October 19, 2022 – The Debtors requested Court authority to: (i) access $10.2mn in debtor-in-possession (“DIP”) financing and (ii) use cash collateral [Docket No. 423].
The DIP financing, provided by "certain" holders of bonds issued under the Debtors' existing DIP financing arrangements (others declined to participate), is to come in the form of senior, secured, priming, “last in, first out” (i.e., “LIFO”) debtor-in-possession bonds (the “LIFO DIP Bonds”) issued by CalPlant I, LLC (“CalPlant”) and guaranteed by Debtor CalPlant I Holdco, LLC, with BOKF, NA, serving as trustee.
With the exception of the ramped up seniority, this latest round of DIP financing is "provided on substantially the same terms as the Existing DIP Facility but would have senior priority," perhaps unsurprising given that "approximately $10 million of the funding contemplated under the LIFO DIP Facility has already been approved by the Court as part of the [$18.3mn] September 2022 Funding Request, and will now simply be made under the new facility rather than the old one." In short, this is largely the same financing albeit sourced from a smaller syndicate now requiring a senior position as inducement to continue with the struggling Debtors.
Following numerous operational and construction-related setbacks that impact the current saleability of the Debtors’ assets (ie its MDF manufacturing plant), the Debtors have been forced to return to the DIP financing well on several occassions, with patience clearly wearing thin with some of the DIP lending group along the way.
On March 25th, the Court hearing the CalPlant I Holdco cases issued an order that amended an already issued final DIP order to authorize the Debtors to access an additional $15.0mn of DIP financing; thereby increasing available DIP financing from $37.4mn to $52.4mn.
On September 14th, the Court issued a second order amending the final DIP order, on that occassion nomibally increasing available DIP financing by an additional $18.3mn of DIP financing. Following that second amending order, only $1.3mn of the approved amount was made available, with the balance to come on an "as needed" basis. When the need arose, however, some of the lenders balked as "the plant’s prospects continued to deteriorate materially during the month of September." Those lenders willing to stick it out, provided $6.8mn of financing under the existing financing arrangements to cover a funding gap until the Debtors were able to negotiate the terms of the present LIFO DIP Bonds.
Is it enough with production levels "far below" expected and the sale efforts stalled? In a declaration in support of the LIFO DIP Bonds [Docket No. 424], the Debtors' investment banker provides: "The Debtors’ plant continues to operate far below guaranteed production levels, and at an operating loss, with production quality and quantity hampered by unresolved design flaws….I expect that, regardless of the strategy ultimately chosen, the LIFO DIP Facility will provide the Debtors with adequate liquidity for the next several months…
The Funding Holders are willing to continue funding these cases and have agreed to provide the LIFO DIP Facility on a senior priority basis. I believe that, in light of the failed sale process and the current state of the plant’s operations, any incremental funding at this stage is inherently riskier than funding provided at an earlier date."
The LIFO DIP Bonds Motion
The motion [Docket No. 423] states, “[t]he Debtors seek entry of an order authorizing the Debtors to issue $10,200,000 of senior, secured, priming, ‘last in, first out’ debtor-in-possession bonds (together with the Postpetition Bridge Bonds, the ‘LIFO DIP Facility’) provided by the holders of a majority in dollar amount of their existing debtor-in-possession bonds (the ‘Existing DIP Facility’). The LIFO DIP Facility would be provided on substantially the same terms as the Existing DIP Facility but would have senior priority.
If approved, the Debtors will use the proceeds of the LIFO DIP Facility to fund one or more strategies currently under consideration by the Debtors (in consultation with the Funding Holders) for maximizing the value of their assets, including hiring an outside firm to reengineer the refiner component of their MDF plant, entering into a consulting arrangement with a liquidator to liquidate their equipment and other tangible assets (if necessary), and/or pursuing recoveries on account of estate claims and causes of action. The Debtors expect that, regardless of the strategy ultimately chosen, the LIFO DIP Facility will provide the Debtors with adequate liquidity for the next several months and a path towards exiting chapter 11.
