April 17, 2020 – Investor Macquarie Septa ("Macquarie") filed a motion seeking dismissal of a majority of the Debtors' Chapter 11 cases (ie those of KPI Intermediate Holdings, Inc. and the Debtors sitting structurally below, the "KPI Intermediate Debtors," see structure chart below), arguing that the directors of KPI Intermediate Holdings lacked the corporate authority to file the Chapter 11 petitions of the KPI Intermediate Debtors [Docket No. 88]. The motion states: "The Court must dismiss the Chapter 11 Cases of the KPI Intermediate Debtors because the directors (the “Directors”) of KPI Intermediate lacked corporate authority to file the voluntary petitions for the KPI Intermediate Debtors. The absence of authority is jurisdictional."
On April 13th, the Debtors filed a prepackaged Chapter 11 Plan further to which the Debtors intend to convert their existing senior secured notes into 100% of the equity in the reorganized Company. Clearly Macquarie believes it has sufficient leverage to get the Debtors to rethink Macquarie's recovery in these cases. A hearing has been scheduled for May 5th to consider the motion.
The dismissal motion continues, “In January of 2018, Macquarie Septa and its affiliate, Macquarie Sierra Investment Holdings Inc. ('Macquarie Sierra'), entered into an Investment and Subscription Agreement with KPI Intermediate and KPI Holdings, LLC. (the 'Investment Agreement'). Pursuant to the Investment Agreement, Macquarie Septa and Macquarie Sierra purchased 250 shares and 150 shares, respectively, of Series A Preferred Stock issued by KPI Intermediate (the 'Series A Preferred Stock') for an aggregate purchase price of $37,150,000. To induce Macquarie Septa and Macquarie Sierra to pay KPI Intermediate $37,150,000 for the Series A Preferred Stock, KPI Intermediate adopted and filed with the Delaware Secretary of State the KPI Intermediate Holdings, Inc. Amended and Restated Certificate of Incorporation (the 'Certificate').
When purchasing the Series A Preferred Stock, Macquarie Septa relied upon these protections in the Certificate, which include without limitation, the following provisions:
6.1 So long as any share of Series A Preferred Stock remains outstanding, the following actions of the Corporation or any of its Subsidiaries (whether undertaken directly or indirectly, by amendment, merger, consolidation or otherwise) shall require the written consent or affirmative vote of the holders of a majority in interest of the Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such action taken without such consent or vote shall be null and void ab initio, and of no force or effect: . . .
6.1.3 directing, adopting or approving any plan of liquidation, dissolution or winding-up of any Pace Company and any voluntary bankruptcy or similar filing by any Pace Company. . . .[emphasis in motion]
On April 12, 2020 (the ‘Petition Date’), the Directors caused the KPI Intermediate Debtors to file unauthorized voluntary bankruptcy petitions (collectively, the ‘Petitions’) with this Court. None of the Petitions include any written consent or affirmative vote of Macquarie Septa, the holder of 62.5% of the Series A Preferred Stock because neither its written consent nor affirmative vote was obtained. Macquarie Septa did not consent to the filing of the Petitions.”
The Court scheduled a hearing to consider the motion for May 5, 2020, with objections due by April 28, 2020.
The KPI Intermediate Debtors: KPI Intermediate Holdings, Inc., a Delaware corporation (“KPI Intermediate”), and each of its direct and indirect subsidiaries, Pace Industries, LLC, Pace Industries, Inc., Pace FQE, LLC, Port City Group, Inc., Muskegon Castings, LLC, Alloy Resources, LLC and Pace Industries of Mexico, L.L.C.
Corporate Structure Chart
Further Background on Debtors Prepackaged Chapter 11
In a press release announcing the filing, the Debtors advised that they had “reached an agreement with its senior secured lenders on the terms of a comprehensive financial restructuring plan, which will deleverage the Company's balance sheet. This agreement has support from 100% of the holders of its senior secured notes as well as its revolving credit facility lenders.
Upon implementation, this agreement will give the Company the financial foundation necessary to resume normal-course operations following the COVID-19 outbreak, realize the full benefit of its cost-savings initiatives and strategic investments recently executed, and continue to serve its customers as a leading fully-integrated provider of die cast aluminum, magnesium and zinc components.
As a result of its noteholder and lender support, the Company expects to complete the process in the second quarter of 2020 – emerging as a financially stronger company that is well-positioned to succeed in the post-COVID-19 environment."
Under the terms of the proposed prepackaged plan, the Company will convert its existing senior secured notes into 100% of the equity in the reorganized Company."
Plan/Restructuring Overview
The Prepackaged Plan provides that:
(a) the Prepetition ABL Lenders, who are anticipated to be paid in full shortly after the commencement of these Chapter 11 Cases with the proceeds of a debtor-in-possession ABL facility, will be refinanced and paid in full through the proceeds of a new ABL exit facility, and
(b) the Prepetition Noteholders will each receive their pro rata share of (i) 100% of the equity issued by a new limited liability company created to own all of the outstanding equity interests of reorganized Pace Industries, LLC as of the Effective Date, subject to dilution by new warrants to be issued to the Debtors’ postpetition lenders and equity that may be issued in connection with a management incentive plan following the Effective Date and (ii) a new junior term loan facility. The Prepackaged Plan also contemplates that the Debtors’ postpetition term loan financing facility will be refinanced and paid in full through the proceeds of a new term loan exit facility and the issuance of new warrants to purchase, in the aggregate, 51% of the equity interests of reorganized Pace Industries, LLC.
In addition to distributions to the Debtors’ pre- and postpetition secured lenders, the Plan provides for the reinstatement or payment in full of the Debtors’ General Unsecured Claims, as well as the following: Allowed (i) Administrative Expense Claims, (ii) Priority Tax Claims, (iii) Professional Fee Claims, (iv) Priority Non-Tax Claims, (v) Other Secured Claims, and (vi) General Unsecured Claims."
DIP Financing
The press release states: "The Company's senior secured noteholders, along with its existing revolving credit lenders, will provide commitments for up to $175 million in debtor-in-possession financing to help ensure that the Company can meet its commitments during the process." The DIP financing, which we cover separately is comprised of (i) a $125.0mn senior secured super-priority asset-based revolving credit facility and (ii) a $50.0mn senior secured, super-priority multi-draw term loan facility, of which $21.0mn shall be available upon entry of an interim DIP order and $29.0mn shall be available upon entry of a final DIP order.
About the Debtors
According to the Debtors: "Pace is North America's leading full-service aluminum, zinc and magnesium die casting company. Pace offers end-to-end, nonferrous, die cast supply chain solutions, and a wide array of capabilities and services, including advanced engineering, tool and die fabrication, prototyping, precision machining, assembly, finishing and painting. Headquartered in Fayetteville, Arkansas, Pace operates the largest number and broadest range of clamping force die-casting machines in North America, which has positioned Pace uniquely to offer die-cast products for practically any customer requirement. Indeed, Pace is the only vertically integrated major die casting supplier in North America providing customers one-stop-shop services on a mass scale."
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