November 25, 2020 – The Court hearing the Debtors’ cases issued an order approving the Debtors' (i) Disclosure Statement (conditionally), (ii) proposed Plan solicitation and voting procedures and (iii) proposed timetable culminating in a December 23rd Plan confirmation hearing hearing [Docket No. 480].
The Debtors, a comprehensive dental practice support services company, filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas on August 3, 2020 citing the impact of COVID-19 on its revenues; which during the period March through May 2020 were 68% lower than during that same period a year earlier.
From the outset of these cases, the Debtors have faced challenges from their Official Committee of Unsecured Creditors (the “Committee”) which had objected to the control/influence of New Mountain Finance Corporation ("New Mountain") has as the Debtors' primary prepetition secured lender, its proposed DIP Lender, its controlling equity holder, and its stalking horse bidder. The result of New Mountain's many-hatted dominance of the cases, the Committee has argued (unsuccessfully), was that the Debtors' DIP financing arrangements and bidding procedures serve "New Mountain’s interests at the expense of all other creditors, particularly unsecured creditors" and "would ram through a rushed and incomplete sales process and artificially augment and insulate New Mountain’s stalking horse credit bid."
Key Dates
- Plan Voting Deadline: December 21, 2020
- Object to Disclosure Statement and Confirmation: December 21, 2020
- Plan Confirmation Hearing: December 23, 2020
Background
Plan Overview
The Debtors' combined Plan of Liquidation and Disclosure Statement (the “Combined Document”) [Docket No. 455] reads: “The Debtors sold substantially all of their assets on October 6, 2020 (more on asset sale below). Pursuant to the Stalking Horse Agreement, the Debtors retained certain litigation claims and funds in order to wind down its operations and make distributions to creditors. On the Effective Date, the Liquidation Trust will be created and the Debtors will transfer the Liquidation Trust Assets into the Liquidation Trust. Included in the Liquidation Trust Assets is the amount of the Wind Down Amount remaining on the Effective Date and potential Causes of Action (including Avoidance Actions). The proceeds of the Liquidation Trust Assets, if any, will be used to make distributions to creditors as set forth in the Plan and Disclosure Statement.
As of the Effective Date of the Plan, the Liquidation Trustee will be responsible for all payments and distributions to be made under the Plan to the Holders of Allowed Claims. Each executory contract and unexpired lease to which the Debtor is a party shall be deemed rejected unless the Debtors expressly assume and assign such agreements to the Purchaser of the Debtors’ assets before the Effective Date.”
The following is summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Combined Document, see liquidation analysis below):
- Class 1 (“Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated amount of claims is unknown and estimated recovery is 100%.
- Class 2 (“Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated amount of claims is $0 and estimated recovery is 100%.
- Class 3 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $10,537,584.46 and expected recovery is 0% to 1%. On the applicable Distribution Date, unless otherwise agreed by a Holder of an Allowed Unsecured Claim and the Debtors and Committee (prior to the Effective Date) or the Liquidation Trustee (on or after the Effective Date), each Holder of an Unsecured Claim will receive its Pro Rata share of the proceeds of the Liquidation Trust Assets.
- Class 4 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $– and expected recovery is 0%.
Asset Sale
Further to an October 2nd sale hearing, the Court hearing the Benevis cases approved (i) the $215.0mn sale of substantially all of the Debtors' assets to stalking horse bidder New Benevis Holdco, Inc. (an affiliate of prepetition and DIP lender New Mountain, the “Stalking Horse Bidder” or "Purchaser") and (ii) the asset purchase agreement (the “APA”) amongst the Debtors and the Purchaser [Docket No. 334].
An executed version of the October 1st APA, which memorializes the terms of a dollar-for-dollar credit bid comprised of (i) prepetition debt ($200.5mn) less $10.0mn, (ii) DIP debt ($25.0mn) and (iii) cure costs/assumed liabilities, is attached to the order at Exhibit 1.
On September 25th, the Debtors notified the Court that absent any further qualified bids beyond that of the Stalking Horse Bidder, the auction scheduled for September 30th had been cancelled and the Stalking Horse Bidder designated as the Successful Bidder [Docket No. 276].
The Combined Document provides, "Prior to the Petition Date, the Debtors engaged in a marketing process to sell substantially all of their assets. Once these efforts proved unsuccessful, the Debtors commenced these Chapter 11 Cases to pursue the sale of their assets pursuant to Section 363 of the Bankruptcy Code. On August 3, 2020, the Debtors filed their Sale Motion that sought Bankruptcy Court approval of bidding procedures to govern the auction and sale of substantially all of the Debtors’ assets and to approve the sale of these assets to the successful bidder at the conclusion of that auction.
