Grupo Posadas S.A.B. de C.V. – Leading Mexican Hotel Opeartor Files Revised Joint Prepackaged Chapter 11 Plan as December 8th Plan Confirmation Hearing Nears

November 30, 2021 – In advance of their December 8th Plan confirmation hearing, the Debtors filed a revised Prepackaged and a related redline showing changes (changed pages only) to the version filed on October 26, 2021 [Docket Nos. 97 and 98, respectively]. The lightly amended Plan amends release language (a shift from opt-out to opt-in for certain releasing parties) and notes that all existing compensation agreements will be deemed to “ride through” the Chapter 11 Cases.

On October 26th, Grupo Posadas S.A.B. de C.V. and one affiliated Debtor (BMV: POSADASA; “Grupo Posadas” or the “Debtors”) filed for Chapter 11 protection  noting estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn (the Disclosure Statement specifies $427.5mn, consisting primarily of $392.6mn of the Debtors' 7.875% Senior Notes due 2022, or "Existing Notes"). 

Although noting the obvious impact of COVID-19 on its hotel operations, the Debtors acknowledge that they have struggled to grow into their balance sheet since the 2015 issuance of the Existing Notes: "Since the issuance of the Existing Notes, the Debtors’ revenues have not grown to a level necessary to support the Debtors’ existing capital structure. The Debtors have struggled financially due to a number of factors, including the COVID-19 pandemic and macroeconomic conditions, which have resulted in decreased consumer confidence in the markets in which the Debtors operate. As a result of these factors, revenue is substantially lower than expected at the time of the issuance of the Existing Notes. The Debtors do not have the capacity to execute on their business strategy or continue paying their debt without the implementation and consummation of the Plan."

Plan Summary

The Seguro Declaration (defined below) states, "The RSA and the Plan contemplate a prompt emergence from bankruptcy with the following key terms:

1. Existing Notes Claims. As of the Plan Effective Date, the Existing Notes Claims shall be Allowed in (i) an aggregate principal amount of $392,605,000 plus (ii) the aggregate amount of any accrued and unpaid interest on the respective series of notes through the Petition Date. Each Holder of an Allowed Existing Notes Claim shall, subject to Section 6.4 of the Plan, be entitled to receive, for (i) each $1,000 in principal amount and (ii) the discharge in full of all accrued and unpaid interest prior to the Petition Date in respect of such Holder’s Allowed Existing Notes Claim: New Notes in the aggregate principal amount equal to (a) $1,000 plus (b) an amount (the 'Additional Initial Principal Amount') equal to the sum of (x) four percent (4%) of a $1,000 principal amount (computed on the basis of daily compounding) multiplied by (y) a fraction equal to (A) the number of days that has elapsed from (and including) August 1, 2021 to (and including) the Plan Effective Date divided by (B) three hundred and sixty (360) days; provided that, if the Plan Effective Date shall occur on or after January 1, 2022, then (1) the amount calculated above for the period from August 1, 2021 to December 31, 2021 shall be paid in the form of Additional Initial Principal Amount to each Holder of an Allowed Existing Notes Claim on the Plan Effective Date and (2) the amount calculated above for the period from January 1, 2022 through the Plan Effective Date shall be paid in Cash on the Plan Effective Date.
2. Other Recoveries Under the Plan. Holders of Allowed Administrative Claims, Allowed Professional Claims, Allowed Priority Tax Claims, Allowed Secured Claims, Allowed Other Priority Claims, Allowed General Unsecured Claims will be paid in full in Cash, or receive other treatment, as provided under the Plan, that renders such Allowed Claim Unimpaired.
3. Holders of Allowed Intercompany Claims shall have their claims Reinstated.
4. Executory contracts and unexpired leases will be assumed by the Reorganized Debtors unless listed on the Rejection Schedule, if any, or rejected pursuant to an order of the Bankruptcy Court.
5. Interests. Holders of Allowed Interests shall have their Interests Reinstated.

