July 13, 2020 – Privately held Congoleum Corporation (“Congoleum” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of New Jersey, lead case number 20-18488 (Judge Kaplan). The Debtor, one of North America’s largest manufacturers of resilient flooring, is represented by Warren A. Usatine of Cole Schotz P.C. Further board-authorized engagements include (i) Phoenix Management Services, LLC as financial advisors, (ii) B. Riley FBR, Inc. as investment banker and (iii) Prime Clerk as claims agent.
The Debtor's lead petition notes between 200 and 1,000 creditors, estimated assets of $74.7mn and estimated liabilities of $117.3mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Quaint Oak Bank ($5.7mn PPP claim), (ii) Hong Kong Jufeng Investment Co., Ltd ($929k trade claim) and (iii) MJ International ($497 trade claim).
The Debtor generated net sales of $117.3mn in 2019 [yes, the same number as stated for liabilities, with both numbers backed up in further disclosure, although the liabilities number does not seem to include the $24.0mn pension obligation discussed below].
Previous Chapter 11
In December 2003, the Debtor, which had historically manufactured products that contained asbestos, filed for Chapter 11 protection (same Court, Case No. 03-51524) to resolve asbestos-related lawsuits and liabilities.
In that lengthy turn through the Chapter 11 turnstiles, the “Prior Debtors” emerged on July 1, 2010 having created created a trust to address asbestos liability claims and which held 50.1% of Congoleum’s new common stock.
Significant Shareholders
- Simplon International Ltd.: 50.27%
- Paul Frontier Holdings LP: 28.64%
- Congoleum Plan Trust (16.38%)
Goals of the Chapter 11 Filings
The O'Connor Declaration (defined below) provides: "The Debtor has devoted significant time and resources to exploring strategic alternatives to maximize value for the benefit of all stakeholders….The Debtor, in consultation with its advisors, determined that an expeditious sale of its assets was necessary to maximize value."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “O'Connor Declaration”), Christopher O'Connor, the Debtor's President and Chief Executive Officer, detailed the events leading to Congoleum’s Chapter 11 filing. The O'Connor Declaration provides: “Although no one factor caused the Debtor to seek relief under chapter 11 of the Bankruptcy Code, numerous factors contributed to the Debtor’s decision to file its bankruptcy petition."
Those factors included:
- a long and acrimonious separation from their exclusive US and Canadian distributor Mohawk Industries, Inc. (“Largely as a result of the Debtor’s strained relationship with Mohawk, its sales declined from $219 million in 2007 to $117 million in 2019.”),
- COVID-19 (“triggered a decrease in sales by 50% in March and April of 2020, causing the Debtor to miss projected sales targets. The Debtor expects such sales to recover slowly given that replacing floor generally is not an essential expense”)
- Chinese import product tariffs (“The Debtor imports approximately 14.9% of its flooring products from China…a cumulative increase of 25%…resulted in additional tariff payments of $1.6 million annually”)
- unsustainable legacy and environmental liabilities (“the Debtor has been, and is, involved in remediation activities at certain of its manufacturing locations and has been identified as a potentially responsible party at numerous sites under [CERCLA]… it has been forced to expend in excess of $1 million annually to in legal costs (despite insurance coverage) and those costs continue to increase” and
- significant ongoing pension obligations relating to "its three defined benefit pension plans, all of which are underfunded. As of the Petition Date, the Debtor was unable to fund the minimum funding requirements for the year ending December 31, 2019 totaling $3,270,098…As of the Petition Date, the pension plans were underfunded by approximately $24 million."
DIP Financing
The Debtor has arranged debtor-in-possession ("DIP") financing to be provided by Wells Fargo Bank, National Association (the “Lender”) pursuant to a Ratification and Amendment Agreement by and between the Debtor and Lender, which amends the Debtor's prepetition ABL Loan Agreement (defined below) to provide for a roll-up DIP credit facility with a maximum availability of up to $18.485mn and the use of cash collateral.
Prepetition Indebtedness
As of the Petition date, the Debtor’s funded indebtedness included:
- The ABL Loan. The Debtor is party to a July 2010 credit agreement (the “ABL Loan Agreement”), with Wells Fargo Bank, National Association (the “ABL Lender”), pursuant to which ABL Lender made revolving loans to the Debtor in an aggregate principal amount not to exceed $35,000,000 (the “ABL Loan”). The ABL Loan has a maturity date of July 31, 2020. As of the Petition date, the aggregate outstanding amount of principal and interest under the ABL Loan is approximately $14.7mn.
