June 6, 2021 – Katerra, Inc. and 32 affiliated Debtors (“Katerra” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 21-31861 (Judge Isgur). The Debtors, a "a technology-driven construction company that develops, manufactures, and markets products and services in the commercial and residential construction spaces" (essentially applying a tech overlay to prefabrication efforts), are represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Alvarez & Marsal North America, LLC as financial advisors, Houlihan Lokey Capital, Inc. as investment banker and (iv) Prime Clerk LLC as claims agent.
The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Stiles Mchinery Inc ($5.9mn trade claim), (ii) Haddad Plumbing and Heating ($5.4mn trade claim) and (iii) Thyssenkrupp Elevator Corp ($4.2mn trade claim). At least 31 unsecured creditors have claims in excess of $1.4mn. Prominenet amongst the Debtors first day filing are a series of motions looking to reject 100s of contracts and leases as of the Petition date [Docket Nos. 25-29 and counting]. The Debtors note: "Katerra’s decision to wind down certain projects was based primarily on a project’s expected profitability once completed and/or “marketability” in an asset sale. Katerra is continuing to work on its approximately 346 active projects, mainly in its Renovations and LAS businesses."
In the year ending 2020, Katerra’s operations generated revenue of approximately $1.75bn.
The lead Debtor Katerra, Inc. is 100% owned by Debtor affiliate Katerra Inc. (Cayman) which is in turn 99.96% owned by a trio of affiliates of SoftBank's Vision Fund which will be adding this unfortunate investment to a recent string of disasters including WeWork and Greensill Capital.. In December 2020, SoftBank invested a further $200.0mn in an attempt to fend off the current bankruptcy filings. That $200.0mn came on top of a reported $2.0bn SoftBank investment with that refinancing also reportedly seeing $425.0mn of debt owed to Greensill Capital cancelled in exchange for a roughly 5% stake the Debtors. Credit Suisse is also among investors exposed to Katerra via Vision Fund and Greensill.
As co-founder Michael Marks once described the Debtors: “We bring massive amounts of tech to construction. We have our own factories to make the components. We make sub-assemblies there, bring them to a site, move them around on trucks and conveyors and bring the buildings to life. There’s no handoff. We do everything. It’s not magic….We’re Silicon Valley people bringing automation to design, and other aspects of the sometimes antiquated construction industry.”
In a press release announcing the filing, the Debtors advised that: “that the company and certain of its U.S. and Cayman Island entities have voluntarily filed for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, as the company takes steps to conduct a marketing and sale process to maximize value for its stakeholders.
Following a thorough review of its strategic alternatives, the company is currently proceeding with certain active projects in a number of states. The company has also entered into commitments for the sale of the Renovations and Lord Aeck Sargent architecture business lines to private buyers, subject to Bankruptcy Court approval.
The rapid deterioration of the company’s financial position is the result of the macroeconomic effects of the COVID-19 pandemic on the construction industry, inability to procure bonding for construction projects following the unexpected insolvency proceedings of Katerra’s former lender, and unsuccessful attempts to secure additional capital and business.”
The Debtors’ Chief Transformation Officer Marc Liebman commented further: “While a number of negative factors have led to Katerra’s current challenges, we are implementing initiatives on multiple fronts to maximize value and provide the best path forward for Katerra and its many stakeholders. Our multi-step action plan has rapidly evolved and includes consolidating U.S. activities, continuing our international businesses, advancing key asset sales, securing DIP financing, and commencing an in-court restructuring process.”
Goals of the Chapter 11 Filings
The Debtors provide: “The Debtors filed these chapter 11 cases to effectuate a marketing process for their assets aimed at maximizing the value of their estates. To that end, the Debtors and their advisors, with the support of the DIP Lender, determined in their business judgment, that exploring a marketing process for potential sales of some or all of the Debtors’ assets was in the best interests of the Debtors’ estates.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Liebman Declaration”), Marc Liebman, the Debtors’ chief transformation officer, detailed the events leading to Katerra’s Chapter 11 filing. The Liebman Declaration provides: “Katerra experienced approximately $2.78 billion in financial losses in 2018, 2019 and 2020, which are attributable, in part, to Katerra’s difficulty in controlling project costs and completion delays. The COVID-19 pandemic only exacerbated these issues. The Company’s project backlog consisted of 147 unprofitable projects ('Loss Projects') out of 428 active jobs as of April 30, 2021. Loss Projects caused a substantial decrease in profits and additional strains on the Company’s liquidity.
