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Strike, LLC – Creditors’ Committee Objects to Proposed DIP Facility, Cites “Gamesmanship” and Undue Influence of Multi-Hatted DIP Lender American Industrial Partners, Ltd.; Takes Particular Offence with Outsized Roll-Up of AIP’s Prepetition Debt

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December 29, 2021 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) has objected to the Debtors’ proposed debtor-in-possession ("DIP") financing facility, arguing that the Debtors, at the behest of the "many-hatted" DIP lender (American Industrial Partners, Ltd. or "AIP," also a prepetition lender and the Debtors' stalking horse ), are requesting financing arrangements that are part of AIP's "overall scheme to acquire these assets as quickly and cheaply as possible (and with as little competitive pressure as possible)" Docket No. 306].

On December 21st, the Committee filed a related objection to the Debtors' bidding procedure motion [Docket No. 248], arguing that as proposed the Debtors' bidding procedures "would result in an extraordinarily expedited sale process largely dictated by the milestones imposed on the Debtors by their DIP Facility lender and Stalking Horse Bidder, AIP."

As was the case with the bidding procedures objection, the Committee makes it clear that the Debtors' financing proposals are fatally and holistically compromised by AIP's "extensive case controls and tight milestones in furtherance of its credit bid and stated desire to own the Debtors’ assets." Notwithstanding its blanket objection to the DIP financing, however, the Committee does find one particular element particularly egregious: The Debtors' proposed $86.6mn roll-up of the "Prepetition Senior Loan Facility" in respect of which AIP is the lender. This roll-up, the Committee argues, is disproportionate to the new money element of the DIP financing ($26.0mn) with that unseemly ratio/multiple made worse by the fact that the Debtors' own proposed budget (see below) indicates that they will not need all of that new money before the Debtors are otherwise sold to AIP. The promotion of $86.6mn of prepetition senior debt to DIP debt, the Committee argues, comes without any benefit to the Debtors' estates while otherwise assuring that AIP would be paid, in cash, the entirety of that amount "before any distribution could be made to unsecured creditors."

The present DIP objection notes, “By the DIP Motion, the Debtors seek approval of a $112.6 million senior secured superpriority priming debtor in possession credit facility (the ‘DIP Facility’) consisting of (i) a new money multiple-draw term loan facility in an aggregate principal amount of up to $26 million comprised of $22 million in Tranche A DIP Loans and $4 million in Tranche B DIP Loans (together, the ‘New Money DIP Loans’) from American Industrial Partners, Ltd and/or certain of its affiliates (collectively, ‘AIP’) and (ii) a roll-up of the Prepetition Senior Loan Facility held by AIP in the amount of $86.6 million to refinance in its entirety AIP’s prepetition Senior Loan Secured Obligations (the ‘Roll-Up’ and, such rolled-up obligations, the ‘Roll-Up DIP Loans’). The New Money DIP Loans are intended to provide the Debtors with liquidity to fund the costs of these cases, including the sale process pursuant to which AIP has submitted a stalking horse bid in an amount equal to the amount of the New Money DIP Loans actually drawn plus AIP’s Senior Loan Secured Obligations to acquire substantially all of the Debtors’ assets. No legitimate or rational business justification has been provided, however, for the Roll-Up or for the other overreaching proposed terms of the DIP Facility which are structured in a manner to further entrench AIP’s position in these cases and limit the Committee’s ability to acquit its fiduciary duties.

As previewed at the Bidding Procedures Hearing (as defined below), the Committee understands the value inherent in a going concern sale and is eager to work with all parties to ensure that the sale process currently underway results in a value maximizing transaction whether with AIP or another party. AIP has established itself as a formidable party in these cases, and has imposed extensive case controls and tight milestones in furtherance of its credit bid and stated desire to own the Debtors’ assets. Indeed, the mechanism through which AIP intends to acquire substantially all of the Debtors’ assets is through a Bankruptcy Code 363 process, in connection with which AIP undoubtedly will seek a good faith purchaser finding and a full release, in addition to a designation that the assets are to be sold free and clear. However, AIP must pay to play for the benefits it seeks from these cases, and its restrictive hold on the Debtors should not come at the expense of unsecured creditors or the Committee appointed to represent their interests. Accordingly, and by this Objection, the Committee objects to those provisions of the DIP Facility and proposed Final DIP Order that, among other things, inappropriately and impermissibly elevate AIP’s prepetition claims, provide credit bid consideration to AIP that should be available for distribution to unsecured creditors and seek to restrict the exercise of the Committee’s fiduciary duties in these cases.

