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Knotel, Inc. – Final DIP Order Unlocks Further $5.4mn of New Money DIP Term Loans and OK’s Dollar-for-Dollar Roll-Up; Also Affirms Creditors’ Committee’s Challenge Rights as to Prepetition Debt Purchased by Stalking Horse Digiatech/Newmark

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March 2, 2021 – The Court hearing the Knotel cases issued a final order authorizing the Debtors to (i) access a further $5.4mn of new money, debtor-in-possession (“DIP”) financing, (ii) roll up $5.4mn of prepetition loans (the “Final DIP Roll-Up Loans”) and (iii) continue using cash collateral [Docket No. 330].

The new money DIP financing, being provided by Digiatech, LLC (“DIgiatech,” an affiliate of Newmark Group, Inc., Nasdaq: NMRK), is part of a $40.8mn DIP financing package comprised of (a) a new money, multi-draw term loan facility in an aggregate principal amount of $20.4mn ($15.0mn made available with a February 3rd interim DIP order and the entire amount by this final order) and (b) a dollar-for-dollar roll-up of $20.4mn roll-up of prepetition secured debt, with $15.0mn of the roll-up to occur with the interim order and the balance with this final DIP order.

In late December 2020, Digiatech purchased all of the outstandings under the Debtors' Senior Credit Facility and in January 2021 did the same in respect of the Debtors' Junior Credit Facility. Since the acquisition of that debt, the DIP Lenders have executed a stalking horse asset purchase agreement further to which they intend to credit bid the approximately $70.0mn outstanding under those two facilities and any amounts outstanding under the DIP facilities (subject to a $70.0mn cap).

The Final DIP order comes with amended milestones which reflect objections (to both DIP financing and sale procedures) raised by the Debtors' Official Committee of Unsecured Creditors (the "Committee") as to what they viewed as an unnecessarily expedited and bid-chilling sale timetable.

In a February 22nd order approving the Debtors' stalking horse arrangements and extending the auction/sale timetable by approximately 2 weeks [Docket No. 227 which we cover separately], the Court also conferred upon the Committee exclusive rights to pursue challenges and/or an adversarial action which the Court affirms in this final DIP order which reads in part: 

"Pursuant to the Order …[D.I. 227], entered February 22, 2021, the Creditors Committee was granted the requisite standing to file an adversary proceeding challenging the validity, perfection, priority, extent, or enforceability of the Prepetition Liens, or the Prepetition Secured Debt Obligations, or otherwise asserting or prosecuting any Avoidance Actions or any other claims, counterclaims or causes of action, objections, contests, or defenses, including those subject to the release set forth in paragraph 29 hereof (collectively and together with the Committee’s Challenge Rights as defined in the Bidding Procedures Order, the ‘Claims and Defenses’) against the Prepetition Secured Lender in connection with any matter related to the Prepetition Collateral, the Prepetition Liens, the Prepetition Secured Debt Obligations or releases set forth in paragraph 29 hereof up until the earlier of (a) March 17, 2021 and (b) such other date as agreed to by the Committee and the DIP Lender or ordered by the Court (the ‘Challenge Deadline’, and the intervening period, the ‘Challenge Period’)…”

The Court's order largely adopted proposed amendments submitted by the Committee on February 1st as to challenge rights [Docket No. 324 which includes a redline highlighting proposed, and now generally adopted, changes].

Key Term of the DIP Financing:

