APC Automotive Technologies Intermediate Holdings, LLC – Automotive Parts Manufacturer Files Prepackaged Chapter 11, Looks to Shed $290mn of Debt and Emerge in One Month

June 3, 2020 – APC Automotive Technologies Intermediate Holdings, LLC and 12 affiliated Debtors (“APC” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-11466. The Debtors, a leading supplier of automotive, light truck, and heavy-duty undercar replacement parts, are represented by Domenic E. Pacitti of Klehr Harrison Harvey Branzburg LLP. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Jefferies Group LLC as financial advisors, (iii) WeinsweigAdvisors LLC as restructuring advisors, (iv) Ernst & Young LLP as tax advisors and (v) Stretto as claims agent. 

The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn (funded debt of $431.2mn). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Longkou Qizheng Auto Parts Co. ($4.2mn trade debt claim), (ii) Posam (Posco America) ($2.7mn trade debt claim) and (iii) [Qingdao Gihon Auto Parts ($2.1mn trade debt claim).

Highlights

• "Comprehensive" restructuring has support of 74% of term loan lenders and private equity sponsors [Audax Private Equity, Crescent Capital, Harvest Partners, and VAP Holdings] 
• COVID-19 impact on palladium prices, consumer demand and production capacity leave untenable liquidity position
• Unable to obtain requisite level of term loan lender support (100%) for refinancing, Debtors "pivoted" to debt-for-equity restructuring
• Debtors anticipate $290.0mn of debt reduction and one month stay in bankruptcy
• Debtors line up $50.0mn of DIP financing from prepetition lenders

Press Release

In a press release announcing the filing, the Debtors advised that they had “entered into a comprehensive Restructuring Support Agreement (the 'RSA') with key stakeholders, including its asset-based lenders, 74% of its term loan lenders that are eligible to vote, and significant financial sponsors (the 'RSA Parties').

The restructuring transaction contemplated under the RSA will reduce APC’s outstanding indebtedness by approximately $290 million on a net basis, significantly strengthening the Company’s balance sheet and enhancing financial flexibility going forward. The RSA represents the commitment of the RSA Parties to support a comprehensive restructuring of the Company’s balance sheet.

The Company will continue to solicit votes on its plan of reorganization during the chapter 11 filing. Because the Company’s plan has already received significant support from its lenders, the Company expects to complete the confirmation process and emerge from bankruptcy within the next month."

Restructuring Support Agreement

On May 31, 2020, the Debtors executed a restructuring support agreement (the "RSA") with key stakeholders, including private equity sponsors Audax, Crescent, Harvest, and VAP (the "Consenting Sponsors") and 74% of their term loan lenders (the “Consenting Term Loan Lenders”). The RSA "contemplates a comprehensive reorganization achieved through the Plan that will provide the Debtors with debtor-in-possession financing consisting of (i) access to the ABL Facility (the 'ABL DIP Facility') and (ii) a debtor-in-possession term loan credit facility in aggregate principal amount of $50 million (the 'Term DIP Facility' and, together with the ABL DIP Facility, the 'DIP Facilities'). On the Effective Date, the Debtors will enter into a new $50 million senior secured term loan facility (the 'Term Exit Facility') and a new revolving loan facility (the 'ABL Exit Facility'), while paying all general unsecured claims in the ordinary course. In order to consummate this exchange out-of-court, the consent of one hundred percent of the Term Loan Lender Group was required. Unable to acquire unanimous consent, the Debtors and their advisors filed these pre-packaged chapter 11 cases."