In May 2020, Katerra commenced another round of financing (Series F) with one of its existing investors, SVF, to raise additional capital to fund operations. As described above, in 2018 and 2019, SVF contributed capital of approximately $1.4 billion in the aggregate as a part of Katerra’s Series D-1 & D-2 financing and Series E financing. In 2019, SVF provided Katerra with an additional $200 million in exchange for a promissory note and another $150 million in exchange for an ownership stake in non-Debtor Katerra Middle East. Pursuant to the terms of the Series F financing, SVF provided Katerra with an initial $100 million in funding and agreed to fund another $100 million approximately 45 days later. In addition, SVF exchanged its 49% ownership stake in non-Debtor Katerra Middle East Inc. for another $150 million in Series F shares.
In late May 2020, however, Katerra identified potential improper revenue recognition practices related to Katerra’s Renovations business. Within days, the Independent Committee was formed to oversee an investigation into potential accounting irregularities within Katerra’s Renovations business unit and engaged Kirkland & Ellis LLP ('Kirkland') as special counsel to conduct an independent investigation. Katerra informed SVF that it was conducting an investigation and ceased additional equity fundraising while these investigations were ongoing, at which time SVF exercised its contractual right to not fund the $100 million in connection with the Series F financing.
The investigation found that certain Renovations employees intentionally recognized costs prematurely in 2018, 2019, and the first quarter of 2020, thereby rendering the revenue and operating margin line items in higher misstated amounts in Katerra’s audited financial statements for the fiscal years ended December 31, 2018 and December 31, 2019 and Katerra’s unaudited financial statements for the three-month period ended March 31, 2020. Katerra took appropriate disciplinary and remedial action. In August 2020, Katerra voluntarily contacted the U.S. Securities and Exchange Commission (the 'SEC') to inform the SEC of the findings of the Independent Committee investigation. In addition, Katerra informed its external auditor, Deloitte Touche Tohmatsu Limited ('Deloitte'), of the findings of the Independent Committee investigation.
Deloitte then requested that additional investigation be undertaken into another part of the U.S. business to understand whether certain other improper practices or irregularities had occurred. The Independent Committee directed Kirkland to undertake such investigation, and Kirkland reported its findings to the Board of Katerra Cayman and, subsequently, to the SEC and Deloitte in November 2020. Katerra continues to cooperate with the SEC and to provide relevant information upon request, but cannot predict the outcome of this investigation. Together, Deloitte and Katerra determined that restatement of Katerra’s audited financial statements for the fiscal year ended December 31, 2019 was not required.
During the investigation, and in part due to the freeze on raising capital, Katerra continued to face worsening liquidity that threatened its operations. Katerra experienced financial and technical setbacks on some of its legacy construction projects due to re-work issues related to earlier-completed work. The Company’s exposure to expensive long-term, third-party commitments in real estate, IT and software further restrained cash flow. Finally, the Greensill Receivables Facility was already fully drawn, and the debt level thereunder, combined with Katerra’s inability to comply with the covenant criteria since early 2020, made it difficult to obtain bonding for new project starts, impeding Katerra’s ability to secure new business. Faced with this significant liquidity crisis, in August 2020, Katerra engaged Kirkland as restructuring counsel to explore strategic alternatives.
To prevent an immediate chapter 11 filing in September 2020, SVF again offered financial support to Katerra and provided the additional $100 million in connection with the Series F financing that it had previously elected not to provide. The Company also contracted to sell its Lifebridge and Amberglen developments in Washington and Oregon, respectively, in September and October 2020. Notwithstanding these efforts, Katerra continued to experience significant losses. Thus, in late September 2020, Katerra engaged A&M as restructuring advisor and Houlihan Lokey ('Houlihan Lokey') as investment banker. Katerra engaged these advisors to explore all restructuring options. With the assistance of Kirkland, A&M and Houlihan Lokey, Katerra engaged its major constituents, as well as third parties, regarding potential restructuring transactions.
