October 14, 2021 – Red River Waste Solutions, LP (“Red River” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of Texas, lead case number 21-42423 (Judge Edward L. Morris). The Debtor, a family run provider of waste management services to more than 310,000 households and commercial locations across the Southern and Midwestern United States, is represented by Marcus A. Helt of McDermott Will & Emery LLP. Further board-authorized engagements include: (i) CRS Capstone Partners LLC as financial advisors (and to provide CRO James Calandra) and (ii) Stretto as claims agent.
The Debtor's lead petition notes between 200 and 1,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $50.0mn and $100.0mn ($35.0mn of funded debt). Documents filed with the Court list the Debtor's three largest unsecured creditors as (i) Toter LLC ($774k trade claim), (ii) Premier Truck Sales and Rentals, Inc ($196k trade claim ) and (iii) Arthur J Gallagher RMS ($150k trade claim).
Goals of the Chapter 11 Filings
The Debtor provides [Docket No. 3]: "Red River seeks to reorganize its business through these chapter 11 cases. However, as of the Petition Date, the Debtor believes it has three reasonable options to pursue: (a) a stand-alone restructuring of its business; (b) a reorganization that includes engaging third-party exit financing; or (c) selling its business in two parts, based upon prepetition marketing."
Events Leading to the Chapter 11 Filing
The Debtor's descent into bankruptcy was largely precipitated by the COVID-19 pandemic as layered on what was already a highly leveraged capital structure, with the operational impact of the pandemic making both debt and fleet servicing difficult…and then impossible. The COVID-19 impact is interesting, with the Debtor detailing a shift in waste production from office and commercial premises to homes. The issue for the Debtor is that it operates its residential waste collection services based on long-term contracts with municipalities, with COVID-19 resulting in a need to collect higher levels of trash under fixed contracts and resulting in a stretched fleet and workforce.
The cost of maintaining the overworked fleet of vehicles; the Debtor's ability to staff those vehicles (the Debtor struggling to augment its workforce and existing employees "more inclined to stay at home in response to the pandemic"); and a growing collection of fines issued as the Debtor tried (and fell short) to maintain DOT-required service levels…all led to considerably higher operational costs. The commercial side of the Debtor's business also suffered as owners of under-utilized office and retail spaces cut back on refurbishments and hence waste production.
Lower revenue ultimately left the Debtor deferring maintenance in favor of making interest payments in respect of a newly negotiated senior credit facility, a choice which was not sustainable in the long-term as its increasingly suffered from increased fleet usage and decreased maintenance. To top it all off, the Debtor was hit with a pair of serious accidents which left it struggling to find new insurance cover, which when found came with significantly higher premiums.
In a "Statement of Background Information" [Docket No. 3], the Debtor provides: "Three primary factors have transformed Red River’s relatively stable operations in the years leading up to 2019 to its current challenged position: (i) the COVID-19 pandemic; (ii) a credit agreement executed on or around April 1, 2020; and (iii) operational challenges.
- The COVID-19 Pandemic. Like most businesses, the COVID-19 pandemic altered the Debtor’s business operations in unpredictable and unprecedented ways. In particular, as various federal, state and local government entities issued shelter-in-place orders, people listened and shifted their daily lives to stay at home. And as people spent more time at homes, their habits shifted. People created significantly more refuse and waste at their homes, while significantly reducing the waste created at their offices and at retail establishments.
As discussed above, a significant portion of the Debtor’s business relies upon entering into and fulfilling long-term contracts with municipalities to deftly handle their residents’ residential waste. Prior to the pandemic, residents traditionally spent long hours away from their homes and their waste needs were served throughout their days: at shops, restaurants, entertainment venues, schools and their places of employment. When people were suddenly sequestered in their homes, their levels of residential waste increased dramatically.
This increase in waste volumes required the Debtor to respond by hiring more workers to collect that waste. This was an added challenge because many workers, including Red River’s employees, were more inclined to stay at home in response to the pandemic. This increase in waste volumes has also taken a toll on the Company’s vehicles and equipment. These unexpected volume increases have hastened the general wear and tear on the vehicles and equipment, not otherwise planned for by Red River. These labor and equipment issues have also caused the Company to incur substantial fines under certain of their municipal contracts for failing to meet certain 'service levels' requirements. One particular municipality has been particularly diligent in levying the majority of the $400,000 in fines against Red River during the pandemic.