AIP wears many hats in these cases, and the provisions of the proposed Final DIP Order reflect both AIP’s favorable negotiating leverage as the Debtors’ sole DIP Lender, primary prepetition secured lender and stalking horse bidder and its overall scheme to acquire these assets as quickly and cheaply as possible (and with as little competitive pressure as possible). The proposed Final DIP Order will, if approved in its current form, authorize both the New Money DIP Loans in the amount of approximately $26 million (in addition to those fees and expenses approved at the interim hearing on the DIP Motion) and the roll up of the Prepetition Senior Loan Facility in the amount of $86.6 million. These two claims form the foundation of AIP’s credit bid, which AIP purports to supplement with yet-to-be-designated assumed liabilities and amounts necessary to fund a liquidating plan in the form of the Wind Down Budget. Yet here too AIP’s approach to the bidding process is both strategic and disingenuous, insofar as the Debtors appear not to need the full extent of the New Money DIP Loans based on current projections. Under the proposed DIP Facility and credit bid structure, however, the fact that the Debtors are currently beating their budget does not actually create any incremental value for these estates; it simply means that AIP will need to fund less than it otherwise committed to fund in connection with the Wind Down Budget, which operates to reduce the actual headline amount of AIP’s stalking horse bid. Moreover, the relevant documents (including the Final DIP Order) currently contemplate that, in the event of any excess funds in the Wind Down Budget, such amounts will similarly not inure to the benefit of the Debtors’ estates and will be swept back to AIP. This inequitable result gives AIP the credit bid currency associated with an increased DIP Claim amount while creating the potential for AIP to either (i) recoup some portion of that claim amount through the return of excess funds under the Wind Down Budget, or (ii) reduce the value of its overall credit bid by reducing the size of the Wind Down Budget that AIP has purportedly committed to provide. While certain of these issues may be issues for another day (i.e., the hearing to consider a potential Sale Transaction), the Committee believes that it is important for the Court to understand the extent of the gamesmanship that AIP is seeking to employ to facilitate its rapid acquisition of these assets.

Relatedly, cause has not been shown as to why this DIP Lender is entitled to a roll up of the Senior Secured Loan Obligations, nor have the Debtors identified any benefit that would be obtained for the estates if the Roll-Up were to be approved. Indeed, the New Money DIP Loans and the Prepetition Senior Loans accrue interest at the same rate, and thus it cannot be said that the Roll-Up saves the estates any incremental interest expense. On the other hand, approval of the Roll-Up would, among other things, unnecessarily impede the Debtors’ ability to change the course of these cases and pursue funding for a plan of reorganization given that the Prepetition Senior Loans, if rolled up into DIP Loans, would need to be satisfied in full, in cash, before any distribution could be made to unsecured creditors. The approval of a roll-up facility, particularly one in which the amount sought to be rolled up is a multiple of the proposed new money to be contributed, is an extraordinary remedy that should not be approved without adequate justification. No justification, adequate or otherwise, has been proposed here and the Roll-Up should therefore be denied.

AIP’s efforts to move these cases to a swift conclusion with minimal disruption (and minimal spend) are perhaps most clearly demonstrated by the restrictions imposed in the proposed Final DIP Order on the actions of the Committee. As currently proposed, the Final DIP Order would tie the hands of the one entity in these cases best positioned to serve as a counterbalance to the sole party currently serving as the Debtors’ DIP Lender, Prepetition ABL Facility lender, Bridge Loan Lender, Junior Lender and stalking horse purchaser—the Committee. Most egregiously, the Carve Out currently includes all allowed fees and expenses of the Debtors’ advisors (projected at $11.2 million in the Approved Budget), but purports to cap the fees of the Committee’s advisors to the amount contemplated for such advisors in the Approved Budget— currently $450,000 in the aggregate (or just 4.02% of the Debtors’ advisors’ projected fees and expenses). The Committee does not believe that the Debtors and the DIP Lender should be permitted to discriminate between estate-retained fiduciaries in a carve out, nor does the Committee believe that its advisors should be subjected to a cap in any event, particularly given that no such cap has been proposed for the Debtors’ advisors or for AIP’s advisors. Moreover, the Final DIP Order provides the Committee with inadequate funding to conduct the expedited investigation into potential Challenges (as defined in the Interim DIP Order) with which it has been tasked. Again, AIP cannot avail itself of the benefits of an extraordinarily compressed chapter 11 sale process without shouldering its ratable share of the burdens imposed by the statutory framework of the Bankruptcy Code (i.e., the fees and expenses of a statutory committee).