Negotiations with SVF and the New Money Consortium
It is my understanding, as set forth in the Niemann Declaration, that faced with the realities of its worsening liquidity situation and its dire need for additional capital, in October 2020, Katerra with the assistance of its advisors, began negotiations with SVF and a consortium of new investors and existing stakeholders (the 'Consortium') who expressed a desire to support Katerra’s business. The proposed transaction contemplated a new-money investment by the Consortium and SVF of approximately $380 million in exchange for a 90% equity ownership stake of the Consortium in Katerra, with the remaining 10% of Katerra’s equity reserved for management. In addition, the transaction contemplated the retirement of Katerra’s outstanding Greensill Receivables Facility and the sale of Katerra’s ownership interests in certain foreign ventures. Katerra, SVF, and the Consortium executed a non-binding letter of intent reflecting this transaction. The transaction, however, did not materialize. Subsequently, Katerra continued to pursue out-of-court restructuring alternatives and reached out to a number of parties, both existing stakeholders and third parties, to provide additional financing.
December 2020 Out-of-Court Transaction
As set forth in the Niemann Declaration, in late November 2020, following the break-down of negotiations with SVF and the Consortium, SVF Abode indicated an interest in investing an additional $200 million to ensure Katerra would be able to meet its ongoing obligations. Katerra issued a promissory note to SVF Abode in exchange for a $25 million bridge loan while Katerra engaged with SVF Abode and other stakeholders to negotiate the terms of an out-of-court restructuring. Ultimately, Katerra consummated a transaction at the end of December 2020 on the following terms:
- SVF Abode exercised its warrant to purchase ordinary shares of the Company and converted $300 million of promissory notes of the Company held by SVF Abode to equity;
- the Company (i) converted all existing preferred shares into ordinary shares of the Company and (ii) issued a new class of preferred shares (the Series A preferred shares) to SVF Abode in exchange for $175 million in cash and extinguishment of a $25 million bridge loan owed to SVF Abode;
- Greensill extinguished approximately $440 million owed by Katerra under the Greensill Receivables Facility in exchange for approximately 5% of the post-equity closing in Katerra, which equity was immediately transferred by Greensill to an affiliate of SVF II in connection with a transaction in which SVF II invested $440 million in the parent company of Greensill;
- 5% of the post-closing equity was reserved for certain existing equity holders and 15% of the post-closing equity was reserved in a share pool for an equity incentive plan and related grants; and
- Katerra and Wolff settled and waived certain claims against Katerra, including the amendment of the 'Substantial Completion Dates' of a number of active projects with Wolff and certain of its related parties, and, in exchange, Katerra granted Wolff a lien on the CLT Facility.
As a part of this transaction, SVF was diluted to the same extent as all other investors (100,000.0:1.0), which resulted in the previous $1.95 billion invested by SVF equaling less than 0.1% of the post-recapitalization equity. An additional transaction that Katerra was negotiating near the end of 2020, that did not materialize, was a joint venture agreement with the Public Interest Fund ('PIF'), a program established and supported by the Kingdom of Saudi Arabia. Pursuant to the proposed terms of the joint venture, PIF was to invest $147 million in Katerra Saudi Arabia in exchange for a 49% equity ownership stake (the 'PIF Sale'). Katerra planned to use approximately $23 million from that investment to restore covenant compliance under the Samba Credit Facility and another approximately $47 million was expected to be paid directly to Katerra Cayman. Despite Katerra’s best efforts, negotiations between Katerra and PIF stalled and the PIF Sale was not executed. Because the sale fell through, Katerra Cayman was forced to use its own capital to pay off the approximately $23 million due under the Samba Credit Facility in March 2021 due to covenant compliance concerns.
Greensill Insolvency Proceedings and the Greensill Receivables Facility
In March 2021, Greensill filed for insolvency proceedings in the United Kingdom, Australia and in the United States. In connection with Greensill’s insolvency proceedings, it was reported by the Wall Street Journal that SVF had injected $400 million into Greensill in exchange for Greensill’s 5% equity in Katerra. Immediately after this article was published, Katerra was bombarded with inquiries from customers, employees, and other third parties about the financial viability of the Company.
On March 11, 2021, Katerra received a letter from a legal representative of Credit Suisse Asset Management, stating that it was the holder of notes totaling approximately $438 million, under whose terms, Katerra acts as a servicer for the notes program and performs all activities to bill and collect from customers. The firm asked Katerra to provide statements and documentation relating to collection activities starting November 1, 2020 to the date of the letter. In addition, the firm referenced the media reports that stated that Katerra’s approximately $440 million debt owed to Greensill was forgiven by Greensill in exchange for a 5% equity stake in Katerra, and inquired whether such debt forgiveness had any relationship with the receivables sold or owed to Greensill.
