GTT Communications, Inc. – Global Provider of Connectivity and Internet Services Files Prepackaged Chapter 11 with Over $2bn of Liabilities After Aggressive Acquisition Strategy Leaves it with Unsustainable Debt Servicing Obligations

October 31, 2021 – GTT Communications, Inc. and nine affiliated debtors (“GTT” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 21-11880 (Judge TBD). The Debtors, a Mclean, Virginia-based provider of network connectivity and internet services to over 14,000 customers in more than 140 different countries, are represented by Ira S. Dizengoff of Akin Gump Strauss Hauer & Feld LLP.  Further board-authorized engagements include: (i) White & Case LLP as general bankruptcy counsel, (ii) Alvarez & Marsal, LLC (“A&M”) as restructuring advisors (and to provide Brian J. Fox as CRO), (iii) TRS Advisors (part of Piper Sandler & Co.) as investment banker and (iv) Prime Clerk as claims agent. 

The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets of $2.8bn; and estimated liabilities of $4.1bn ($2.015 of funded debt). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Wilmington Trust, National Association (as Trustee for $612.7mn of 7.875% Senior Unsecured Notes due 2024), (ii) Centurylink ($6.4mn trade claim) and (iii) AT&T ($4.9mn trade claim).

In 2020, the Company’s annual revenue was $1.341bn.

Highlights

• Mclean, Virginia based Telecom files prepackaged Chapter 11 with over $2.0bn of liabilities
• Prepackaged Plan (now already solicited with support levels in excess of Chapter 11 thresholds) backed by RSA, with support from 88% holders of senior secured loans and 88% of holders of 2024 notes
• Filing follows September 2021 $1.74bn cash sale (lowered from earlier announced $2.15bn by "purchase price adjustments") of infrastructure assets to private equity house I Squared Capital (with $1.673bn of proceeds used to pay funded debt)
• Prepack will see almost $1.0bn of further debt eliminated, with senior lenders taking 88% of new equity and issuing $929mn of exit financing and 2024 bonds taking 12% of equity and warrants
• Aggressive acquisition strategy led to unsustainable debt servicing obligations as compunded by discovery of accounting irregularities and subsequent senior debt/bond defaults

In a press release announcing the filing (8-k here), the Debtors advised that: “As previously announced, on September 1, 2021, GTT entered into an RSA with key stakeholders, including holders of a majority of its secured and unsecured debt and I Squared Capital, to implement a comprehensive restructuring of the Company’s balance sheet following the sale of its infrastructure division to I Squared Capital. The sale closed on September 16, 2021.

Subsequent to executing the RSA and the closing of the sale, GTT solicited acceptances of its Prepackaged Plan, which received overwhelming support from its debtholders. Lenders holding over 88% of the aggregate outstanding principal amount of GTT’s secured loans and holders of over 88% of the aggregate outstanding principal amount of GTT’s 7.875% Senior Notes due 2024, including all lenders and noteholders that voted on the Prepackaged Plan, voted to accept. The Company is seeking to have the Prepackaged Plan confirmed in mid-December.

The Prepackaged Plan advances GTT on its path to improve its capital structure and execute its long-term business strategy. The combination of the completed infrastructure division sale and the transactions contemplated by the Prepackaged Plan will reduce the Company’s debt by approximately $2.8 billion."

The Debtors’ CEO Ernie Ortega, commented: “I am pleased by the support we’ve received from our debtholders and other stakeholders demonstrating their confidence in the Company’s business plan and long-term strategy. Following the entry into the RSA, we closed the sale of our infrastructure division, and repaid a significant portion of our secured debt, as we said we would. Commencing the Company’s chapter 11 cases is the next major milestone that enables us to further strengthen our financial position as we continue to operate our business around the world.”

Restructuring Support Agreement (attached as Exhibit to Disclosure Statement)

Pursuant to that certain restructuring support agreement dated September 1, 2021 (as may be amended, supplemented, or otherwise modified from time to time, the “Restructuring Support Agreement” or “RSA”), the Plan is currently supported by the Debtors, Holders of more than 84% in amount of the 2018 Credit Facility Claims, Holders of more than 76% in amount of the Senior Notes Claims, and certain Holders of Existing GTT Equity Interests.