Plan Overview

The Disclosure Statement provides: “The Plan provides for the treatment of Claims against and Interests in the Debtors through, among other things, the following: (a) the issuance of New Common Equity and New Warrants; (b) the Unimpaired treatment of certain Claims and Interests; and (c) conversion of certain Claims into the Term Exit Facility (subject to the Term DIP Lenders consent to entry into an Alternative Term Exit Facility) or the ABL Exit Facility, as applicable. As more fully described herein and in the Plan:

• Holders of Allowed Other Secured Claims and Allowed Other Priority Tax Claims will (i) be paid in full in Cash in the ordinary course of business, (ii) be Reinstated, (iii) receive the collateral securing the Claim, or (iv) be otherwise rendered Unimpaired, each as applicable;
• Holders of Allowed ABL Claims shall receive new loans under the ABL Exit Facility in an amount equal to the principal amount of loans outstanding under the ABL Credit Agreement held by such Holder as of the Effective Date; 
• Holders of Allowed Term A Claims shall receive, in full and final satisfaction of its Term A Claims, its Pro Rata Share of 100% of the New Common Equity, subject to dilution by the New Warrants, the DIP Fee, and the Management Incentive Plan; 
• No distributions to Holders of Allowed Term B Claims; provided, however that each Holder of an Allowed Term B Claim that is a Consenting Term Loan Lender or that otherwise votes in favor of the Plan shall receive their Pro Rata Share of the New Warrants;
• Holders of Allowed General Unsecured Claims (other than any Sponsor Claims or other Claims arising from the ownership of any instrument evidencing an ownership interest in a Debtor) shall have their Claims Reinstated as of the Effective Date as an obligation of the applicable Reorganized Debtor and shall be satisfied in full in the ordinary course of business in accordance with the terms and conditions of the particular transaction giving rise to such Allowed General Unsecured Claim; Intercompany Claims shall be Reinstated, compromised, or cancelled at the election of the Debtors or the Reorganized Debtors, as applicable;
• Intercompany Interests shall be Reinstated, compromised, or cancelled at the election of the Debtors or the Reorganized Debtors, as applicable; and
• All Equity Interests in APC shall be deemed cancelled and extinguished and shall be of no further force and effect, whether surrendered for cancellation or otherwise, and there shall be no distributions to Holders of Equity Interests in APC on account of any such Interests."

Significant Prepetition Equity Holders (together the "Consenting Sponsors")

• Affiliates of Harvest Partners  VII,  L.P.: 54.5%
• Affiliates of Audax Private Equity Fund IV AIV: 23.2%
• Affiliates of Crescent Mezzanine Partners VII, L.P: 12.5%
• Affiliates of VAP Holdings, Inc.: 6.9%

The following is a summary of classes, claims, voting right and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, please see also the liquidation analysis below)

Plan recovery figures are shown prior to any impact of the Management Incentive Plan and reflect the full range of the Debtors’ valuation analysis; however, for the avoidance of doubt, the Exchange Benchmark Value is fixed at the midpoint of the Debtors’ equity valuation, or $94.0mn.

• Class 1(“Other Secured Claims”) is unimpaired and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 2 (“Other Priority Claims”) is unimpaired and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 3 (“ABL Claims”) is unimpaired and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 4 (“Term Claims”) is impaired and entitled to vote on the Plan. Expected recovery on the Term A claims is 29% (NB: this has amended from 45% following a “scrivener’s error” in the solicitation Disclosure Statement…thats quite an error!) and Term B claims is 0%. Each Holder of Allowed Term A Claims shall receive its pro rata share of 100% of the New Common Equity, subject to dilution by the New Warrants, the DIP Fee, and the Management Incentive Plan. All Term B Claims shall be deemed cancelled and extinguished and shall be of no further force and effect, whether surrendered for cancellation or otherwise, and there shall be no distributions to Holders of Term B Claims on account of any such Interests; provided, however, that each Holder of an Allowed Term B Claim that is a Consenting Term Loan Lender or that otherwise votes in favor of the Plan shall receive its Pro Rata Share of the New Warrants.
• Class 5 (“General Unsecured Claims”) is unimpaired and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 6 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Expected recovery is 100%/0%.
• Class 7 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Expected recovery is 100%/0%.
• Class 8 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Expected recovery is 0%.

