreement as a result of 'unforeseen drastic and material decreases in the Credit Parties’ business operations due to the impact of the COVID-19 pandemic, resulting in a Material Adverse Effect' and (b) an Event of Default under Section 10.1(aa) of the DIP Credit Agreement as a result of the Debtors “permitting aggregate cash receipts and net cash flows to be less than budgeted cash receipts and net cash flows by more than the applicable Permitted Variance for the applicable period[.]”
This second interim DIP order specifically amends the DIP credit agreement to stipulate that the Material Adverse Effect clause (and the impact of the COVID-19 pandemic) will not be an issue going forward. The order adds the following amendment: "Material Adverse Change. Since the date of entry of the Second Interim Order, no event shall have occurred or condition shall have arisen, either individually or in the aggregate, that could, in the reasonable judgment of DIP Agent and the Required DIP Lenders, be expected to have a Material Adverse Effect, it being understood and agreed by the DIP Agent and the Required DIP Lenders that the continued cessation of business operations by the Debtors during the Second Interim Period shall not constitute a Material Adverse Effect.”
After a bizarre set of events that resulted in the dismissal of the Debtors' CEO and CFO (see more below), Fortress has now agreed to reinstate the DIP financing arrangements and fund the Debtors, albeit with conditions. The motion (which the Debtors hope will be heard at an emergency April 1st hearing) continues: "To enable the Debtors to preserve, maintain and secure their assets, pay the Critical Expenses and administer these Chapter 11 Cases, the DIP Lenders and Prepetition Secured Parties have agreed to withdraw the Termination Notice and the DIP Agent and the DIP Lenders have agreed that the DIP Credit Agreement (and the obligations and commitments set forth therein) shall be reinstated as if the Termination Notice had not been delivered (and the Designated Case Defaults had not occurred), subject to entry of the Proposed Second Interim Order. In addition, the DIP Agent and the DIP Lenders have agreed to provide the Second Interim Financing on an as-needed basis, subject to the Modified Budget and in accordance with the Proposed Second Interim Order."
Interestingly, the conditions do not include more fees but does include the requirement that any disbursement greater than $5,000 not explicitly permitted by a revised budget be approved in advance. Also included, a novel coronavirus clause requiring that "all Cash provided to any Credit Party or any of its Subsidiaries by or on behalf of any Governmental Authority pursuant to any disaster relief or other similar assistance program in respect of, or enacted in response to, COVID-19 to the extent any such amount is not legally required to employees (the ‘Relief Proceeds’) shall be deemed DIP Collateral and used to pay down outstanding Loans under the DIP Credit Agreement."
We expect to see that clause used again.
Dismissal of CEO and CFO (or Fortress has Enough)
We are reminded, as was perhaps Fortress, of an old French joke (or joke about the French) along the lines of "Why do the French only have one egg for breakfast? Because one egg is un oeuf."
On March 19th, a day after receiving the default notice from Fortress, the Debtors then-CEO Hazem Ouf and then-CFO James Lebs caused the Debtors to pay approximately $7.0mn in sales tax to various state taxing authorities. Without the permission of Fortress. After a mad scramble, the Debtors were able to recover $360k of those payments. The Debtors' DIP motion states that the payments "were done both surreptitiously by those individuals and with knowledge of the Debtors’ obligations and restrictions under the Initial Interim Order….Given the gravity of the actions taken by Mr. Ouf and Mr. Lebs, the Debtors’ Board of Managers terminated both of them for cause [ie undoubtedly saving the Debtors, and Fortress, some money]."
Layoffs
The present DIP financing motion, and a declaration in support of that motion [Docket No. 229], provide some insight into the Debtors' current state of operations and the current status of a workforce that once totaled 18,000. Media reports have suggested that the entire workforce has been laid off, but the Court has not been presented with the issue of lay-offs on a stand-alone basis. The DIP motion makes clear that the entire workforce, except for 25 "Remaining Critical Employees," has been terminated. The motion states: "To comply with business closure mandates imposed by governmental authorities as a result of the Coronavirus Disease 2019 (‘COVID-19’) outbreak, the Debtors ceased operating all of their 261 restaurants and have laid off nearly all of their approximately 18,000 employees.
With the hope of re-starting their operations and re-opening certain previously profitable restaurants in the future when the COVID-19 crisis has passed, thus preserving as much future enterprise value as possible, the Debtors’ plan is to cut remaining operating and administrative expenses to the bare minimum. Until such time as the Debtors are able to re-open their restaurants, the Debtors plan to retain a small group of less than 25 employees (the ‘Remaining Critical Employees’) to help preserve, maintain and secure their assets during the shut-down period. In addition, during the shut-down period, the Debtors plan to pay only their most critical business-related expenses including accrued employee wages, accruing employee wages and benefits for the small group of the Remaining Critical Employees, insurance, basic utilities, and professionals (collectively, the ‘Critical Expenses’), as set forth in the Modified Budget (as defined below) approved by the DIP Agent.
