May 18, 2020 –The Debtors and their investment banker Evercore Group L.L.C. ("Evercore") have elicited several heated objections relating to Evercore's retention and the retention's proposed fee structure, a fee structure that could result in fees for Evercore of "$129 million based on events that reasonably could be expected to occur." The Evercore retention motion (fee structure summarized below) was filed on May 14th [Docket No. 196].
The objections filed to date include: (i) the joint objection of unaffiliated holders of over 75% of the Debtors' senior notes (the "Noteholders," important signatories to the Debtors' restructuring support agreement), (ii) the objection of the Debtor's Official Committee of Unsecured Creditors (the "Committee") and (iii) the objection of the U.S. Trustee assigned to the Debtors' cases [Docket Nos. 293, 295 and 298, respectively].
The Noteholder Objection
In their objection, the Noteholders argue that the Debtors are asking the Court to approve "on the basis of almost no evidence" fees entirely devoid of a rational relationship to the Debtors Chapter 11 cases, all the more galling in their enormity because these are pre-arranged, consensual cases, ie not actually all that difficult.
In a clear swipe at the Debtors and Debtors' counsel (Kirkland & Ellis), the Noteholders take issue with the Debtors' willingness to front a fee structure on behalf of Evercore based on Evercore's own assessment of what it should be paid: "Instead of evidence, the Debtors rely on conjecture. The Debtors assert that they believe the Fee Structure is 'reasonable and market based' because they 'believe' the Fee Structure is comparable to other engagements and consistent with Evercore’s normal practices." As detailed further below, once the Noteholders get past their disbelief that the Debtors would let this much potential value, value that would otherwise come their way, escape the Debtors' estates, they offer up an alternative fee structure which would cap Evercore's fees at $45.0mn.
The Noteholder objection states: "The Debtors have not met their burden of proving that the fees of their proposed investment banker, Evercore Group L.L.C. ('Evercore'), reflect ‘reasonable terms and conditions of employment’ to warrant approval of the Evercore Application under Bankruptcy Code section 328. Nor could they. To do so would require the Debtors to explain why this Court should—on the basis of almost no evidence—approve fees for a single professional estimated to be no less than $63.4 million and potentially in excess of $129 million in the aggregate for prepetition and postpetition services to the Debtors.
Potential aggregate compensation in this range bears no rational relationship to the circumstances of these consensual chapter 11 cases, does not reflect 'market' terms when comparing the aggregate fees that Evercore may 'earn' to compensation arrangements approved for similar debtor-side advisors in other recent, large and complex chapter 11 cases and, manifestly, is not in the best interests of the Debtors’ estates.
Against the backdrop of these consensual, pre-arranged chapter 11 cases, the Debtors seek pre-approval of uncapped, excessive professional fees for their investment banker that bear no relation to the market for debtor-side investment bankers in recent chapter 11 cases of like size and complexity. The most glaring differences to the fees contemplated by the Evercore Application as compared to fee structures for debtor-side investment bankers in other recent, large chapter 11 cases (including cases much more complex than these) are that here: (i) there is no aggregate cap on what the Debtors may pay Evercore or any type of meaningful crediting of fees;and (ii) Evercore’s prepetition and postpetition fees could exceed $129 million based on events that reasonably could be expected to occur."
The Noteholders proceed to offer an alternative fee schedule which will now probably serve as the baseline for a likley compromise amongst Debtors/Evecore and the objecting parties. The Noteholders suggest a "Fee Structure [that] would be appropriate in light of the Evercore’s prepetition and postpetition services for the Debtors, the circumstances of these chapter 11 cases and the fees charged in other comparable cases," namely:
- The aggregate fees for all of Evercore’s services (whether earned or paid prepetition or postpetition, including in connection with the PNW Sale) should be capped at no more than $45 million.
- Upon full disclosure to the Court and other parties in interest of the M&A Agreement and an opportunity to review and analyze the terms set forth therein, reasonable fees in connection with the PNW Sale may be approved, after notice and a hearing.
- Any Sale Fee other than the Sale Fee earned in connection with the PNW Sale must be subject to prior approval of the Court, after notice and a hearing, and be subject to the above referenced aggregate fee cap.
- At least 50% of any Financing Fees should be credited against the Restructuring Fee."
The Committee Objection
The Committee's objection largely echoes that of the Noteholders and highlights several additional concerns, including (i) the lack of a fee cap, (ii) the inclusion of fees already earned, (iii) the "a-la-carte" nature of the fees and the failure to apply "sufficient crediting" and (iii) the fact that Evercore would be paid before the transaction generating their fees actually closed.
The Committee objections states: "The Evercore Retention Application seeks pre-approval under Section 328 of the Bankruptcy Code of a significantly above-market fixed fee structure, as well as retroactive approval of several million dollars of fees that have already been paid to Evercore. If approved, the Evercore Retention Application contemplates that Evercore will be entitled to potential fees in excess of $126 million, which is a multiple of the fees awarded to investment bankers in other comparable chapter 11 bankruptcy cases.