DIP and Exit Financing

The Restructuring Support Agreement (“RSA”) contemplates that the Debtors will obtain debtor-in-possession (“DIP”) financing consisting of (i) (a) a “roll-up” of their May 2017 ABL Credit Agreement and (b) a new money term DIP credit facility in the aggregate principal amount of $50.0mn ($43.5mn of which is committed as of the Petition date and $6.5mn of which will be committed on or before the date by which the Plan Supplement. The RSA also contemplates the Debtors’ entry into a credit agreement for an exit term loan facility and an exit ABL facility upon emergence from the Chapter 11 Cases.

Capital Structure

Events Leading to the Chapter 11 Filing

The Disclosure Statement provides the following overview of the Debtors' slide into bankruptcy: "The Debtors’ difficulties are consistent with those faced industry-wide. In the recent years, unprecedented volatility caused by soaring PGM [Platinum Group Metals] prices, as well as increased steel prices, have challenged the aftermarket automotive part suppliers. Between October 2019 and March 2020, palladium prices increased from $1,700 to a high of $2,700 per t-oz and rhodium prices increased from $5,000 to $12,560 per t-oz, reducing the Debtors’ cash flow by approximately $5.6 million from October 2019 to March 2020.

Due to their crucial role in the manufacturing of catalytic converters, a significant price increase in these commodities immediately impacts the Debtors’ cash and revenues. As of the Petition Date, these prices remain volatile due to uncertainty around supply and demand challenges, further straining the Debtors’ liquidity to a point where the Debtors’ balance sheet could no longer support their current debt load. Consequently, the Debtors were forced to reevaluate their financial position and decide on immediate next steps.

At the same time, in March 2020, drastic and unprecedented global events, including the macroeconomic and unprecedented effects of the COVID-19 pandemic, further exacerbated the Debtors’ liquidity position. COVID-19 caused an unheard of planet shutdown and has had a significant impact on the Debtors’ business, both in the context of consumer demand and production capacity. On a macro level, this pandemic has dampened global growth and ultimately led to an economic recession. Consequently, demand for automotive parts has declined, which has negatively impacted the Debtors’ financial performance. In addition, government lockdowns and employee infections have inhibited the Debtors’ ability to manufacture and distribute their products. This diminished manufacturing and distribution capacity has also negatively affect the Debtors’ financial performance. 

In March 2020, in light of the Debtors’ significant cash interest obligations and severe liquidity constraints, the Debtors viewed a comprehensive debt restructuring as the necessary next step. In April 2020, the Debtors engaged with the Term Loan Lender Group, the ABL Lenders, and its equity sponsors to begin negotiations regarding a potential restructuring transaction.

As part of these discussions, the Debtors sought to secure incremental financing to improve the Debtors’ liquidity and provide a longer runway to determine a value-maximizing path forward. The financing would have been either super senior in priority to all existing term debt or pari passu with existing Term A Loans. However, the proposed transaction required certain lender consents and the Term Loan Lender Group was unable to reach sufficient consensus. Subsequently, the Debtors pivoted to a debt-for-equity exchange.

Meanwhile, given the liquidity crisis, the Debtors chose to withhold a $4.8 million interest payment under the Term Credit Facility on May 12, 2020 for the purposes of maintaining liquidity to fund ongoing operations. After negotiating the terms of a forbearance agreement (the 'Term Loan Forbearance Agreement') with the Term Loan Lender Group, the Debtors and the applicable parties agreed to the terms of the Term Loan Forbearance Agreement with respect to the Term Facility through May 25, 2020. Simultaneously, the Debtors and the ABL Lenders agreed to a forbearance agreement with respect to certain events of defaults for the same period ('ABL Forbearance Agreement'). The forbearance period was ultimately extended by agreement of all parties through June 1, 2020, which enabled the Debtors and the Term Loan Lender Group and the Consenting Sponsors to negotiate a fully consensual prepackaged restructuring as contemplated under the Restructuring Support Agreement."

About the Debtors

APC Automotive Technologies is a leading supplier of automotive, light truck, and heavy-duty undercar replacement parts. 

Liquidation Analysis (see Exhibit C to Disclosure Statement for notes)

Corporate Structure Chart

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