Because of the news articles discussing Katerra’s relationship with Greensill and SVF, certain of Katerra’s contract counterparties stopped doing business with Katerra, expressing concerns that Katerra was still burdened with the Greensill Receivables Facility and that Katerra was going to be implicated into the Greensill proceedings. Katerra was quickly faced with a series of operational issues, including: (a) customers on existing projects looked to replace Katerra mid-project; (b) customers for new projects displayed a new-found reluctance to contract with Katerra; (c) customers and their lenders, in general, demanded Katerra provide bonds or blocked funds in escrow accounts under their control to protect themselves; (d) bonding and surety companies were increasingly difficult about providing bonding capacity for new projects; (e) in verbal conversations, banks were not willing to provide any borrowing facilities to Katerra based on recent history and the publication of recent news articles; and (f) Katerra’s current capital raises were negatively impacted.
In mid-May 2021, in response to requests for support in the face of the Greensill downfall, SVF informed Katerra that it would not make any further investments to fund the Company’s operations on a go-forward basis to cover Katerra’s unexpected capital shortfall stemming from the failure of the PIF Sale, the Greensill insolvency proceedings and the Company’s historic losses. After investing approximately $2.5 billion in equity and capital in Katerra, including the approximately $440 million it paid to Greensill, SVF explained to Katerra that it could not reasonably invest additional funds into Katerra’s business plan.
Katerra’s Liquidity Constraints and Actions Taken to Preserve Assets
On May 17, 2021, three senior members of Katerra’s management team resigned. Shortly thereafter, Katerra created the Special Committee and re-engaged A&M to provide certain officers and restructuring personnel and Houlihan Lokey, as investment banker, to seek alternative financing and market certain of its assets. Together, Katerra, the Special Committee, Kirkland, A&M, and Houlihan Lokey began exploring a number of restructuring options on an expedited basis. Katerra and its advisors engaged their major constituents, as well as third parties, regarding potential restructuring transactions that could be effectuated either in-court or out-of-court.
Despite Katerra’s best efforts, it was unable to find an investor willing and able to provide the financing necessary for Katerra to meet its ongoing obligations. As a result, by the end of May 2021, Katerra faced a critical liquidity shortfall such that it projected a negative cash balance, requiring an immediate capital infusion to conduct a marketing process for its assets and effectuate an orderly wind-down of its domestic businesses. To preserve liquidity and retain as many employees as possible while searching for solutions, on June 1, 2021, Katerra decided to cease a majority of its operations in the United States, which resulted in winding down approximately 82 projects representing 76.9% of its active project revenue. As part of this wind down, Katerra also implemented a reduction in force and terminated 730 of its 1,300 employees in the United States. Katerra has retained its capability to serve its Wolff, Lifebridge, and Amberglen projects."
The Debtors have secured commitments for $35.0mn of debtor-in-possession ("DIP") financing from SoftBank affiliate SB Investment Advisers (UK) Limited to fund operations during the Chapter 11 process.
Prepetition Capital Structure
As of the Petition Date, the Debtors and certain of their non-debtor subsidiaries have an aggregate principal amount of approximately $1.29 billion to $1.55 billion in estimated obligations, consisting primarily of (i) prepetition funded debt of certain of the Debtors’ foreign non-Debtor subsidiaries, (ii) surety bond obligations, (iii) letters of credit, and (iv) corporate guarantees. The aggregate outstanding amount of each debt obligation is as follows:
About the Debtors
Petition date filings note: "Katerra is a technology-driven construction company that develops, manufactures, and markets products and services in the commercial and residential construction spaces. Katerra delivers a comprehensive suite of products and services for its clients through a distinct model that combines end-to-end integration with significant investment in technological and design innovation. Katerra offers services to its clients through three distinct offerings: (a) end-to-end new build; (b) construction services; and (c) renovations. Katerra has approximately 6,400 employees who are primarily located in nine countries. In the year ending 2020, Katerra’s operations generated revenue of approximately $1.75 billion.
According to the Debtors: “Katerra is on a mission to transform construction through innovation of process and technology. As a new breed of company within industry, Katerra is powered through vertical integration and technology investment to provide a range of services and products to clients across the construction value chain. Founded in 2015, Katerra's demonstrated progress includes advanced manufacturing facilities, design and construction services, a large number of completed projects, and a growing product portfolio that includes whole-building platforms and sustainable mass timber.
Corporate Structure Chart
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