The Disclosure Statement adds: "…after extensive, good faith negotiations with certain of the holders of the Existing Notes, the Plan embodies a settlement among the Debtors and their key creditor constituencies on a consensual transaction that will restructure the Debtors’ note obligations and position the Debtors for continued operations (the ‘Restructuring’). To evidence their support of the Debtors’ restructuring plan, an ad hoc group of Noteholders (the ‘Ad Hoc Group’) has executed the Restructuring Support Agreement, dated as of August 17, 2021 (the ‘RSA’) and an additional group of holders (the ‘Additional Noteholders’) have expressed their support for the Restructuring by executing the Letter Agreement, dated as of August 17, 2021 (the ‘RLA’), which together with noteholders who have executed joinders to the RSA (the ‘Joining Noteholders’ and, together with the Ad Hoc Group and the Additional Noteholders, the ‘Supporting Noteholders’) represent approximately 64.73% of the aggregate outstanding principal amount of the Existing Notes. The RSA and the RLA provide for the implementation of the restructuring through an expedited chapter 11 process and commit the Supporting Noteholders and the Debtors to support the Restructuring subject to the terms and conditions of the RSA and the RLA.

After giving effect to the following transactions contemplated by the RSA and the Plan, the Debtors will emerge from chapter 11 appropriately capitalized to support their emergence and going-forward business needs.

• On the Plan Effective Date, the Reorganized Debtors shall issue: (i) senior secured notes (the ‘New Notes’), which shall have the terms indicated in the RSA and as summarized in part in Section VII.A(i). On the Plan Effective Date, the New Notes will be distributed to the holders of Existing Notes Claims in accordance with the Plan.

On the Plan Effective Date:

• Except as otherwise expressly provided in the Plan, each holder of an Allowed Administrative Claim shall receive payment in full in cash.
• Each holder of an Allowed Priority Tax Claim shall receive treatment in a manner consistent with section 1129(a)(9)(C) of the Bankruptcy Code.
• Each holder of an Allowed Secured Claim shall receive, at the Debtors’ option: (a) payment in full in cash; (b) the collateral securing its Allowed Secured Claim; (c) Reinstatement of its Allowed Secured Claim; or (d) such other treatment rendering its Allowed Secured Claim Unimpaired in accordance with section 1124 of the Bankruptcy Code.
• Each holder of an Allowed Other Priority Claim shall receive treatment in a manner consistent with section 1129(a)(9) of the Bankruptcy Code.
• The Existing Notes Claims shall be Allowed in a total aggregate principal amount of $392,605,000 plus any accrued and unpaid interest on the respective series of notes through the Petition Date. On the Plan Effective Date (or as soon as practicable thereafter), each holder of an Allowed Existing Notes Claim shall, subject to Section 6.4 of the Plan, be entitled to receive, for (i) each $1,000 in principal amount and (ii) the discharge in full of all accrued and unpaid interest prior to the Petition Date in respect of such Holder’s Allowed Existing Notes Claim: New Notes in the aggregate principal amount equal to (a) $1,000 plus (b) an amount (the ‘Additional Initial Principal Amount’) equal to the sum of (x) four percent (4%) of a $1,000 principal amount (computed on the basis of daily compounding) multiplied by (y) a fraction equal to (A) the number of days that has elapsed from (and including) August 1, 2021 to (and including) the Plan Effective Date divided by (B) three hundred and sixty (360) days; provided that, if the Plan Effective Date shall occur on or after January 1, 2022, then (1) the amount calculated above for the period from August 1, 2021 to December 31, 2021 shall be paid in the form of Additional Initial Principal Amount to each Holder of an Allowed Existing Notes Claim on the Plan Effective Date and (2) the amount calculated above for the period from January 1, 2022 through the Plan Effective Date shall be paid in Cash on the Plan Effective Date.
• Each holder of an Allowed General Unsecured Claim shall be, at the option of the applicable Debtor or Reorganized Debtor, (a) Reinstated or (b) paid in full in cash.
• Each holder of an Allowed Intercompany Claim shall have its Claim Reinstated.
• Each holder of an Interest shall have such Interest Reinstated.”