The proposed fee structure is essentially an ‘a-la-carte’ fee proposal for specific tasks that Evercore has or will perform in connection with any restructuring, including a separate fee for general restructuring advice ($35 million); an asset sale ($22 million), DIP and exit financing ($65 million) and monthly fees (estimated to be $6 million). Importantly, the Evercore engagement letter does not include an aggregate cap on the amount of fees to be paid, nor does it apply sufficient crediting to bring the numerous fees in line with market comparables.
In addition, the engagement letter calls for Evercore to be paid before certain transactions triggering payment of the fees have closed, and thus the Debtors will be forced to pay the fees before they can be assured of receiving any benefit.
As the Committee intends to demonstrate at an evidentiary hearing held on the Evercore Retention Application, the fees and other provisions currently contemplated under the Evercore Retention Application are not reasonable when compared to other similar chapter 11 cases and should not be approved."
U.S. Trustee Objection
The U.S. Trustee's objection picks up on a timing point raised in the Committee objection (and also touched on by the Noteholders), namely that the Debtors' are asking the Court to raise to the level of administrative expenses fees that were earned and paid prior to the filing of the Debtors' Chapter 11 cases. Not only do these fees not deserve to be treated as administrative expenses, the U.S. Trustee argues, but they might even more properly be construed as unsecured claims and thrown down the waterfall.
The U.S. Trustee's objection states: "Evercore seeks pre-approval under Section 328 of the Bankruptcy Code of significant fees, including fees that have already been paid. The Debtors must explain why this Court should preapprove these fees as an administrative expense in these cases. And if these fees were earned prepetition, Evercore is possibly a creditor or subject to an avoidance action, and is not disinterested. The Debtors should also explain why Evercore should benefit from financings or restructurings that result from the work of others, and not Evercore."
The Evercore Fees
The Debtors' motion seeking approval of the Evercore retention [Docket No. 196] provides the following fee summary: "
In consideration of the services to be provided by Evercore, and as more fully set forth in the Engagement Letter, subject to Court approval, the Debtors have agreed to pay Evercore in cash under the following fee structure (the “Fee and Expense Structure”):
- A monthly fee of $250,000 (the 'Monthly Fee'), payable on execution of the Engagement Letter and on the first day of each month commencing May 1, 2019 until the earlier of the consummation of an In-Court Restructuring or the termination of Evercore’s engagement; provided, however, that so long as Monthly Fees for months one through twelve have actually been earned and paid, 50 percent of the Monthly Fee for months one through twelve shall be credited (without duplication) against any Liability Management Transaction Fee or In-Court Restructuring Fee (each as defined below) payable; provided, that any such credit of fees contemplated by this sentence shall apply only to the extent that all fees earned by Evercore are approved in their entirety by the Court pursuant to a final order not subject to appeal and which order is acceptable to Evercore.
- A fee of $35 million (the 'In-Court Restructuring Fee'), payable upon the confirmation of a Restructuring Plan of any In-Court Restructuring.
- A fee of $16.5 million (the 'Sale Fee'), payable after entry of the Order and upon consummation of a WDC Sale, for which fee applications will be subsequently filed.5 Fees for any other asset sale shall be negotiated in good faith and consistent with the compensation customarily paid to investment bankers of similar standing acting in similar situations
- A fee (the “Financing Fee”), payable upon consummation of any Financing and incremental to any other fees earned, equal to:
i. if Evercore serves as the placement agent or similar function on such Financing, the applicable percentage(s) of the aggregate amount of capital committed, whether or not drawn or funded (the “Gross Proceeds”), as set forth in the table below (provided, however, that, if Evercore serves as the placement agent on a Financing, the Parties will enter into an appropriate form of agreement relating to the type of transaction involved and containing customary terms and conditions, including provisions relating to Evercore’s indemnity):
As a Percentage of Financing Gross Proceeds
Indebtedness Secured by a First Lien
Indebtedness Secured by a Junior Lien
Unsecured and/or Subordinated Indebtedness
Equity or Equity-linked Securities/Obligations
ii. if Evercore does not serve as the placement agent or similar function on such Financing, 35 percent of the applicable fee percentages set forth in Section 2(f)(i) of the Engagement Letter; provided, however, that so long as such Financing Fee under Section 2(f)(ii) of the Engagement Letter has actually been earned and paid, 35 percent of such Financing Fee shall be credited (without duplication) against any Liability Management Transaction Fee or In-Court Restructuring Fee payable in connection with the underlying Financing; provided, further, that any such credit of fees contemplated by this sentence shall apply only to the extent that all fees earned by Evercore are approved in their entirety by the Court pursuant to a final order not subject to appeal and which order is acceptable to Evercore.
Notwithstanding the foregoing, in connection with any DIP Financing offered to the Debtors, the Debtors shall pay Evercore a fee of the greater of $3 million or 0.5 percent of the Gross Proceeds of the DIP Financing (the “DIP Financing Fee”), payable in full upon the execution of a commitment letter or other similar document in respect of such financing."
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