[t]here are a number of infirmities in the proposed Final DIP Order that must be remedied before the DIP Facility can be approved on a final basis. These infirmities include, among other things, the following:

  1. Prior to the Closing of a Sale, the Carve Out Reserves Must Be Funded: In order to enforce the subordination of the DIP Liens and DIP Adequate Protection Claims to the Carve Out, the Final DIP Order must provide that, prior to the closing of a sale, the Carve Out Reserves shall be funded.
  2. The Definition of ‘Diminution in Value’ Is Overly Broad and Must Be Modified: The Prepetition First Lien Secured Parties are entitled to adequate protection from the diminution in value of their interests in the Prepetition Collateral securing the Senior Loan Secured Obligations. The definition of Diminution in Value contained in the proposed Final DIP Order, however, expands what is permitted by the Bankruptcy Code and must be scaled back to what the Bankruptcy Code allows.
  3. Payment of Fees and Expenses of the Junior Loan Agent is Inappropriate: Given that the Junior Loan appears to be entirely unsecured, any provision purporting to provide for payment of the Junior Loan Agent’s fees is inappropriate. The Final DIP Order should not include any payment of the Junior Loan Agent’s fees or expenses.

[t]he Committee respectfully requests that the Court condition final approval of the DIP Motion and entry of the proposed Final DIP Order on the Debtors and AIP addressing the objections raised herein and reflected in the Committee’s mark-up of the proposed Final DIP Order attached hereto as Exhibit A (the ‘Committee Mark-Up’)”

Background

Key Terms of the DIP Facility:

  • Borrower: Strike, LLC, Delta Directional Drilling, LLC and Strike Global Holdings, LLC
  • Guarantors: Strike Holdco, LLC and each of its subsidiaries (the “Subsidiary Guarantors”)
  • DIP Lenders: As of any time of determination, each Person that has a Commitment and/or holds any Loan at such time (including any Person that has become a Lender pursuant to an Assignment and Acceptance) (the foregoing Persons, collectively, the “Lenders”). As of the Closing Date, the Lenders shall be the Persons whose name are set forth on Schedule 1.1 of the DIP Loan Agreement under the heading “Lenders.”
  • DIP Agent: Lightship Capital II LLC (an AIP affiliate)
  • Amount and Facility: A senior secured superpriority debtor-in-possession term loan facility comprised of:
  1. a new money multiple-draw term loan facility in an aggregate principal amount of up to $26 million (the “DIP Term Facility,” and the term loans made or advanced thereunder, the “DIP Term Loans”), comprised of $22 million in tranche A DIP Loans (the “Tranche A DIP Loans”), and $4 million in tranche B DIP Loans, pursuant to which (1) an aggregate principal amount of up to $8 million of Tranche A DIP Loans (the “Interim Borrowings”), may be borrowed in one or more borrowings, during the period from and after the Closing Date (as defined in the DIP Loan Agreement) through the date of entry of the Final Order, and (2) the remaining aggregate principal amount available under the DIP Facility (and together with the Interim Borrowings, the “Borrowings”) may be borrowed, in one or more borrowings, following entry of the Final Order; and
  2. subject to entry of the Final Order, a roll-up facility (the “DIP Roll-Up Facility,” and the loans deemed to be made or advanced thereunder, the “DIP Roll-Up Loans;” the DIP Term Loans and, subject to the entry of a Final Order, the DIP Roll-Up Loans, collectively, the “DIP Loans;” and the DIP Term Facility and, subject to the entry of a Final Order, the DIP Roll-Up Facility, collectively, the “DIP Facility”), pursuant to which all amounts outstanding under the Senior Loan Facility as of the entry of the Final Order shall automatically be deemed “rolled up” into the DIP Facility, on a cashless dollar for dollar basis, and shall automatically be deemed DIP Loans.
  • Funding Use of Proceeds: All proceeds of the DIP Loans and all Cash Collateral shall be used and/or applied solely for the purposes permitted in the Approved Budget, including, without limitation:
  1. to pay the costs of administration of the Chapter 11 Cases;
  2. for general corporate and working capital purposes;
  3. to pay adequate protection payments to the extent set forth in the Interim Order; and
  4. to pay professional fees and expenses and fund the Carve Out in accordance with the Interim Order
  • Interest Rate: (i) For Base Rate Loans, the Base Rate in effect plus 10%, payable in-kind and (ii) For LIBOR Loans, LIBOR for the applicable Interest Period plus 10%, payable in-kind
  • Default Interest: Interest Rate applicable plus 2% to accrue automatically upon any Event of Default, payable in cash
  • Fees:
    • New Money Loan Commitment Payment: 7.50% of the New Money Loan Cap ($26.0mn), which amount shall be deemed earned in full and payable in-kind upon the Closing Date.
    • Termination Payment: Dollar amount equal to (a) in the case of any Termination Payment Triggering Event described in clause (a) of the definition thereof, 3.00% of the aggregate principal amount of the New Money Loans being prepaid, repaid, paid or redeemed (as applicable) at such time, and (b) in the case of any other Termination Payment Triggering Event, 3.00% of the aggregate principal amount of then-outstanding New Money Loans. For the avoidance of doubt, there shall be no Termination Payment due and payable in respect of the Roll-Up Loans.
  • New Money: $26.0mn
  • Roll-Up: With a final DIP order, all outstandings under the Debtors' prepetition Senior Loan Facility
  • Milestones:
    • The sale procedure shall be entered; on or before the date that is twenty-one (21) calendar days following the Petition Date
    • The Final DIP Order shall be entered; on or before the date that is thirty-five (35) calendar days following the Petition Date
    • The deadline for the submission of final qualified bids in connection with the Sale Process shall have occurred; on or before the date that is forty (40) calendar days following the Petition
    • The Sale Auction (if required in accordance with the Sale Procedures) shall have occurred; on or before the date that is forty-two (42) calendar days following the Petition Date
    • The Sale Approval Order shall have been entered by the Bankruptcy Court; on or before the date that is forty-five (45) calendar days following the Petition Date
    • The Sale Transaction shall have been consummated, on or before the date that is sixty (60) calendar days following the Petition Date