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):

• Class 1 (“Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 3 (“Existing Notes Claims”) is impaired and entitled to vote on the Plan. As of the Plan Effective Date, the Existing Notes Claims will be Allowed in (i) an aggregate principal amount of $392,605,000 plus (ii) the aggregate amount of any accrued and unpaid interest on the respective series of notes through the Petition Date. Expected recovery if 87.7%. Each Holder will be entitled to receive, for (i) each $1,000 in principal amount and (ii) the discharge in full of all accrued and unpaid interest prior to the Petition Date in respect of such Holder’s Existing Notes Claim: New Notes in the aggregate principal amount equal to (a) $1,000 plus (b) an amount equal to the sum of (x) four percent (4%) of a $1,000 principal amount (computed on the basis of daily compounding) multiplied by (y) a fraction equal to (A) the number of days that has elapsed from (and including) August 1, 2021 to (and including) the Plan Effective Date divided by (B) three hundred and sixty (360) days; provided that, if the Plan Effective Date shall occur on or after January 1, 2022, then (1) the amount calculated above for the period from August 1, 2021 to December 31, 2021 will be paid in the form of Additional Initial Principal Amount to each Holder of an Allowed Existing Notes Claim on the Plan Effective Date and (2) the amount calculated above for the period from January 1, 2022 through the Plan Effective Date will be paid in Cash on the Plan Effective Date. 
• Class 4 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Each Holder will be, at the option of the applicable Debtor or Reorganized Debtor, (a) Reinstated or (b) paid in full in cash. 
• Class 5 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 6 (“Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.

Voting Results

On October 26, 2021, the Debtors' claims agent notified the Court of the voting results as follows [Docket No. 9]:

• Class 3 (“Existing Notes Claims”): 120 claims holders, representing $199,939,000.00 (or 100%) in amount and 100% in number, accepted the Plan.

Key Documents

The Disclosure Statement [Docket No. 3] attaches the following:

• Exhibit A: Debtors’ Joint Prepackaged Chapter 11 Plan
• Exhibit B: Restructuring Support Agreement
• Exhibit C: Restructuring Letter Agreement
• Exhibit D: Financial Projections
• Exhibit E: Liquidation Analysis
• Exhibit F: Organizational Chart

The Debtors November 23rd Plan Supplement [Docket No. 92] attaches the following:

• Exhibit A: Directors and Officers of the Reorganized Debtors
• Exhibit B: Form of New Notes Indenture
• Exhibit C: Rejection Schedule
• Exhibit D: Identification of Any Disbursing Agent Other Than the Reorganized Debtors
• Exhibit E: Form of Proposed Amendment to the Bylaws of Grupo Posadas S.A.B. de C.V.
• Exhibit F: Form of Proposed Amendment to the Bylaws of Operadora del Golfo de Mexico, S.A. de C.V.2 

Prepetition Indebtedness

1. 7.875% Senior Notes due 2022 or Existing Notes On June 30, 2015, Posadas issued $350,000,000 aggregate principal amount of its 7.875% Senior Notes due 2022 (the “Existing Notes”) pursuant to an indenture among Posadas, as issuer, the guarantors party thereto, The Bank of New York Mellon, as Trustee, Registrar, Paying Agent and New York Transfer Agent, and The Bank of New York Mellon (Luxembourg) S.A., as Luxembourg Listing Agent, Luxembourg Paying Agent and Luxembourg Transfer Agent (as amended and supplemented and in effect from time to time, the “Existing Notes Indenture”). On May 16, 2016, Posadas completed an additional issuance of Existing Notes in the aggregate principal amount of $50,000,000. As of December 31, 2020, the aggregate outstanding principal amount of the Existing Notes was $392,605,000, which does not include unliquidated amounts including interest, fees, expenses, charges and other obligations, if applicable.
2. Bank Loans, Facilities and Other Programs In addition to the Existing Notes described above, Posadas has entered into various loans with banks or other financial institutions, which are mainly for working capital purposes and are typically secured by liens on real estate. As of September 30, 2021, the Debtors had approximately $13 million outstanding in bank loans and loans with other financial institutions.
3. Equity Posadas has a single class of common stock consisting of 512,737,588 fully subscribed and paid shares. As of the Petition Date, 495,881,988 shares of common stock were outstanding, of which Posadas held 16,855,600 shares. As of December 31, 2020, the total stockholders’ equity of Posadas was $45,600,000, composed of $24,900,000 in total capital issued and $24,300,000 in total retained earnings and other items.

