CraftWorks Parent, LLC – Court Approves $93mn Sale of Debtors’ Assets to Credit Bidding First Lien Lender Fortress; Also Approves $25.4mn of Financing in Final DIP Order

May 21, 2020 –  At a May 20th hearing, the Court hearing the CraftWorks Parent cases issued an order authorizing the Debtors (i) to access $25.4mn of debtor-in-possession (“DIP”) financing on a final basis and (ii) continue use cash collateral [Docket No. 535]. The DIP financing is provided by prepetition first lien lenders fronted by Fortress Credit Co LLC (“Fortress”) whose $93.0mn acquisition of substantially all of the Debtors' assets was also approved at the May 20th hearing (see further below). The Court has yet to issue a sale order, although a revised proposed sale order was filed at Docket No. 529. 

In documents filed with the Court, the Debtors note that there were no further qualified bids in respect of a purchase of the Debtors' assets as a whole, this notwithstanding aggressive efforts on the part of investment bankers Configure (enthusiastically encouraged by Fortress) which sent out "revised teasers" to over 200 potentially interested parties in the week prior to the May 20th sale hearing.

For the Debtors' and Fortress this has been a bumpy ride, with Fortress pulling its original $138.0mn credit bid and temporarily declaring a default in respect of the Debtors' DIP facility before the parties eventually recut the terms of Fortress's acquisition and lowered the purchase price to $93.0mn. It will be interesting to see what Fortress, a reluctant purchaser throughout the process, decides to do with 150 of the Debtors' restaurants and whether the lowered purchase will eventually result in a higher recovery for Fortress which will still have $45.0mn (equal to the price reduction) of first lien debt sitting atop the Debtors' capital structure.

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 $25.4mn (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.

Prepetition Indebteness

Budget (dated as of May 21st)

Background on Asset Sale

[As previously reported, we will update upon issuance of the Court's sale order] May 4, 2020 – The Debtors filed a motion requesting Court authority for a $93.0mn "semi-private" sale (the “Sale”) of substantially all of the Debtors’ assets to DBFLF CFTWE HOLDINGS L.P. (the “Purchaser," an affiliate of prepetition and debtor-in-possession ("DIP") lender Fortress Credit Co LLC). 

The asset purchase agreement governing the proposed semi-private sale ("semi-private" because the Debtors will continue marketing efforts which could result in a section 363 auction) is attached to the proposed order (in turn attached to the motion) as Exhibit 1. 

This is the second time at the altar for the Debtors and the Purchaser who had agreed a $138.0mn deal in the weeks preceding the COVID-19 outbreak; with the Purchaser subsequently pulling out of the deal (and pulling the plug on continued DIP financing) in mid-March following shuttering of the Debtors' restaurants. Further to extensive negotiations, and in no small part because the Purchaser holds more than $140.0mn of the Debtors' prepetition and DIP debt whether it likes it or not, the parties have now executed a replacement APA that includes a $45.0mn reduction in the purchase price. The Debtors' motion makes clear that both parties would be perfectly happy to have a third party come along with a better offer and that the APA "expressly permits…a [further] marketing process [with] as few barriers to interested parties as is possible under the circumstances." It also "contemplates no bid protections in favor of the Proposed Purchaser, including no break-up fee."

The Debtors’ motion states, “The Debtors seek to sell substantially all of their assets to their senior lender via a credit bid of pre- and post-petition secured claims. The goal is to transfer and convey the assets to a buyer that can restart the business as quickly and safely as possible under the circumstances, thereby enabling the Debtors’ landlords, vendors, and former employees to resume their business relationship with the Proposed Purchaser. The proposed sale is a “semi-private” sale that contemplates the continued marketing of the assets to any and all prospective purchasers up through the sale hearing. Prior to the scheduling of a hearing on the Original Bid Procedures/Sale Motion, to comply with business closure mandates imposed by governmental authorities as a result of the novel Coronavirus Disease 2019 (“COVID-19”) outbreak, the Debtors ceased operating all of their restaurants and laid off approximately 18,000 employees. As a result, the Proposed Purchaser, which was the stalking horse purchaser under the Stalking Horse Purchase Agreement, validly terminated the Stalking Horse Purchase Agreement by notice dated March 18, 2020.

In light of the Debtors’ temporarily discontinued restaurant operations and the termination of the Stalking Horse Purchase Agreement, the auction process contemplated in the Original Bid Procedures/Sale Motion is no longer viable. Following the termination of the Stalking Horse Purchase Agreement, the Debtors and their advisors have and continued to work extensively with the Proposed Purchaser and its advisors on a revised asset purchase agreement in light of the changed circumstances and that maximizes the value of the Debtors and their estates. The APA expressly permits the Debtors to seek and attempt to consummate an alternate transaction that the Debtors determine, in the exercise of their business judgment, to be higher and better than the transaction set forth in the APA. While the Debtors believe that the Proposed Purchaser’s proposal is the best option available, the Debtors will continue to explore the market for alternatives that may be better for the Debtors, their estates, and their creditors and are expressly permitted by the APA to consider all such alternatives. The APA contemplates no bid protections in favor of the Proposed Purchaser, including no break-up fee. The goal is to make the marketing process have as few barriers to interested parties as is possible under the circumstances. Such expediencies are required given the Debtors’ challenging situation with limited access to additional financing and the accumulation of administrative expenses—through the semi-private sale process.”

Key Terms of the APA

• Purchaser: DBFLF CFTWE Holdings L.P., an affiliate of Fortress Credit Co LLC.
• Sellers: All of the Debtors other than (i) CraftWorks Parent, LLC; (ii) Craftworks Intermediate Co, LLC; and (iii) CraftWorks Holdings, LLC.
• Purchase Price: The aggregate consideration for the sale and transfer of the Purchased Assets shall be equal to (x) the full amount of the outstanding DIP Obligations as of the Closing Date plus (y) an amount of the Prepetition First Lien Obligations equal to (A) $93,000,000 minus (B) the sum of (i) the outstanding DIP Obligations as of the Closing Date, and (ii) the amount of the Assumed Liabilities identified in Section 2.3(a), (c), (d), (e), (f), (g), (h) and (i).

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