Prepetition Indebtedness

The Debtors’ prepetition capital structure consists of (i) a revolving asset-backed loan facility (the “Prepetition ABL Facility”), which was subsequently amended to provide incremental delayed draw term loans provided by the AIP Parties (the “Prepetition Bridge Facility,” and together with the Prepetition ABL Facility, the “Prepetition Senior Loan Facility”) governed by the Prepetition Senior Loan Agreement (as defined below), (ii) a term loan facility (the “Prepetition Junior Loan Facility”) governed by the Prepetition Junior Loan Agreement (as defined below), and (iii) certain capital lease obligations. In addition, the Company has one cash-collateralized undrawn letter of credit in an aggregate face amount of $2,000,000 (the “Prepetition LC”).

As of the Petition Date, the aggregate amount of revolving loans outstanding under the Prepetition ABL Facility was approximately $51,000,000 and the aggregate principal amount of Bridge Loans outstanding under the Prepetition Bridge Facility was approximately $30,000,000. As of the Petition Date, the aggregate principal amount of term loans outstanding under the Prepetition Term Loan Agreement was approximately $215,000,000.

Interim DIP Budget

About the Debtors

According to the Debtors: “Strike is a full-service pipeline facilities, and energy infrastructure solutions provider. Headquartered in The Woodlands, Texas, Strike partners closely with clients all across North America, safely and successfully delivering a full range of integrated engineering, construction, maintenance, integrity and specialty services that span the entire oil and gas life cycle. For more information, visit www.strikeusa.com."

The Debtors are a portfolio company of private equity house OEP Capital Advisors which saw a 2019 effort to sell their stake to Sentinel Energy Services Inc. aborted in November 2019 when market conditions led to Sentinel withdrawing from that transaction (see our filing date coverage for more).

About American Industrial Partners

According to AIP: "AIP is an operationally-oriented middle-market private equity firm that makes control investments in industrial businesses serving domestic and global markets. The Firm has deep roots in the industrial economy and has been active in private equity investing since 1989. AIP invests in all forms of corporate divestitures, management buyouts, recapitalizations, and going-private transactions of established businesses with revenues of $300 million to $1 billion+."

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The post Strike, LLC – Creditors’ Committee Objects to Proposed DIP Facility, Cites “Gamesmanship” and Undue Influence of Multi-Hatted DIP Lender American Industrial Partners, Ltd.; Takes Particular Offence with Outsized Roll-Up of AIP’s Prepetition Debt appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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