The Debtors entered chapter 11 on October 5, 2021. At the time, the Debtors believed the serious engineering and design challenges faced by their plant would be resolved within a few months by Siempelkamp Maschinen-und Anlagenbau GmbH (‘SICO’), their chief equipment supplier. The goal of the bankruptcy filing was to provide the Debtors with a breathing spell during which SICO would implement a handful of repairs to the Debtors’ processing equipment, and the Debtors would then be able to market and sell their plant to the highest bidder under the this Court’s supervision. Unfortunately, those goals have not been reached. The Debtors’ plant continues to operate far below guaranteed production levels, and at an operating loss, with production hampered by unresolved design flaws. And, as discussed immediately below, the Debtors’ marketing efforts have failed to yield an acceptable bid for the plant.
This past July, under the belief that long-promised engineering solutions were around the corner, the Debtors and their transaction advisor began a formal outreach to identify a buyer for the plant. The Debtors and their advisor identified and contacted in excess of 210 potential buyers for the plant, including more than 30 strategic buyers and more than 180 financial buyers. The Debtors and their advisor also undertook a second effort to solicit feedback from parties that did not respond to their initial outreach. Of the parties contacted, 39 parties, including domestic and international leaders in the MDF industry and middle-market U.S.-based investment firms, signed non-disclosure agreements and reviewed the Debtors’ confidential information memorandum. Ten of these parties were active in the Debtors’ virtual data room, and four parties undertook site visits. To date, no buyer has been willing to make an offer for the plant at a level that would be acceptable to the holders of a majority of the Debtors’ prepetition senior secured bonds.
Faced with a failed sale process, the Debtors and their advisors worked diligently to identify alternative strategies for maximizing the value of the plant, both short-term and longterm, and presented those strategies to the holders of a majority of the Existing DIP Bonds (the ‘Consenting Holders’) along with a request for $18.3 million of additional funding under the Existing DIP Facility (the ‘September 2022 Funding Request’). The Consenting Holders reacted favorably to the request and, on September 1, 2022, the Debtors filed a notice seeking authority to obtain that funding under expedited procedures previously approved by the Court. The Court approved the incremental funding on September 14, 2022, and, shortly thereafter, the Consenting Holders funded $1.3 million of the $18.3 million authorized by this Court, with the intention to fund the remainder on an ‘as needed’ basis.
Unfortunately, the plant’s prospects continued to deteriorate materially during the month of September. On October 3, 2022, the Debtors and their advisors met with the Consenting Holders to discuss the Debtors’ ongoing liquidity needs and to request the remaining $17 million of funding contemplated by the September 2022 Funding Request. A few days later, on October 5, 2022, the Debtors learned that certain of the Consenting Holders are currently unwilling to fund their remaining share of the September 2022 Funding Request.
The other Consenting Holders (the ‘Funding Holders’) are willing to continue funding these cases and have agreed to provide the LIFO DIP Facility on a senior priority basis. The Debtors believe that senior priority for any incremental funding at this stage is appropriate in light of the failed sale process and the current state of their plant’s operations because such funding is inherently riskier than funding provided at an earlier date. Recognizing that it would take time to negotiate and obtain approval of the LIFO DIP Facility, the Funding Holders also agreed to fund $6.8 million of the September 2022 Funding Request under the Existing DIP Facility to bridge the Debtors to approval of the LIFO DIP Facility.
The Debtors believe that approval of the LIFO DIP Facility is in the best interests of their estates. As an initial matter, the Debtors’ decision to transition from the Existing DIP Facility to the LIFO DIP Facility affects only the holders of the Debtors’ postpetition financing; it has no impact on other stakeholders. Moreover, other stakeholders appear to concur with the Debtors’ funding decisions to date, as no objections were filed to the Debtors’ requests in March and September 2022 for incremental funding under the Existing DIP Facility. On that point, it is worth noting that approximately $10 million of the funding contemplated under the LIFO DIP Facility has already been approved by the Court as part of the September 2022 Funding Request, and will now simply be made under the new facility rather than the old one. Finally, the Debtors believe that obtaining additional liquidity under the LIFO DIP Facility is critical to preserving the value of their assets and achieving the highest possible distributions to stakeholders.’