Petition Date Perspective

In a press release announcing the filing, Grupo Posadas advised that: “ that it has advanced its previously announced debt restructuring by obtaining additional support from holders of its 7.875% senior notes due 2022 (the 'Existing Notes'). This consensual financial solution will reduce the Company's debt service obligations and extend the schedule on which its debt matures by 5.5 years, to December 30, 2027, allowing Grupo Posadas to prioritize the use of cash for operating activities to preserve jobs and help maintain the high quality for which its hotels are known.

To implement the financial solution in the most expedited manner, Grupo Posadas and one of its subsidiaries commenced 'prepackaged' in-court restructuring proceedings in the U.S. by filing voluntary Chapter 11 petitions in the U.S. Bankruptcy Court for the Southern District of New York. Given that the Company has already obtained the necessary support from noteholders, with 100% of those voting having voted to approve the Company's Plan of Reorganization (the 'Plan'), it is expected that the process will be completed within approximately 60 days.

Jose Carlos Azcarraga, the Debtors' chief executive officer, commented further, "Today marks the culminating step toward achieving a sustainable capital structure for Grupo Posadas. This comprehensive debt restructuring, which we announced two months ago as part of our ongoing efforts to maximize our financial flexibility and best manage the COVID-19-related challenges affecting the entire hospitality industry globally, will enable us to emerge from the pandemic as a financially stronger enterprise. Appropriately capitalized to meet our go-forward business needs and open exciting new properties as tourism further rebounds, Grupo Posadas will be well-positioned to continue operating with the highest standards and remain the country's leading hotel operator. We are grateful to have the support of our valued stakeholders as we take this final pivotal step to strengthen our finances. The significant revenue growth we experienced in the third quarter is further proof that Grupo Posadas is poised for long-term success as government restrictions on occupancy continue to ease in many regions in Mexico."

The press release continues, "Subject to Court approval, the Plan provides for the exchange of the Existing Notes for new senior notes secured by liens on real estate and certain accounts receivable of the Company. All other undisputed claims, including those of suppliers for goods and services provided before as well as during the Chapter 11 process, are unimpaired and will be paid in full in the ordinary course or otherwise satisfied. Common shares of Grupo Posadas are expected to continue to trade in the normal course."

Goals of the Chapter 11 Filings

According to the Segura Declaration (defined below), "The Debtors have commenced the Chapter 11 Cases to restructure a balance sheet burdened by approximately $405,605,000 on account of the obligations under the Existing Notes and the bank loans, facilities and other programs described in Section II. A restructuring of the Debtors’ balance sheet is necessary in order for the Debtors to be able to meet their financial obligations over the long-term… [T]he Debtors have filed these prepackaged Chapter 11 Cases to effectuate the proposed restructuring on an expedited basis and to allow the Debtors to emerge with a sustainable capital structure and as a competitive business. In light of these circumstances, confirmation of the Plan is in the best interests of the Debtors’ estates and stakeholders."

Restructuring Support Agreement (RSA and Subsequently executed RLA are attached to the Disclosure Statement)

The Segura Declaration further explains, "As a result of the Debtors’ financial difficulties, and after having considered various alternatives, the Company engaged in extensive negotiations with certain holders of the Existing Notes who hold $131,258,000 in principal amount, or approximately 33.4%, of the outstanding Existing Notes (such holders, the 'Ad Hoc Group') to garner support for a restructuring transaction that would refinance the Existing Notes.