Asset Sale
On March 3, 2020, the Debtors filed a motion requesting each of a bidding procedures order and a sale order. The bidding procedures order would (i) approve bidding procedures for the sale of substantially all the Debtors’ assets (the “Sale”) and (ii) establish an auction/sale timetable culminating in an auction on May 19th and a sale hearing on May 22nd. The sale order would authorize (i) the Debtors to enter into a stalking horse asset purchase agreement (the “APA”) with DBFLF CFTWE Holdings L.P., an affiliate of Fortress Credit Co LLC (the “Stalking Horse Bidder”) and (ii) the Sale itself [Docket No. 19].
The APA governing the terms of the proposed $138.0 sale is attached to the motion as Exhibit 2. The Debtors and Fortress do not appear to have advanced sale discussions in light of the turmoil relating to COVID-19 and DIP financing. Bidding procedures in respect of an asset sale were expected to be discussed at an April 3rd hearing, but the Debtors indefinitely postponed that hearing on March 18th.
Background on DIP Financing
The Debtors' DIP financing motion [Docket No. 11] stated: "The Debtors have insufficient cash to operate their business and continue paying their debts as they come due. The Debtors require immediate access to liquidity to ensure that they can continue operating in these Chapter 11 Cases while they conduct a sale and marketing process for their assets. Without prompt postpetition financing and access to Cash Collateral, the Debtors do not have sufficient cash to operate their business, pay employee wages, or pay other critical business expenses, causing immediate and irreparable harm to the value of the Debtors’ estates to the detriment of all stakeholders.
Only the Prepetition First Lien Lenders made a financing proposal. No other party M-III contacted expressed interest in providing postpetition credit on an unsecured or subordinated basis given the existence of preexisting secured parties with liens on all of the Debtors’ assets. Because substantially all of the Debtors’ assets are encumbered by the Prepetition Liens, either the Prepetition Secured Parties would need to consent to priming financing from a new party or the Debtors would have to prevail on a protracted, expensive and uncertain priming litigation."
Key Terms of the DIP Financing
- Borrower: Craftworks Restaurants & Breweries, Inc. and Logan’s Restaurants, Inc. (together, the “DIP Borrower”).
- Guarantors: Holdings and each of the DIP Borrowers’ existing and future direct and indirect subsidiaries, on a joint and several basis (other than Logan’s Roadhouse of Conway, Inc., an Arkansas non-profit corporation).
- The Facilities: (i) a new money credit facility in an aggregate principal amount not to exceed $23.0mn (the “New Money DIP Facility”) with interim borrowings set at $12.0mn and (ii) a roll up loan facility (the “Roll-Up DIP Facility”) pursuant to which the DIP Lenders shall be deemed to make loans under the Roll-Up DIP Facility in an amount equal to five dollars for every dollar of New Money DIP Loans disbursed by such DIP Lenders with the aggregate principal amount of all Roll-Up DIP Loans of all DIP Lenders shall not exceed $115.0mn.
- DIP Lenders: Certain Prepetition First Lien Lenders
- DIP Agent: Fortress Credit Co LLC
- Interest Rate: The New Money DIP Loans will bear interest at the Applicable Margin plus the current LIBOR rate, where the “Applicable Margin” is defined as a rate per annum equal to 8.5% paid in cash. The Roll-Up DIP Loans will bear interest at the non-default rate set forth in the Prepetition First Lien Loan Documents, payable in cash on the DIP Termination Date.
- Default Rate: Upon the occurrence an Event of Default, the DIP Loans and all DIP Obligations will automatically bear interest at an additional 2.00% per annum.
- Use of Proceeds: To provide working capital, for general corporate purposes and to fund the Chapter 11 Cases, in each case subject to the DIP Budget.
- Maturity Date: The earliest of the date which is the earliest of (a) July 1, 2020, (b) April 2, 2020, if the Final DIP Order Entry Date shall not have occurred as of such date, (c) the date on which the Credit Parties consummate any sale of all or substantially all of the assets of the Credit Parties pursuant to Section 363 of the Bankruptcy Code or otherwise, (d) the date on which the Commitments are terminated and the Loans are accelerated, (e) the earlier of the effective date and the date of the substantial consummation (as defined in Section 1101(2) of the Bankruptcy Code), in each case, of a Reorganization Plan of the Credit Parties, (f) the date the Bankruptcy Court converts any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code and (g) the date the Bankruptcy Court dismisses any of the Chapter 11 Cases.
- Fees: A closing fee equal to 2.00% (the “Closing Fee”) on the entire New Money DIP Commitments, which shall be earned upon entry of the Interim DIP Order, with such Closing Fee to be shared on a pro rata basis by the DIP Lenders.
- Milestones:
- No later than three calendar days after the Petition Date, the Bankruptcy Court shall have entered the Interim DIP Order.
- No later than twenty-eight (28) calendar days after the Petition Date the Debtors shall have filed their Schedules and Statement of Financial Affairs with the Bankruptcy Court.
- No later than thirty (30) calendar days after the Petition Date, the Bankruptcy Court shall have entered an order setting the date (the “Bar Date”) by which proofs of claim for general unsecured creditors must befiled.
- No later than thirty (30) calendar days following the Petition Date, the Bankruptcy Court shall have entered the Final DIP Order.
- No later than sixty-five (65) calendar days following the Petition Date, the Bar Date shall have occurred.
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The post CraftWorks Parent, LLC – DIP Lender (and Nominal Stalking Horse) Fortress Credit Co Gives Go-Ahead to Further DIP Lending after Declaring Coronavirus-Related Default appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.