May 9, 2022 – The Debtors requested Court authority to (i) access $5.0mn of new money, debtor-in-possession (“DIP”) financing to be provided by prepetition lender APE V Cypress, LLC (the “Lender,” an affiliate of PE house Argonaut Private Equity or "Argonaut") and (ii) use cash collateral [Docket No. 13]. The proposed DIP financing will come in two tranches: $3.0mn with an interim DIP order and the $2.0mn balance to be available upon entry of a final DIP order.
On May 8th, Cypress Environmental Partners, L.P. and 18 affiliated debtors (NYSE: CELP; together “Cypress” or the “Debtors”) filed for Chapter 11 on a "prepackaged" basis noting estimated assets of $97.0mn and estimated liabilities of $62.4mn ($58.9mn of funded debt). That funded debt is held by Argonaut which purchased it in the run-up to the Debtors' Chapter 11 filing. Argonaut has also agreed to serve as a stalking horse in a section 363 auction/sale process.
The DIP motion [Docket No. 13] states, “[t]he Company requires immediate access to debtor-in-possession financing and authority to use Cash Collateral to maintain sufficient liquidity to continue to operate and effectively reorganize to maximize value for their stakeholders. All of the Company’s cash on hand as of the Petition Date, including the cash in deposit accounts, any proceeds of the Prepetition First Lien Collateral, and all other cash is subject to the liens of the Prepetition First Lien Agent and Prepetition First Lien Lenders. Pursuant to the terms of the Interim Order, the Prepetition First Lien Lenders have consented to the Company’s use of Cash Collateral and the DIP Lenders have agreed to provide the DIP Facility on the terms set forth in the Interim Order, subject to the Approved Budget.
The proceeds from the proposed DIP Facility will be used for, among other things, continuing the Company’s business operations, paying administrative costs associated with the Chapter 11 Cases, and satisfying working capital needs in the ordinary course of business. Moreover, the liquidity to be provided under the DIP Facility, combined with access to existing Cash Collateral, will enable the Company to (a) fund the ordinary course of its operations during the Chapter 11 Cases, (b) ensure that the chapter 11 administrative costs are paid in full and value is preserved during the course of the Chapter 11 Cases, and (c) carry out the restructuring contemplated under the Restructuring Support Agreement to maximize value for all stakeholders.
Given the Company’s urgent need for authority to use Cash Collateral and obtain access to the DIP Facility, entry of the DIP Orders is necessary to provide the capital required to operate the Company’s businesses and continue paying postpetition obligations as they come due, including the expenses set forth in the Approved Budget during the anticipated term of the Chapter 11 Cases.”
The Debtors' motion provides: "In April 2022, the Company, with the assistance of Piper and its other advisors, commenced a process to obtain debtor-in-possession financing as part of the proposed Restructuring. In connection with this process, Piper contacted 12 potential third-party debtor-in-possession financing providers (the 'Third Parties'). However, providing debtor-in-possession financing to the Debtors involved numerous challenges, including the fact that (a) all or substantially all of the Debtors’ assets are encumbered and subject to liens of the Prepetition First Lien Secured Parties, (b) obtaining debtor-in-possession financing that would prime liens of the Prepetition First Lien Secured Parties would likely invoke costly and time consuming legal challenges from the Prepetition First Lien Secured Parties, including with respect to the ability to prime the Prepetition First Lien Secured Parties’ liens and the Debtors’ ability to adequately protect the Prepetition First Lien Secured Parties’ interest in the prepetition collateral securing the loans under the Prepetition First Lien Facility, and (c) the Prepetition First Lien Secured Parties’ stated refusal to agree to have their liens primed by a Third Party.
Despite these challenges, Piper explored various financing alternatives with the Third Parties, including the possibility of priming the Prepetition First Lien Secured Parties’ interests in the collateral securing the Prepetition First Lien Facility, the potential for obtaining financing with liens that are pari passu or junior to the Prepetition First Lien Secured Parties’ liens, and unsecured financing.
Unfortunately, none of the Third Parties was willing to provide postpetition credit on an unsecured basis, or secured only by liens junior to or pari passu with the liens of the Prepetition First Lien Secured Parties….Moreover, outside financing alternatives would also expose the Company to the execution risk associated with a new lender transaction, including material timing and due diligence constraints, necessarily involving the payment of additional and substantial professional fees and costs. As a result, the Company, with the assistance of Piper, concluded that the DIP Facility was the only viable source of debtor-in-possession available to the Company to fund the Chapter 11 Cases.
Key Terms of the DIP Facility:
- Borrower: CELP
- Guarantors: CELP and each Subsidiary of CELP that executes the DIP Credit Agreement as a Guarantor or otherwise guarantees the DIP Obligations as of the Closing Date or thereafter.
- DIP Lenders: APE V Cypress, LLC
- DIP Facility and Borrowing Limits: The DIP Credit Agreement provides, subject to the terms and conditions set forth in the DIP Facility Documents, postpetition financing in the form of a non-amortizing, new money term loan facility in an aggregate principal amount of $5 million upon entry of the Final Order; provided that, prior to entry of the Final Order, the maximum amount of the DIP Loans available to be drawn shall be limited to $3 million.