On August 17, 2021, following months of intensive, arms-length negotiations, the Debtors entered into a restructuring support agreement (the 'RSA') with the Ad Hoc Group, under which the Ad Hoc Group agreed to support the restructuring transactions subject to the terms and conditions of the RSA. Subsequently, and prior to the Petition Date, additional holders of $54,366,000 in principal amount, or approximately 13.8%, of the outstanding Existing Notes executed joinder agreements to the RSA (such holders, the 'Joining Consenting Noteholders' and, together with the Ad Hoc Group, the 'Consenting Noteholders').

In addition, on August 17, 2021, the Debtors executed a Letter Agreement (the 'RLA') with an additional group of holders of Existing Notes (the 'Additional Noteholders') pursuant to which the Additional Noteholders expressed their support for the restructuring transactions. Together, the Consenting Noteholders and the Additional Noteholders hold approximately 66.66% of the outstanding Existing Notes… The New Notes will be guaranteed on a joint and several basis by all current subsidiaries of Posadas set forth on Exhibit F to the Disclosure Statement, other than Fundación Posadas, A.C. and Inmobiliaria del Sudeste S.A. de C.V. (FA Mérida), and the terms of the New Notes will provide for certain Subsequent Guarantors (as defined in Exhibit B to the RSA) to guarantee the New Notes on a joint and several basis.

The RSA also requires the Debtors to meet certain case milestones, including:

• no later than fifteen (15) business days after the Petition Date, the Debtors shall have filed (A) the Plan Solicitation Materials, (B) the RSA Assumption Motion and (C) the Solicitation Motion (each as defined in the RSA);
• no later than twenty (20) business days after the Petition Date, the Debtors shall have obtained entry of an order approving the RSA Assumption Motion;
• no later than sixty (60) days after the Petition Date, the Debtors shall have obtained entry of the Confirmation Order, which shall have become a Final Order within fifteen (15) days after entry thereof; provided that the Debtors may extend the deadline for obtaining a Confirmation Order by an additional sixty (60) days if the Debtors believe in good faith that they can achieve the confirmation of the Plan within such time period; and
• no later than seventy-five (75) days after the Petition Date, the Plan Effective Date shall have occurred; provided that if the Debtors have extended the deadline for the entry of the Confirmation Order to one hundred twenty (120) days, then this deadline shall be extended to one hundred and thirty-five (135) days."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Segura Declaration”), Francisco Javier Barrera Segura, the Debtors’ Vice President of Strategy, Alliances and Human Resources, detailed the events leading to Grupo Posadas' Chapter 11 filing. The Segura Declaration provides: "Since the issuance of the Existing Notes, the Debtors’ revenues have not grown to a level necessary to support the Debtors’ existing capital structure. The Debtors have struggled financially due to a number of factors, including the COVID-19 pandemic and macroeconomic conditions, which have resulted in decreased consumer confidence in the markets in which the Debtors operate. As a result of these factors, revenue is substantially lower than expected at the time of the issuance of the Existing Notes. The Debtors do not have the capacity to execute on their business strategy or continue paying their debt without the implementation and consummation of the Plan.

Impact of COVID-19 on Operations

The effects of the global COVID-19 pandemic have had a significant impact on the Company’s operations and results and is predicted to continue to have negative impacts on the Company and the hotel industry in general for the foreseeable future. In 2020, government-mandated lockdowns forced the Company to close its hotels and, following such lockdowns, hotels were required to operate with reduced capacity or amenities. These limitations increased the Company’s operating costs and threatened its ability to develop consumer confidence. Moreover, all of the Company’s brand licensing and hotel franchising agreements contain variable fee structures tied to revenue and gross operating profit, which has resulted in a decrease in fees payable to the Company during the pandemic.

While the Company is continuing to assess its effects, COVID-19 has put a significant strain on the Company’s liquidity. The Company suspended almost all of its operations from March to June 2020. Subsequently, in accordance with the applicable law, all of the Company’s hotels have been operating at a limited capacity. To date, no Mexican state has allowed the hotels and their different consumption centers to operate at one hundred percent capacity.

Year-end revenues for 2020 were 42% less compared to 2019 and the Company reported negative EBITDA of $47 million. The consolidated result for 2020 was a loss of $106.2 million and, as of June 30, 2021, the Company had a cash balance of $46.7 million, of which $5.7 million was restricted cash.