On September 1st, the Debtors entered into a Restructuring Support Agreement (the “RSA”) with key stakeholders, including holders of a majority of its secured and unsecured debt and I Squared Capital, to implement a comprehensive restructuring of the Company’s remaining balance sheet following completion of the pending sale of its infrastructure division.

As at filing, the RSA had been executed by Holders of more than 84% in amount of the 2018 Credit Facility Claims and Holders of 76% in amount of the Senior Notes Claims.

RSA milestones include:

• Within five calendar days after the Petition Date, the Bankruptcy Court shall have entered the Interim Cash Collateral Order.
• Within seven calendar days after the Petition Date, the Company shall file the Plan and the Disclosure Statement.
• Within 45 calendar days following the Petition Date, the Bankruptcy Court shall have entered the Final Cash Collateral Order.
• Within 75 calendar days following the Petition Date, the Bankruptcy Court shall have entered the I Squared Infrastructure Sale Assumption Order.
• Within 75 calendar days following the Petition Date, the Bankruptcy Court shall have entered the Confirmation Order.
• No later than the Outside Date [ie six months after the Petition Date unless otherwise mutually agreed by RSA parties], the Effective Date shall have occurred.

Plan Summary

The Disclosure Statement provides: "The Plan implements a pre-packaged restructuring agreed to by and among the Debtors and the Debtors’ major stakeholders—including Holders of more than 84% in amount of the 2018 Credit Facility Claims and Holders of more than 76% in amount of the Senior Notes Claims. On September 16, 2021, the Company consummated the I Squared Infrastructure Sale…and prepaid approximately $1.673 billion in funded debt.

Prior to the consummation of the I Squared Infrastructure Sale, the Company had approximately $3.695 billion in principal amount of funded debt. As of the date of this Disclosure Statement, the Company has approximately $2.015 billion in principal amount of funded debt, as reflected in the below chart. Through a combination of the distribution of proceeds from the I Squared Infrastructure Sale and the balance sheet deleveraging contemplated by the Plan, the Company will reduce its funded debt burden from approximately $2.015 billion to a projected $929 million⁴ as of the Effective Date of the Plan.

The anticipated benefits of the Plan include, without limitation the following:

1. conversion of approximately $1.440 billion in aggregate principal amount of 2018 Credit Facility Claims to a combination of (i) 88% of the New Equity Interests, subject to dilution by the Management Incentive Plan and New Equity Interests issuable upon exercise of the Noteholder Warrants and/or the Equityholder Warrants (the 'Secured Claims New Equity Interests'), (ii) a new senior secured term loan facility (the 'New GTT Term Loan Facility') and (iii) certain Cash distributions;
2. conversion of approximately $575 million in aggregate principal amount, plus accrued and unpaid interest as of the Petition Date, of the Senior Notes Claims to (i) 12% of the New Equity Interests, subject to dilution by the Management Incentive Plan and New Equity Interests issuable upon exercise of the Noteholder Warrants and/or Equityholder Warrants (the 'Noteholder New Equity Interests') and (ii) warrants exercisable for 30% of the New Equity Interests , which will have a five (5) year term and an initial aggregate exercise price based on an equity value of the Reorganized Parent that, as of the Effective Date, provides for payment in full of the Allowed amount of the aggregate 2018 Credit Facility Claims (in each case, subject to dilution and on terms and conditions more fully set forth in the Noteholder Warrant Term Sheet and applicable definitive documentation) that are to be distributed to Holders of Senior Notes Claims on account of such Claims pursuant to and in accordance with the Plan and the Noteholder Warrant Agreement (the 'Noteholder Warrants');
3. payment in full, in Cash, of General Unsecured Claims in the ordinary course of business;
4. distribution of the warrants exercisable for 4.9% of the New Equity Interests, which will have a five (5) year term and an initial aggregate exercise price based on a $2.8 billion enterprise value of the Reorganized Parent (in each case, subject to dilution and on terms and conditions more fully set forth in the Equityholder Warrant Term Sheet and applicable definitive documentation) that are to be distributed to Holders of Existing GTT Equity Interests on account of such Existing GTT Equity Interests pursuant to and in accordance with the Plan and the Equityholder Warrant Agreement (the 'Equityholder Warrants');
5. the Debtors’ prompt emergence from chapter 11; and
6. access to capital in the form of (i) the New GTT Term Loan Facility in the aggregate principal amount of approximately $854 million and (ii) a new cash flow or asset-based revolving credit facility of up to $75 million in the aggregate on terms acceptable to the Required Consenting Creditors ('Exit Revolving Credit Facility')."