By the deadline to submit bids under the Bid Procedures Order, the only bid for the Debtors’ assets was a credit bid made by the Prepetition Lenders and DIP Lenders. As a result, the Debtors and the Purchaser, the assignee of the Prepetition Lenders’ and DIP Lenders’ credit bid, executed the Stalking Horse Agreement, which was approved by the Bankruptcy Court when it entered the Sale Order.
As a result of the Committee’s negotiations with the Prepetition Lenders, DIP Lenders and Purchaser, the purchase price under the Stalking Horse Agreement was increased to include a 'Settlement Amount.' As further described in the Stalking Horse Agreement, the Settlement Amount required the Purchaser to fund: (a) an amount sufficient to pay certain allowed Administrative Expense Claims that were forth in the Approved Budget (as defined in the Stalking Horse Agreement), unless these Administrative Expense Claims were otherwise assumed by the Purchaser, (b) $1,034,000 for payment of Allowed 503(b)(9) Claims that were set forth in the Approved Budget, unless those Claims were otherwise assumed by the Purchaser, (c) up to $1,853,000 for payment of Allowed Priority Tax Claims that were set forth in the Approved Budget, unless those Claims were otherwise assumed by the Purchaser, (d) up to $2,101,000 to pay the Allowed employer portion of payroll Taxes deferred pursuant to Section 2302 of the CARES Act and up to $696,000 to pay Allowed Priority Tax Claims, unless those Claims were otherwise assumed by the Purchaser, as set forth on Schedule 1.1(d) of the Stalking Horse Agreement, and (e) $1,850,000 to fund the liquidation of the Debtors, including the process of obtaining confirmation of this Plan, with the remainder to be distributed to the Liquidation Trust. This $1,850,000 is referred to as the Wind-Down Amount.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Mell Declaration”) [Docket No. 12], Scott Mell, the Debtors’ Chief Restructuring Officer, detailed the events leading to Benevis’ Chapter 11 filing. The Mell Declaration provides: “Prior to the COVID-19 pandemic, the Debtors anticipated liquidity issues on account of general dentistry patient declines during the second half of 2019 and costs associated with the April 2019 acquisition and integration of six (6) supported practices and COVID-19 exacerbated the Debtors’ distress.
In the twelve-month period immediately prior to COVID-19, the Debtors generated $360 million in net revenue and approximately $25 million in EBITDA. Due to the COVID-19 pandemic, all 16 states in which the PCs’ practices are located and the District of Columbia, were shut down for a period of time by local government officials. The pandemic and these shut-downs halted the Debtors’ operations and significantly slowed the PCs’ practices. Primarily as a result of COVID-19, the Debtors’ total revenue for the months of March, April and May 2020 was approximately 68% lower than for the same period in 2019.
Facing defaults and liquidity challenges, the Prepetition Lenders negotiated with the Debtors and their principal shareholders — LittleJohn & Co. and Tailwind Management LP (collectively, the ‘Prior Sponsors’) — regarding potential amendments to the Prepetition Credit Agreement in exchange for capital infusions from the Prior Sponsors. The Prepetition Lenders entered into the First Forbearance Agreement on April 30, 2020 where they agreed to, among other things, forbear from exercising their rights and remedies as a result of events of default under the Prepetition Credit Agreement. The Prepetition Lenders extended the forbearance period at least five times.
Despite good faith negotiations, the parties were unable to reach consensus with the Prior Sponsors. As a result the Prior Sponsors were threatening to file a chapter 7 liquidation. As an alternative, the Prior Sponsors expressed a desire to exit their controlling equity status in the Debtors. New Mountain ultimately agreed to a two-step process where it would first ‘purchase’ the equity of LT Smile Corporation (the ‘HoldCo Equity’) from the Prior Sponsors for nominal consideration and second, negotiate a more holistic restructuring of the Debtors in chapter 11. On June 5, 2020, New LT Smile Holdings, LLC (‘New LT Smile I’) and New LT Smile Holdings II, LLC (‘New LT Smile II’, collectively with New LT Smile I, ‘New LT Smile’), a newly formed entity affiliated with NM, acquired the HoldCo Equity.
Although New Mountain has technically been the sole shareholder for roughly seven weeks, New Mountain acquired the HoldCo Equity because the Prior Sponsors left it no other viable option to preserve the going concern business and avoid the alternative: chapter 7 liquidation. New Mountain continues to act as a secured lender and not as a shareholder.”
Liquidation Analysis (See Exhibit A at combined Document [Docket No. 455])
About the Debtors
According to the Debtors: “Benevis is a comprehensive dental practice support services company focused on improving access to dentistry by providing the highest quality non-clinical practice support services to some of the nation’s leading dental practices.
The Company affiliates with top dentists throughout the country by providing support services that help dentists better manage and grow their practices and allow dentists to focus on providing high-quality care to their patients.”
Corporate Structure Chart (See [Docket No. 12])
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