Investment and Divestment Strategy and Related Asset Sales

In an effort to improve its liquidity, the Company has sold various less efficient or unproductive assets. On January 31, 2020, the Company received $5.8 million from the sale of the Fiesta Americana Hermosillo hotel. On February 24, 2020, the Company completed the sale of land in Nuevo Vallarta, Nayarit for $12.8 million. In March 2021, the Company executed the sale agreement of the Fiesta Americana Hacienda Galindo hotel, receiving $7.6 million in proceeds.

In October 2021, the Company closed a transaction evidenced by a purchase agreement for the sale of its 12.5% ownership in a trust controlling the construction and development of two hotels in the Mayan Riviera (together, 'Tulkal'), receiving $57.7 million in proceeds. The Company used the proceeds of the Tulkal sale to pay down the 2021 Liquidity Facility. In addition, the Company has used or intends to use such proceeds to make settlement payments to the SAT in respect of taxes due in years 2006 and 2017 and/or to make prepayments for taxes coming due in the future.

Termination of Leasing and Operating Contracts

In an effort to maximize liquidity and financial flexibility and allow the Company to focus its operations on properties that will generate stronger short-term value, in the years leading up to the Petition Date, the Company instituted a strategy to focus on its strengths in brand recognition and hotel management and divest from real estate developments. The Company has also terminated several of its leases and management contracts that were burdensome given the financial strain imposed on the Company during the pandemic.

In 2020, seven (7) hotels under the Company’s brands ceased operating. An additional four (4) hotels have ceased operations in 2021… In May 2020, the Company terminated management contracts with two (2) hotels in Cuba operated under their own brand, which are still in the process of being handed over to subsequent ownership due to pandemic-related restrictions… In August 2021, the Company terminated its lease of the Grand Fiesta Americana resort located in Puerto Vallarta and terminated the operating contract for a project under development in the Riviera Maya. As a part of the termination of the Riviera Maya operating contract, the Company sold its ownership in the corporation that will operate the hotel property and expects to assign its rights in a trust that exists to develop the project.

The Debtors’ Debt Service Obligations

The Debtors’ current debt service obligations place significant strain on the Debtors’ available cash flows. As of the date hereof, the Debtors have approximately $400.6 million in total debt outstanding, of which approximately $392.6 million will become due between the Petition Date and December 31, 2022. At the same time, the Debtors are facing approximately $83 million in scheduled interest payments over the same period, putting severe pressure on the Debtors’ ability to generate sufficient cash to service such debt obligations….

On June 30 and December 30, 2020 and on June 30, 2021, the Company defaulted on its obligation to remit semi-annual interest payments due under the Existing Notes. As of the Petition Date, the holders of the Existing Notes have not called a default, accelerated the Existing Notes obligations or enforced any other remedies against the Debtors. Absent the refinancing of the Existing Notes contemplated by the Plan, the Debtors will not be able to continue to service their debt or conduct their business in the ordinary course."

Significant Shareholders

• BLK Acciones México DISCII, S.A. de C.V.:12.83% 
• JPMorgan Chase Bank N.A.: 11.89%.

Liquidation Analysis (for notes, see Exhibit E attached to Docket No. 3)

About the Debtors

According to the Debtors: “Posadas is the leading hotel operator in Mexico and owns, leases, franchises and manages 185 hotels and 28,690 rooms in the most important and visited urban and coastal destinations in Mexico. Urban hotels represent 87% of total rooms and coastal hotels represent 13%. Posadas operates the following brands: Live Aqua Beach Resort, Live Aqua Urban Resort, Live Aqua Boutique Resort, Grand Fiesta Americana, Curamoria Collection, Fiesta Americana, The Explorean, Fiesta Americana Vacation Villas, Live Aqua Residence Club, Fiesta Inn, Fiesta Inn LOFT, Fiesta Inn Express, Gamma, IOH Hotels, and One Hotels. Posadas has traded on the Mexican Stock Exchange since 1992."

Corporate Structure Chart

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