^FN4: Assuming a fully-drawn Exit Revolving Credit Facility, if one is obtained by the Debtors.

^FN5: Amounts outstanding under the Prepetition Term Loans account for amortization payments scheduled to be made on September 30, 2021.

^FN6: Based on 1.181x EUR/USD spot rate.

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):

• Class 1 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The expected recovery is 100%.
• Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The expected recovery is 100%.
• Class 3 (“2018 Credit Facility Claims”) is impaired and entitled to vote on the Plan. The expected recovery is 99.2%. Each Holder of an Allowed 2018 Credit Facility Claim (or its designated Affiliate, managed fund or account or other designee) will receive (1) its pro rata¹² share of and interest in the following: (a) the New GTT Term Loans; (b) the Secured Claims New Equity Interests; (c) the Noteholder New Common Equity Investment Cash (if any); (d) any Excess Cash; (e) the I Squared Deferred Consideration, in accordance with Section 4.3 of the Plan and (2) Cash (in the currency of the relevant underlying loans) in an amount equal to all accrued but unpaid prepetition interest and, pursuant to the Cash Collateral Orders, postpetition interest with respect to such 2018 Credit Facility Claim at the applicable default interest rate under the Credit Agreement from the Petition Date through and including the Effective Date.
• Class 4 (“Senior Notes Claims”) is impaired and entitled to vote on the Plan. The expected recovery is 17.5%. Each Holder of an Allowed Senior Notes Claim shall receive its Pro Rata share of and interest in: (a) the Noteholder New Equity Interests; (b) the Noteholder Warrants; and (c) the right to participate in the Noteholder New Common Equity Investment in accordance with Section 4.7 of the Plan.
• Class 5 (“General Unsecured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The expected recovery is 100%.
• Class 6 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The expected recovery is 0%.
• Class 7 (“Intercompany Claims”) is unimpaired/impaired, presumed to accept/reject and not entitled to vote on the Plan. The expected recovery is 100%/0%.
• Class 8 (“Intercompany Interests”) is unimpaired/impaired, presumed to accept/reject and not entitled to vote on the Plan. The expected recovery is 100%/0%.
• Class 9 (“Existing GTT Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The expected recovery is N/A.

Voting Results

The Debtors’ claims agent notified the Court of Plan voting results [Docket No. 19], which were as follows:

• Class 3 (“2018 Credit Facility Claims”) – 799 claim holders, representing $1,283,245,287.64 in amount (or 100%) and 100% in number, voted in favor of the Plan.
• Class 4 (“Senior Notes Claims”) – 111 claim holders, representing $509,492,000.00 in amount (or 100%) and 100% in number, voted in favor of the Plan.

Proposed Key Dates:

• Objection Deadline: December 1, 2021
• Plan Supplement Filing Deadline: December 5, 2021
• Combined Hearing: December 15, 2021

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filings (the “Fox Declaration”), Brian J. Fox, the Debtors’ Chief Restructuring Officer, detailed the events leading to GTT’s Chapter 11 filing. The Fox Declaration provides: "Beginning in 2009, the Company pursued an aggressive acquisition strategy to grow its global presence and service clients on the scale of other major network connectivity and internet service providers. This acquisition strategy led to explosive growth in revenues from just $64 million in 2009, to $522 million in 2016, and to $1.341 billion in 2020. The Company funded these acquisitions primarily with debt. While these acquisitions dramatically increased the Company’s earnings, those earnings proved insufficient to continue operations and satisfy the debt service burden. As a result, the Company pursued a sale of its infrastructure business as discussed herein. And when the Company subsequently began experiencing resultant liquidity constraints, it raised additional liquidity in the form of the Priming Term Facility (defined below). The Company’s financial difficulties were exacerbated when, in the course of closing its books for the second quarter of 2020, accounting issues arose related to the reporting of certain expenses in its previously filed financial statements. The audit committee of GTT’s board of directors oversaw a review conducted by retained professionals of the accounting issues.