- Interest Rate: The DIP Loans shall bear interest at a rate per annum equal to 9.00%.
- Default Rate: 11.00% per annum.
- Maturity Date: “Maturity Date” means the earliest of:
- the Scheduled Maturity Date (i.e., the date that is three (3) months after the Petition Date;
- the consummation of a sale of all or substantially all of the assets of the Credit Parties pursuant to Section 363 of the Bankruptcy Code or otherwise;
- the effective date of a plan of reorganization or liquidation in the Chapter 11 Cases;
- the entry of an order by the Bankruptcy Court dismissing any of the Chapter 11 Cases or
- converting such Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code; and
- the date of termination of the DIP Lenders’ commitments and the acceleration of any outstanding extensions of credit, in each case, under the DIP Credit Agreement.
- Duration/Use of Cash Collateral: The Debtors are authorized to use Cash Collateral to fund (a) (i) working capital, (ii) general corporate purposes, (iii) restructuring expenses, and (iv) any fees required under the DIP Credit Agreement or any other DIP Facility Document, in each case with respect to clauses (i) through (iv), pursuant to the Approved DIP Budget, subject to Permitted Variances, and (b) fees and expenses incurred by Professionals; provided, however, that no Cash Collateral shall be used in a manner that would violate the “Limitation on Use of Financing Proceeds and Cash Collateral” in paragraph 17 of the Interim Order. The Debtors’ right to use any such Cash Collateral (other than with respect to the payment of fees and expenses of Professionals) shall be in accordance with the Approved DIP Budget, subject to Permitted Variances, and such right shall terminate automatically upon the earliest of (x) the Maturity Date and (y) five (5) Business Days’ written notice provided by the DIP Agent to the U.S. Trustee, the Debtors, and the Committee through their respective counsel, or provided by the Debtors to the DIP Secured Parties and the Prepetition First Lien Secured Parties, through each of their respective counsel, of the occurrence and continuance of any Event of Default under the DIP Facility Documents.
- Use of DIP Proceeds and Cash Collateral: Proceeds to be used for continuing the Company’s business operations, paying administrative costs associated with the
Chapter 11 Cases, and satisfying working capital needs in the ordinary course of business.
- New Money: $5.0mn, $3.0mn interim
- Roll-Up: N/A
- Commitment Fees. An upfront fee in an amount equal to $50,000 (i.e., 1.00% of the DIP Loans).
- Additional Fees. The Borrower agrees to pay to the DIP Agent additional fees, the amount and dates of payment of which are embodied in certain fee letters executed and delivered by Borrower in connection with this Agreement and as may otherwise have been separately agreed upon by Borrower in writing in connection herewith or therewith.
- Milestones: The DIP Facility shall be subject to the timely satisfaction of the following milestones related to the Chapter 11 Cases:
- The Debtors shall have filed initial versions of the Plan of Reorganization, the Disclosure Statement, and a motion to approve the Disclosure Statement and other solicitation materials; on the Petition Date;
- The Debtors shall have filed a motion seeking entry of the DIP Orders; on the Petition Date;
- Entry of the Interim Order; no later than four (4) days after the Petition Date;
- The combined hearing to consider approval of the Disclosure Statement and confirmation of the Plan of Reorganization (the “Confirmation Hearing”) shall have commenced; no later than the date that is thirty five (35) days after the Petition Date;
- The Bankruptcy Court shall have entered the Confirmation Order; no later than the date that is forty (40) days after the Petition Date; and
- The Effective Date shall have occurred, No later than the date that is fifteen (15) days after the entry of the Confirmation Order.
As at the Petition date, the Debtors haveapproximately $59.2mn in outstanding debt obligations, consisting of approximately: (i) $58.9mn outstanding under their Prepetition First Lien Credit Agreement; (ii) $250k in Trade Payables outstanding; and (iii) $74k in General Unsecured Claims.
Budget (see Docket No. 13)
Petition Date Highlights
- Service Provider to Energy and Municipal Water Industries Files Prepackaged Chapter 11 with $59.0mn of Funded Debt
- Debtors Cite "Perfect Storm" of Back-to-Back Energy Downturns, Pandemic and FLSA litigation as Compelling Bankruptcy
- Argonaut Private Equity, Having Recently Acquired Senior Debt from Deutsche Bank Led Syndicate, to Serve as Stalking Horse
- Restructuring Support Agreement has Debtors Emerge within 55 Days of Filing
- Argonaut to Provide $5mn of DIP Financing
The Boylan Declaration (defined below) provides: "The Debtors commenced these Chapter 11 Cases to implement the Restructuring Support Agreement…which contemplates eliminating nearly $60 million in prepetition secured debt, paying substantially all of the unsecured creditors in full, and is supported by the Debtors’ prepetition lender. The Debtors entered into the Restructuring Support Agreement principally because for several years they have been unable to refinance their sole funded debt obligation with an outstanding principal amount as of the Petition Date in the amount of $58,853,976….The Credit Agreement [governing that debt] matures on May 31, 2022 and in the months leading up to the filing of these Chapter 11 Cases, it became clear that a forbearance, renewal or extension of the Credit Agreement with the Former Lenders [led by various Deutsche Bank entities] would not be possible.
