August 17, 2020 – RGN-Group Holdings, LLC ("Holdings") and two affiliated Debtors (together with the earlier filers noted below, “RGN” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-11961. These three filers join four other Debtor affiliates who filed for bankruptcy protection in the same Court between July 30th and August 8th.
The Debtors are represented by Patrick Johnson of Faegre Drinker Biddle & Reath LLP. Further board-authorized engagements include (i) AlixPartners as financial advisors, (ii) Duff & Phelps, LLC, as restructuring advisors and (iii) Epiq Corporate Restructuring as claims agent. The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets of $1,005,956,000 and estimated liabilities of $946,016,000. The vast majority of the assets are comprised of furniture, fixtures, equipment ("FF&E") held by Holdings ($999.0mn book value as at the Petition date) with liabilities including amounts borrowed from parent company Regus Corporation ("Regus") to purchase that FF&E (eg Holdings owes Regus $427.8mn).
The Debtors are each direct or indirect subsidiaries of Regus, a Delaware corporation, that, together with its affiliates, offers a network of on-demand office and co-working spaces, and ancillary services and support, to a variety of clients across a host of industries in over 1,000 locations in the United States and Canada.
Each of the earlier (July 31st to August 8th) filers is a special purpose entity ("SPE") created to operate just one of the "over 1,000 locations;" and each has (i) entered into a long-term lease with a property owner, (ii) fitted it with FF&E leased from Holdings (with money borrowed from Regus), (iii) set about subletting the enhanced office space to short-term "Occupants" and (iv) then, thanks in large part to the impact of COVID-19, found themselves subject to threats of lock-outs from landlords they have not generated enough revenue to pay.
Two of the August 17th filers, RGN-National Business Centers, LLC (“RGN-NBC”) and H Work, LLC (“H Work”) are guarantors in respect of one or more of the struggling earlier filers and hence targets for those angry/unpaid landlords. Holdings, in addition to being a guarantor, is, as noted above, the lessor of FF&E.
As the Feltman Declaration (defined below) sums up: "The Guarantor Debtors commenced their Chapter 11 Cases…to preempt both a potential 'run on the bank' by Landlords exercising their rights under the various guarantee agreements, and the inevitable 'race to the courthouse' that would follow."
As the Feltman Declaration makes clear in its description of the Debtors' goals for their Chapter 11 filings and the COVID-19 driven events that have necessitated those filings, it will not be easy sitting in the middle between Landlords and Occupants; arguing on the one hand that Landlords should allow rent deferrals and lower rents "to bring them in line with the COVID-19-adjusted market realities" while trying to fend off identical requests from Occupants ("the Company has had to cut pricing for new sales and renewals"). This balancing act occurring while the Debtors face a heightened risk of a "race to the bottom" (along with that race to the courthouse) given the similar existential challenges faced by competitor WeWork.
The Feltman Declaration also makes clear that the Debtors intend to play a standard, carrot and stick lease renegotiating game: looking "to more fully explore the possibility of restructuring their various contractual obligations…If these restructuring efforts prove unsuccessful, the Lease Holder Debtors intend to utilize the procedures available to them under the Bankruptcy Code." The problem here (and a clear distinction with the more familiar case of a rent reduction seeking retailer threatening its mall owning landlord with a lease rejection) is that the Debtors are landlords themselves…with paying tenants that they cannot afford to see thrown out onto the street.
Goals of the Chapter 11 Filings
The Feltman Declaration states: "The Debtors commenced their Chapter 11 Cases to prevent the forfeiture of the Lease Holder Debtors’ Leases, and to preserve all Debtors’ ability to operate their respective businesses—thereby, importantly, protecting the Occupants of the Lease Holder Debtors’ Centers from any disruption to their businesses. I expect that the 'breathing spell' from Landlords’ collection efforts that will be afforded by the chapter 11 process will allow the Debtors, and the Company more broadly, to more fully explore the possibility of restructuring their various contractual obligations in order to put the Company’s North American portfolio on a surer footing going forward, so as to allow the Debtors to emerge from this process stronger and more viable than when they went in.
If these restructuring efforts prove unsuccessful, the Lease Holder Debtors intend to utilize the procedures available to them under the Bankruptcy Code to (i) orderly wind down the operation of the applicable Centers (including, to the extent necessary, the removal of the FF&E from the leased premises, and to the extent possible, transition of the Occupants to other locations), (ii) liquidate the amounts due to the Landlords under their respective Leases and guarantees, as well as amounts due to the Debtors’ affiliates under their respective agreements, and (iii) to make distributions to creditors in accordance with their respective priorities under the Bankruptcy Code and applicable law."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Feltman Declaration”), James S. Feltman (of Duff & Phelps, LLC) detailed the events leading to the Debtors' Chapter 11 filing. The Feltman Declaration provides: “Following a strong first quarter in 2020, the Company experienced significant challenges during the second and third quarters as a direct result of the COVID-19 pandemic, which has severely disrupted business plans and operations for certain locations within the Company’s U.S. portfolio. With the near universal adoption of work-from-home policies (either voluntary, or government-mandated) by U.S. businesses during the early months of the pandemic, demand for temporary office space has been depressed, which I understand resulted in lower occupancy rates than were anticipated when the Company decided to make certain investments in the Centers, e.g., in acquiring and building out additional space in cities in which it already had a footprint. To attract and retain Occupants in this environment, the Company has had to cut pricing for new sales and renewals, resulting in a reduction of revenue from the space that is occupied. And with the dramatic contraction of the overall economy during the second and third quarters of 2020, certain Occupants’ inability to timely pay their Occupancy Fees—or unwillingness to do so, as part of their emergency cash-conservation measures—has impacted the Company’s liquidity at the level of the U.S. portfolio. Like so many other companies navigating these troubled times, the Company instituted a variety of comprehensive actions to reduce costs and improve cash flow and liquidity, including the deferral of rent payments and engagement with Landlords to negotiate forbearances, temporary accommodations, and, where possible, permanent modifications to the various Leases to bring them in line with the COVID-19-adjusted market realities so as to permit the Company to continue operating Centers at those respective locations despite the uncertainty when the pandemic will subside and when (and indeed, whether) the U.S. will return to something resembling the pre-pandemic 'business as usual'.”
About the Debtors
The Debtors are direct or indirect subsidiaries of Regus Corporation, a Delaware corporation, that, together with its affiliates (collectively, “IWG” or the “Company”), offers a network of on-demand office and co-working spaces, and ancillary services and support, to a variety of clients across a host of industries in over 1,000 locations in the United States and Canada.
IWG’s business model begins with entry into long-term non-residential real property leases (each, a “Lease”) with property owners (each, a “Landlord”) that provide the Company unoccupied office space (the “Centers”). Based on significant market research on potential client needs in local markets and the unique requirements of their existing clients, IWG engineers each of the Centers to meet the architectural style, service, space, and amenity needs of those individuals, companies, and organizations who will contract for use of subportions of the Centers. IWG markets its Centers under an umbrella of different brand names, each tailored to appeal to different types of clients and those clients’ specialized needs. These clients (the “Occupants”) enter into short-term licenses (each, an “Occupancy Agreement”) to use portions of the Centers, which are customizable as to duration, configuration, services, and amenities. When operating successfully, a Center’s Occupants’ license payments (“Occupancy Fees”) will exceed the combined cost of the underlying long-term lease, management cost, and operating expenses of the Center.
Corporate Structure Chart
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