Due to the pendency of this accounting review, GTT has been unable to file certain quarterly and annual financial reports with the U.S. Securities and Exchange Commission (the ‘SEC’). GTT’s failure to file the aforementioned financial reports caused events of default under certain of the Company’s debt documents. As a result, the Company has continued to operate under a series of forbearance agreements (and extensions) with its creditors while the accounting review remains ongoing.

As it operated under the forbearance agreements, the Company sought to preserve the cornerstone of the Debtors’ restructuring: the sale of certain of its hard assets and related businesses (the ‘Infrastructure Business) to Cube Telecom Bidco Limited (the ‘Buyer’), a company controlled by funds managed and/or advised by I Squared Capital Advisors (US) LLC (‘I Squared’) for $2.13 billion in maximum total consideration (the ‘I Squared Infrastructure Sale’) [an earlier press release notes: "While the 'headline' purchase price was $2.15bn, a number of purchase price adjustments…lowered the aggregate consideration received by GTT Communications through the transaction"]. The Infrastructure Business included three undersea, transatlantic cables that route data between Europe and North America and a large fiber-optic network in Europe. Preservation of the I Squared Infrastructure Sale was of paramount importance to the Debtors and their stakeholders during these forbearance periods because a substantial portion of the net proceeds of the I Squared Infrastructure Sale was to be used to reduce the Company’s outstanding secured indebtedness.”

Key Documents

The Disclosure Statement attached the following documents:

• Exhibit A: Joint Prepackaged Plan of Reorganization
• Exhibit B: Restructuring Support Agreement
• Exhibit C Restructuring Term Sheet
  • Annex 1: Defined Terms
  • Annex 2: New GTT Term Loan Facility Term Sheet
  • Annex 3: Noteholder Warrant Term Sheet
  • Annex 4: Equityholder Warrant Term Sheet
  • Annex 5: Governance Term Sheet
• Exhibit D: Liquidation Analysis
• Exhibit E: Financial Projections
• Exhibit F: Corporate Organizational Chart

Significant Prepetition Shareholders

• Spruce House Partnership LLC: 25.01%
• Brian Thompson:11.80%
• Conifer Management, L.L.C.: 8.86

Prepetition Indebtedness

The Debtors are obligors (either as borrower orguarantor) on a principal amount of prepetition funded indebtedness totaling approximately $2.015bn, as summarized below, as of September 30, 2021

Liquidation Analysis (see Exhibit D to Disclosure Statement for notes and additional tables on high and low end recoveries for "Legal Entities")

^FN1:  The estimated claims in the Liquidation Analysis may differ from the estimated claims included in the Disclosure Statement because of differing assumptions between a chapter 11 reorganization and a hypothetical chapter 7 liquidation.

About the Debtors

According to the Debtors: “GTT provides secure global connectivity, improving network performance and agility for your people, places, applications and clouds. We operate a global Tier 1 internet network and provide a comprehensive suite of cloud networking and managed solutions that utilize advanced software-defined networking and security technologies. We serve thousands of businesses with a portfolio that includes SD-WAN and other WAN services, internet, security and voice services. Our customers benefit from a customer-first service experience underpinned by our commitment to operational excellence."

The Disclosure Statement adds: "GTT Communications, Inc. ('GTT'), together with its affiliated debtors, as debtors and debtors in possession (collectively with GTT, the “Debtors” and, together with their non-Debtor Affiliates, the 'Company'), is a global provider of network connectivity and internet service to over 14,000 customers in more than 140 different countries. Founded in 2005, the Company has over approximately 2,350 employees, approximately 700 of whom are employed by the Debtors. The Company’s principal executive offices are located in McLean, Virginia, and GTT is incorporated in Delaware. The Company has offices, data centers, colocation facilities and points of presence throughout North America, Europe, Asia, South America, Africa and Australia.

The Company counts among its clients more than 80 of the Fortune Global 200. Its clients are some of the largest companies in the world, operating across multiple continents and serving many customers internationally. The Company’s clients span a wide variety of industries, including technology, health care, defense, government and finance."

Corporate Structure Chart

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