- 9% Senior Secured Notes Due 2017. In December 2010, the Debtor issued 9% Senior Secured Notes due December 31, 2017 (the “2017 Notes,” Delaware Trust Company as indenture trustee) in the aggregate principal amount of $33,000,000 to the holders (the “Holders”) of those certain 8.625% Senior Notes Due 2008 (the “2008 Notes”), which 2008 Notes were cancelled. In accordance with the Note Indenture, the Debtor issued additional senior notes in the aggregate original principal amount of $7,821,213 to the Holders to pay interest in kind in lieu of paying cash interest. In 2014, the Debtor defaulted on the 2017 Notes for, among other things, failure to pay interest due on the notes. The Debtor and Note Trustee entered into that certain Forbearance Agreement dated July 29, 2014 to address those defaults. In 2017 certain of the 2017 Notes were exchanged for new senior secured notes. However, 8% of the 2017 Notes were not exchanged and matured on December 31, 2017. The Debtor did not pay the $3 million due on December 31, 2017 causing an event of default on the 2017 Notes. While the Debtor subsequently paid $500,000 of the principal balance due on the 2017 Notes on February 5, 2018, it failed to pay the coupon interest payments due on July 1, 2018 and January 1, 2019. In response to those defaults, the Debtor received a Noteholder Consent and Waiver from the Holders on the remaining $2.8 million and the outstanding coupon interest payments, but was required to satisfy those payments on or before December 31, 2019. Those payments were not made. As of the Petition Date, the aggregate outstanding amount of principal and interest under the 2017 Notes is approximately $3.9mn.
- 9% Senior Secured Notes Due 2020. In June 2017, the Debtor exchanged approximately 92% of the amounts outstanding under the 2017 Notes for up to $37,520,609 of new 9% Senior Secured Notes due December 31, 2020 (the “2020 Notes,” with Delaware Trust Company as indenture trustee). The current Holders of the 2020 Notes are Simplon International Ltd., Frontier Cap Partners, LLC, Paul Frontier Holdings, and Frontier C IV, LLC (the “Noteholders”). As of the Petition date, the aggregate outstanding amount of principal and interest under the Exchanged Notes is approximately $49.4mn.
Additional indebtedness includes (i) $5.6mn owed under an $8.0mn capital lease from Varilease Finance, Inc. (“VFI”) to finance a new production line at the Debtor’s Trenton plant (the “VFI Lease”) and (ii) $47.0mn of general unsecured claims, the latter including underfunded pension liabilities of approximately $24.0mn.
About the Debtor
The O'Connor Declaration provides: "As one of North America’s largest manufacturers of resilient flooring, the Debtor has been a leader in the flooring industry for more than 125 years. The Debtor manufactures and sells vinyl sheet and tile products for both residential and commercial markets. Its products are used in remodeling, manufactured housing, new construction, commercial applications and recreational vehicles. The Debtor’s history includes such industry highlights as the introduction of the first no-wax floor, the first chemically embossed vinyl-sheet floor and the first grout-able vinyl tile, which innovations redefined the resilient flooring market.
The Debtor is the only flooring manufacturer in the United States that produces solely resilient flooring. Resilient vinyl flooring is a durable, cost-effective and design-driven value alternative that appeals to a wide variety of end users. Resilient flooring represents 19.4% dollars and 24.7% of square feet of the total domestic flooring market. The Debtor’s sales comprise approximately 25% of the vinyl sheet market and those sales represent a significant share of the vinyl sub-markets, including manufactured housing (80%) and recreational vehicles (40%)."
According to the Debtor: "Since 1886 Congoleum has been committed to developing innovative flooring products that push the industry forward. Congoleum holds numerous patents for novel creations over the years and these patents have resulted in products that are like no others in the industry.
Congoleum manufactures residential and commercial resilient products that are engineered with state-of-the-art manufacturing equipment and that demonstrate Congoleum`s styling and design leadership. Congoleum has plans for a successful future that includes enhanced products and styles that will show off our true flooring expertise."
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