In total, from March 2020, when the first shelter-in-place orders were issued, through February 2021, the Company’s prudent and necessary responses to the COVID-19 pandemic have created an incremental expense of approximately $1.3 million.
In addition, because the nation’s workforce was no longer frequenting their offices, the demolition, construction and refurbishment of office space slowed significantly. This lack of commercial development essentially eliminated contractors’ needs for Red River’s other services, such as roll-off containers. From March 2020, through February 2021, Red River’s commercial revenue dipped approximately $1.0 million.
- April 2020 Refinancing. In April 2020, Red River entered into an approximately $35.0 million loan comprised of a $29.6 million term loan and a $5.0 million revolver. This obligation is secured by a first lien on all of the assets of Debtor Red River Waste Solutions, LP; Debtor Red River Service Corporation is a guarantor under this term loan.
Because of the significant debt service required under this loan obligation, the Company was forced to significantly reduce or eliminate the funds it otherwise budgets for the maintenance and repairs required to preserve its vehicle fleet and other equipment. This has greatly harmed Red River and its operations, causing one of its largest assets to deteriorate significantly. This is in addition to the increased wear and tear caused by higher residential-waste volumes the Company’s pandemic operations have inflicted on these critical assets.
The Company has already entered into three amendments under the loan: First Amendment on September 30, 2020; Second Amended on December 1, 2020; and Third Amendment on March 9, 2021. On July 12, 2021, Red River received a notice of default. On October 4, 2021, Red River received an additional notice of default and reservation of rights.
The Debtor has built up a deferred maintenance obligation of approximately $2.6 million since April 2020, which represents the accumulated cost of deferred fleet maintenance and repairs. Approximately $1.0 million of this deferred maintenance obligation relates to repairs that are necessary to comply with the safety inspection requirements of the U.S. Department of Transportation.
- The Debtor’s Insurance Challenges. During the policy term ending July 2021, the Company’s vehicles were involved in two significant accidents. The Debtor’s general liability insurer was forced to pay two major claims on behalf of Red River during a single year. As a result, when the Company went to the market to price and purchase its general liability insurance policy for the upcoming period, the available market narrowed significantly. These limited choices were additionally restricted because of the Company’s deteriorating financial position. In order to purchase general liability insurance for the current period, premium costs had increased by $400,000 and the total cost of its insurance program increased by approximately $1 million, a 60% year over year increase.
As of September 30, 2021, Red River had approximately $35.0mn in total debt funded obligations, consisting of (a) approximately $5.0mn in aggregate principal and interest amounts outstanding under a prepetition revolving facility (the “Revolving Facility”), and (b) approximately $29.6mn in aggregate principal and interest amounts outstanding under a term loan facility (the “Term Loan Facility”). The following table summarizes Red River’s prepetition capital structure.
About the Debtors
According to the Debtors: “Red River, a third-generation family-run waste management services company, was founded in its in current form in 1988 and rebranded with its current name in 1993. Based in Dripping Springs, Texas, and originally known as Midland Maintenance, Red River was founded by Weldon Smith. Smith began the family’s waste management lineage in 1953 by providing refuse collection and disposal services to the United States Army at Fort Sill, the United States Air Force Academy, Fort Benning, Fort Hood and Tinker Air Force Base.
Now operated by Mr. Smith’s son and grandson, Jim and Weldon James, Red River provides solid waste management services for more than 310,000 households and commercial locations across the Southern and Midwestern United States. The Company serves these customers in (i) Huntsville, Alabama; (ii) Fort Wayne, Indiana; (iii) Elizabethtown and Hardin County, Kentucky, (iv) Nashville, Newbern, Union City, Dyer County, Gibson County and Obion County, Tennessee; and (v) Del Rio, Texas. Red River also offers industrial services (such as roll-off containers, self-contained compactors, and stationary compactors), and landfill management."
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