APC Automotive Technologies Intermediate Holdings, LLC – Files Solicitation Versions of Plan and Disclosure Statement, Side Letter Leaving 1% of Emerged Equity to Current Private Equity Sponsors

June 3, 2020 – The Debtors filed solicitation versions of their prepackaged Chapter 11 Plan and Disclosure Statement [Docket Nos. 23 and 24, respectively]; and further filed a motion requesting approval of (i) the Disclosure Statement, (ii) proposed Plan solicitation and voting procedures and (iii) a proposed timetable culminating in a July 10th confirmation hearing [Docket No. 15]. 

Having just filed the solicitation version of the Disclosure Statement, the Debtors, also on June 3rd, filed an amended version of that document and a related blackline [Docket Nos. 25 and 26, respectively] which does little more than add an "Equity Assignment Side Letter," dated 4 days earlier, at Exhibit G.  

The unceremoniously filed side letter (foregoing the standard cover letter explaining the document's history and the blackline) is none the less quite interesting, detailing the agreement of members of the Term Loan Lender Group (who will receive 100% of the Debtors' new equity upon emergence) to leave the Debtors' current private equity sponsors (Harvest Partners, Audax Private Equity Fund, Crescent Mezzanine Partners and VAP Holdings) 1% of the emerged Debtors' equity in exchange for waiving unspecified claims "constituting general unsecured claims."

The letter reads in part: "This letter agreement ('Agreement') hereby confirms that in consideration for the Sponsor Parties’ agreement to waive the Sponsor Claims constituting general unsecured claims against the Debtors…each of the undersigned members of the Term Loan Lender Group….severally and not jointly, agrees to transfer their pro rata share (in proportion to their respective Term A Claims) of 1% of the New Common Equity distributed under the Plan on account of their Term A Claims to the Sponsor Parties …"

The Disclosure Statement clarifies that the "Sponsor Claims" relate to "accrued management fees" and the Debtors go to some length to distance themselves from the arrangement stating: "Notably, the Debtors are not a party to this side letter and did not participate in its negotiation." The following disclosure was added to the amended Disclosure Statement: "Upon information and belief, while the Debtors were negotiating the Restructuring Support Agreement and the Term DIP Facility, the Term Loan Lender Group and the Consenting Sponsors were discussing a number of issues, including whether the Consenting Sponsors would take part in the funding of the Term DIP Facility and whether the Consenting Sponsors would receive payment in full for their general unsecured claims against the Debtors on account of accrued management fees consistent with the Plan’s treatment for all other general unsecured claims. The Consenting Sponsors decided not to participate in the Term DIP Facility and the members of the Term Loan Lender Group participating in the Term DIP Facility agreed to transfer their pro rata share of 1 percent (1%) of the reorganized equity the members of the Term Loan Lender Group participating in the Term DIP Facility will receive on account of their Term A Claims to the Consenting Sponsors after the Effective Date in exchange for the Consenting Sponsors’ agreement in the Restructuring Support Agreement to waive their claims for accrued management fees. This arrangement was set forth in a 'side letter,' which is attached to the Disclosure Statement as Exhibit G. Notably, the Debtors are not a party to this side letter and did not participate in its negotiation."

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%

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."

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%.

The Disclosure Statement attached the following Exhibits:

• Exhibit A: Joint Prepackaged Chapter 11 Plan of Reorganization 
• Exhibit B: Restructuring Support Agreement (and exhibits thereto) 
• Exhibit C: Liquidation Analysis 
• Exhibit D: Valuation Analysis 
• Exhibit E: Financial Projections 
• Exhibit F: Corporate Organizational Chart 
• Exhibit G: Equity Assignment Side Letter

Proposed Key Dates

• Voting Deadline: June 24, 2020
• Confirmation Objection Deadline: July 6, 2020
• Combined Hearing: July 10, 2020

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

Read more Bankruptcy News

The post APC Automotive Technologies Intermediate Holdings, LLC – Files Solicitation Versions of Plan and Disclosure Statement, Side Letter Leaving 1% of Emerged Equity to Current Private Equity Sponsors appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.