  • Borrowers: Knotel, Inc.and each of the other Debtors 
  • Guarantors: N/A
  • DIP Lenders: Digiatech, LLC 
  • Agent: N/A
  • Term: The DIP Facility shall mature and be due and payable upon the earliest to occur of (i) seventy-five (75) days after the Petition Date, (ii) the closing date of any Section 363 sale for all or substantially all of the Borrower’s assets and the authorization by the Bankruptcy Court to pay the sale proceeds to the DIP Lender, (iii) the substantial consummation (as defined in Section 1101 of the Bankruptcy Code) of a plan of reorganization or liquidation filed in the Chapter 11 Cases that is confirmed pursuant to an order entered by the Bankruptcy Court, and (iv) the date of acceleration of the DIP Loans (the “Maturity Date”).
  • Commitment: $40.8mn comprised of (a) a new money, multi-draw term loan facility in an aggregate principal amount of $20.4mn ($15.0mn on an interim basis) and (b) a dollar-for-dollar roll-up of $20.4mn roll-up of prepetition secured debt with $15.0mn of the roll-up to occur with the interim order and the balance after a final DIP hearing.
  • Interest Rates: 12% per annum to be paid at the Maturity Date with default rate at 2% above the applicable rate.
  • New Money: $20.4mn
  • Roll-Up: $20.4mn on a dollar-for-dollar basis in line with new money term loan with $15.0mn rolled up with interim order and $5.4 million with final order.
  • Use of Proceeds: To (i) permit the orderly continuation of their respective businesses; (ii) maintain business relationships with their vendors, suppliers, customers, and other parties; (iii) make payroll; (iv) make capital expenditures; (v) make adequate protection payments; and (vi) pay the costs of the administration of these chapter 11 cases and satisfy other working capital and general corporate purposes of the Debtors. 
  • Credit Bid: The DIP Lenders have executed a stalking horse asset purchase agreement further to which they intend to credit bid the approximately $70.0mn outstanding under the Senior Credit Facility and the Junior Credit Facility
  • Fees: An upfront fee in an amount equal to 3.00% of the New Money DIP Loans, payable as original issue discount at the time, and on the amount, of each New Money DIP Loan draw.
  • Term/Maturity: The maturity date of the DIP Facility (the “Maturity Date”) shall be the earliest of (i) three (3) months following the Closing Date, (ii) the date of consummation of any sale of all or substantially all of the assets comprising the Debtors’ estates pursuant to section 363 of the Bankruptcy Code, and (iii) the date of acceleration of the DIP Loans and the termination of the DIP Facility upon the occurrence of an Event of Default.
  • Milestones: 
    • Deadline for interim DIP order: Three days after the Petition date; 
    • Deadline for final DIP order: 25 days after the Petition date; and
    • Sale milestones (adopted from bidding procedures order at Docket No. 227) which include an auction on March 12th and a sale hearing on March 18, 2021

The Committee Objection

The Committee objection reads: “Based on limited and rushed prepetition efforts seeking additional liquidity, the Debtors seek approval of a $40.8 million short-term and expensive debtor in possession financing facility (the ‘DIP Facility’) with Digiatech as the DIP Lender. The DIP Facility is structured as a term loan facility, subject to borrowing restrictions, through the post-petition use of cash collateral and a ‘roll-up’ of $20.4 million of the Debtors’ prepetition secured debt, which Digiatech strategically acquired on December 30, 2020 and January 10, 2021, a mere few weeks prior to the Petition Date. The DIP Facility provides the Debtors, at great expense, $20.4 million of ‘new money’, but in reality, the Debtors are at best receiving $18.9 million in ‘new money’ through the DIP Facility. The DIP Motion makes it clear that Digiatech will not be obligated to fund the costs of these Chapter 11 Cases even though it is receiving the unique benefits provided by chapter 11. The Debtors have entered into the DIP Facility mostly to facilitate Digiatech’s credit bid, initiated by a stalking horse proposal, for the potential purchase of substantially all of the Debtors’ assets. The DIP Motion provides that the DIP Lender will receive a complete waiver of any claims for the surcharge of their collateral pursuant to section 506(c) of the Bankruptcy Code or otherwise. As an initial matter, Digiatech is not a ‘white knight’ offering the Debtors needed liquidity to run a value-maximizing chapter 11. Instead, Digiatech (i) is an affiliate of Newmark, an equity holder of the Debtors with an observer seat on the Debtors’ board of directors, (ii) is a recent acquirer of the Debtors’ prepetition secured indebtedness, (iii) is affiliated with the Debtors’ prior investment banker, and (iv) required the Debtors to pay $1 million to an affiliate of Newmark to compensate for Digiatech’s due diligence less than a month before the Petition Date. For the privilege of incremental liquidity, the Debtors have practically ceased all case controls to Digiatech via sale Milestones and given away all unencumbered value on both the Debtors’ domestic and international assets.