The Restructuring Support Agreement, and the Plan, contemplate a debt-to-equity recapitalization transaction, whereby Argonaut* will receive 100% of the new equity interests of reorganized CEP…subject to dilution by a management incentive plan, in exchange for extinguishing the obligations remaining under the Credit Agreement (the 'Reorganization Transaction').
The Restructuring Transaction will provide the Debtors and their business a fresh start, deleveraging their balance sheet, providing a stable platform to grow post-emergence and preserving over 350 quality high paying jobs."
* Argonaut Private Equity which had submitted a bid during the Debtors' prepetition sale process; with that bid (and others) rejected by the Debtors in consultation with the Former Lenders.
Events Leading to the Chapter 11 Filing
In a declaration in support of first day filings (the “Boylan” Declaration), Peter C. Boylan III, the Debtors' Co-founder, Chairman, Chief Executive Officer, and President provides: “The Debtors have faced back-to-back energy downturns starting with an OPEC price war from 2015-2017, and then on March 8, 2020, Saudi Arabia initiated a price war on oil with Russia, facilitating a 65% quarterly fall in the price of oil. In the first few weeks of March 2020, US oil prices fell by 34%, crude oil fell by 26%, and Brent oil fell by 24%. The price war was triggered by a break-up in dialogue between the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia over proposed oil-production cuts in the midst of the COVID-19 pandemic. Then in early April 2020 and again in June 2020, Saudi Arabia and Russia agreed to oil production cuts. Oil production can be slowed, but not stopped completely, and even the lowest possible production level resulted in greater supply than demand and those holding oil futures actually began to pay money to sell their oil contracts due to their inability to store the oil. These market events, the start of a global pandemic, and material litigation under the Fair Labor Standards Act (the 'FLSA') had a material adverse impact on the Debtors. These factors…created the perfect storm that forced the Debtors to commence these Chapter 11 Cases."
About the Debtors
According to the Debtors: “Cypress Environmental Partners, L.P. ('Cypress') and its affiliates provide essential environmental services to the energy and municipal water industries. Our suite of services include inspection, testing, recycling, survey, water treatment, and other environmental services that help our customers protect people, property, infrastructure, and the environment with a focus on safety and sustainability. Cypress is a publicly traded company on the New York Stock Exchange (NYSE: CELP). We are master limited partnership ('MLP') that is controlled by a Cypress Environmental GP who’s owners interests are fully aligned with our minority investors with management and insiders owning approximately 74% of CELP. We hold ourselves to the higher standards of the Securities and Exchange Commission ('SEC'), Environmental Protection Agency ('EPA'), Department of Transportation ('DOT'), various state regulators, and the NYSE. Cypress also has a code of conduct that requires us to operate ethically, honestly, and with integrity.
We provide a wide range of environmental services including inspection, testing, integrity, and support services for energy infrastructure owners and operators, public utilities, and the municipal water industry.
Cypress also provides water pipelines, water treatment, filtration, separation, hydrocarbon recovery, and injection services for upstream energy companies.
The Disclosure Statemet adds: "Headquartered in Tulsa, Okalhoma, CELP is a publicly traded limited partnership that was formed in 2013. Trading of CELP’s common units began in January 2014 on the New York Stock Exchange under the symbol “CELP”. CELP is the direct parent of, and owns 100% of the equity
interests in, Cypress Environmental Partners, LLC ('CEP'). In turn, CEP is the direct or indirect parent of all of the remaining Debtor entities, controlling (either directly or indirectly) 100 percent of the equity interests of all of the remaining Debtors except for Cypress Brown Integrity, LLC, of which CEP owns 51 percent.
Cypress Environmental Partners GP, LLC (the 'General Partner'), a non-debtor, is the general partner of CELP. All of the equity interests in the General Partner are indirectly owned by Cypress Environmental Holdings, LLC ('Holdings'), a non-debtor. Holdings is owned by Charles C. Stephenson, Jr., entities related to Mr. Stephenson’s family, Mr. Stephenson’s daughter, Cynthia A. Field, and a company controlled by CELP’s CEO, Peter Boylan. The Debtors offer various services to the energy and utility industries, including inspection, water treatment, and other environmental services that help their customers protect people, property, infrastructure, and the environment w ith a focus on safety and sustainability. The Debtors’ services also help their clients comp ly with increasingly complex federal and state environmental and safety rules and regulations . The substantial majority of the Debtors’ environmental services are required services under various federal and state laws.
The Debtors’ business is organized into two reportable segments: (1) inspection services ('Inspection Services'), comprising the operations of the 'Inspection Entities' (as noted on the Structure Chart); and (2) water and environmental services (“Environmental Services”), representing the water treatment operations of the 'Salt Water Disposal Entities' (as noted on the Structure Chart).
Corporate Structure Chart
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