It is abundantly clear that the sole purpose of this proposed DIP Facility is to fund an expedited free and clear ‘friendly foreclosure’ sale of the Debtors’ assets for the exclusive benefit of Digiatech rather than the estates as a whole. More troubling, the proposed DIP Facility is insufficient in that it neither (i) provides adequate funding or time for a value-maximizing sales process, nor (ii) provides for payment of all administrative expenses that will be incurred by the Debtors’ estates. Most troubling, while the potential of administrative insolvency looms large, neither the Debtors nor Digiatech seek to remedy it. Instead, Digiatech seeks to monopolize for itself any available cash, by seeking default interest on its newly acquired Prepetition Secured Debt, in addition to the hefty fees and expenses associated with the DIP Facility. To add insult to injury, immediately post-closing of a section 363 sale, which is intended to cleanse the assets and provide Digiatech and its affiliates broad releases, the Debtors and Digiatech, intend to convert these Chapter 11 Cases to chapter 7. 

If Digiatech intends to use the chapter 11 process to liquidate and obtain its collateral free and clear, it must fund a process that is fair and equitable to all parties in interest. This Court should not reward Digiatech’s loan-to-own gambit — where it or its affiliates wore and continue to wear multiple hats with respect to these Debtors — designed to control the Debtors and benefit itself alone. The Committee’s concerns regarding the DIP Facility are exacerbated by Digiatech’s desired grab of all value from previously unencumbered assets for the repayment of the DIP Facility and the recently acquired Prepetition Secured Debt whether by virtue of the RollUp Loans, DIP Liens, and super-priority claims, as well as a hefty adequate protection package. The unencumbered assets include, but are not limited to, the Debtors’ real property leasehold interests and related deposits, insurance proceeds, 35% equity interest in scores of foreign nondebtor subsidiaries, the proceeds of claims and causes of action under chapter 5 of the Bankruptcy Code (‘Avoidance Actions’), certain foreign assets, tax and other refunds (including potentially those related to the CARES Act), and commercial tort claims and settlement proceeds8 thereof.

The DIP Facility, as proposed, provides substantial protections to Digiatech while hampering unsecured creditors’ chances for recovery and uncertainty surrounding payment of administrative claims. Simply put, Digiatech’s desired expansion of its collateral package by way of the Roll-Up Loans and abhorrent adequate protection package is not appropriate. To the extent that DIP Liens and super-priority claims related to the New Money DIP Loans are appropriate on previously unencumbered assets, Digiatech should be required to look to all other assets first to secure repayment of the New Money DIP Loans. The sale milestones (the ‘Milestones’) should be removed and de-linked from the DIP Facility. The Milestones and other case controls are designed to solely benefit Digiatech as a stalking-horse bidder and its desire to chill a competitive bid process. The overreaching nature of the Milestones is self-evident and magnified by the fact that the Debtors undertook no prepetition marketing efforts prior to the filing of these Chapter 11 Cases. For the reasons set forth herein and in the Committee Bidding Procedures Objection, the Milestones should be removed from the DIP Facility.

Prepetition Indebtedness

As at the Petition date, the debtors had the following indebtedness:

  • Senior Credit Facility: The Debtors are party to a February 2019 Amended and Restated Loan and Security Agreement with Bridge Bank (a division of Western Alliance Bank) which memorializes the terms of a revolving credit facility with a revolving line of up to $30.0mn and a per annum interest rate equal to 6.0% plus the greater of either 5.25% or the prime rate. As of January 31, 2021, the outstanding balance on the Bridge Bank Loan was approximately $18.55mn of debt, plus $2.4mn of cash-collateralized letters of credit. Western Alliance Bank declared the Debtors to be in default under the Bridge Bank Loan as of November 17, 2020. Pursuant to a forbearance agreement dated as of December 4, 2020, Western Alliance Bank agreed to forbear from the exercise of certain rights and remedies as a result of such defaults from the period of December 4, 2020 through December 31, 2020. On December 30, 2020, Western Alliance Bank sold and assigned all of its right, title, and interest in and to the Bridge Bank Loan to Digiatech. 
  • Junior Credit Facility: The Debtors are party to a February 2019 Plain English Growth Capital Loan and Security Agreement (the “TPC Loan”), with original lender and collateral agent TriplePoint Venture Growth BDC Corp. and lender TriplePoint Capital LLC. The TPC Loan is a revolving credit facility with a revolving line of up to $50.0mn. The per annum interest rate is equal to 6.0% plus the greater of either 5.25% or the prime rate. As of the Petition Date, the outstanding principal balance on the TPC Loan was $50.0mn. The TPC Loan is junior to Bridge Bank Loan. On about January 10, 2021, the Debtors received notice that Newmark, through its subsidiary Digiatech, purchased the TPC Loan as well. 
  • Unsecured 2019 and 2020 Convertible Notes: In November 2019, Debtor Knotel, Inc. issued $9,559,424 of unsecured notes (the “2019 Convertible Notes”) with a per annum interest rate equal to 4%. All such outstanding principal and accrued interest remains outstanding and shall be subject to conversion on demand made to Debtor Knotel, Inc. on or after June 30, 2021. All such outstanding notes are subordinate to the Bridge Bank Loan and the TPC Loan. In July 2020, Debtor Knotel, Inc. issued $20,461,714 of unsecured notes (the “2020 Convertible Notes”) with a per annum interest rate equal to 4%. All principal and accrued interest remains outstanding and shall be due and payable on demand made to Debtor Knotel, Inc. by the lender at any time, as the maturity date applicable thereto was December 31, 2020. All such outstanding notes are subordinate to the Bridge Bank Loan and the TPC Loan. 
  • PPP Loan: Debtor Knotel, Inc. has a $7.2mn “unsecured, forgivable” PPP loan through JPMorgan Chase Bank, N.A.

Budget (Exhibit B to Credit Agreement, itself attached as an exhibit to proposed DIP order)

About the Debtors

According to the Debtors: “Knotel operates a leading flexible workspace platform that matches, tailors, and manages space for customers. Founded in 2016 to give businesses the flexibility and speed to scale on their own terms, Knotel caters to established and growing companies, giving them the freedom to focus on their business, culture, and people. All Knotel spaces are tailored to the needs of each individual company by an in-house team of architects, interior designers, and workplace strategists."

The Jureller Declaration adds: "Founded in 2015, Knotel is a market leader in the dedicated flexible workspace industry and focuses on enterprise customers. At the beginning of 2020, Knotel had over 4.0 million square feet of leased workspace under management, over 300 customers contracted for workspace, and expanded operations in various major business centers in the U.S., U.K., E.U., Asia, and South America, including New York City, San Francisco, Paris, London, Berlin, Amsterdam, and Dublin. 

About Newmark

According to Newmark: "Newmark Group, Inc. (Nasdaq: NMRK), together with its subsidiaries (“Newmark”), is a world leader in commercial real estate services, with a comprehensive suite of investor/owner and occupier services and products. Our integrated platform seamlessly powers every phase of owning or occupying a property. Our services are tailored to every type of client, from owners to occupiers, investors to founders, growing startups to leading companies. Harnessing the power of data, technology, and industry expertise, we bring ingenuity to every exchange, and imagination to every space. Together with London-based partner Knight Frank and independently owned offices, our 18,800 professionals operate from approximately 500 offices around the world, delivering a global perspective and a nimble approach. In 2019, Newmark generated revenues in excess of $2.2 billion.

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The post Knotel, Inc. – Final DIP Order Unlocks Further $5.4mn of New Money DIP Term Loans and OK’s Dollar-for-Dollar Roll-Up; Also Affirms Creditors’ Committee’s Challenge Rights as to Prepetition Debt Purchased by Stalking Horse Digiatech/Newmark appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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