Key Terms of LIFO DIP Bonds
- Issuer: Debtor CalPlant I, LLC
- Guarantor: Debtor CalPlant I Holdco, LLC LIFO DIP
- LIFO DIP Trustee: BOKF, NA
- LIFO DIP Bonds: $10.2mn in aggregate amount of LIFO DIP Bonds to be issued after entry of the LIFO DIP Order, which amount is exclusive of the $6.8mn of Postpetition Bridge Bonds, which shall be treated, in all respects, as issued under the LIFO DIP Facility.
- Interest Rate: The LIFO DIP Bonds issued under this LIFO DIP Order shall accrue interest at the rate of 9.5% per annum (the ‘Applicable Rate’) as of the date of funding (i.e., within four (4) business days of entry of this LIFO DIP Order), which interest shall be due and payable commencing on December 1, 2022, and continuing on the first day of every month thereafter.
- Default Rate: Upon the occurrence of an Event of Default that has not been waived by the LIFO DIP Trustee, the LIFO DIP Bonds shall accrue interest at a default rate of interest equal to 2% over the Applicable Rate (the ‘Default Rate’).
- Fees: The LIFO DIP Trustee shall receive a $15,000 settlement agent fee with respect to the LIFO DIP Bonds, as well as a $6,500 annual fee. The Debtors agree to pay all costs and expenses of the LIFO DIP Trustee incurred in connection with the LIFO DIP Facility.
- Maturity Date: The earliest of (i) January 31, 2023; (ii) the effective date of a confirmed Plan of Reorganization; or (iii) the occurrence of an Event of Default under this Indenture.
- Milestones: (from Docket No. 286-1, PSA)
- Deadline to filed the Bidding Procedures Motion (pursuant to paragraph 3(d) of the Plan Support Agreement); no later than fourteen (14) days following the date that the Company, or its counsel, receives an email from the Senior Trustee, or its counsel, establishing such deadline (such date of receipt, the ‘Bidding Procedures Trigger Notice Date’).
- Deadline for approval of the Disclosure Statement within 84 days of the Bidding Procedures Trigger Notice Date.
- Deadline to confirm the Plan; before within 133 days of the Bidding Procedures Trigger Notice Date, and
- Deadline for Plan effectiveness; before within 143 days of the Bidding Procedures Trigger Notice Date.
Case Status
On October 5, 2021, CalPlant I Holdco, LLC and one affiliated Debtor (‘CalPlant’ or the ‘Debtors’) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. At filing, the Debtors, builder/owners of ‘a first-of-its-kind manufacturing plant that produces environmentally-friendly medium density fiberboard (‘MDF’) from rice straw’ (the ‘Plant’), noted that they had ‘encountered various struggles completing construction of the Plant and achieving their operational goals,’ with the result being that they had fallen substantially short of achieving ‘Plant Acceptance’ by July 2019 as anticipated when they lined up bond financing in 2017.
From the outset, the Debtors have intended to use Chapter 11 for an asset sale, but that process has been delayed as the Debtors, with the support of prepetition and DIP bondholders, have chosen to do further work on the Plant before putting it up for sale.
At filing (ie October 5, 2021), the Debtors filed a motion seeking Court approval for $37.4mn in DIP financing (the ‘Original DIP Bonds’) to fund their cases through March 2022, with the Court issuing a final DIP order in respect of that amount on October 27th. On March 25th, the Court gave the go ahead for an additional $15.0mn bond (the ‘Supplemental DIP Bond’) to fund the cases ‘through late September 2022.’
Further, On September 14th, the Court issued a second order that amends an existing final DIP order and authorizes the Debtors to access a further $18.3mn of DIP financing [Docket No. 403].
The Debtors have yet to file a bidding procedures motion.
Prepetition Indebtedness
The Debtors have an aggregate principal amount of $343,850,000 of funded indebtedness outstanding, plus approximately $36,390,433.15 in accrued interest (calculated at the original coupon rate) plus incremental default interest, reimbursable costs and expenses. The funded debt was incurred to finance the construction and operation of the Plant and was issued by the California Pollution Control Financing Authority (the "CPCFA") in the form of tax-exempt “green” bonds. As of the Petition Date, the Debtors also have outstanding trade payables of approximately $1.6 million.
About the Debtors
According to the Debtors: “CalPlant and its predecessor company, CalAg, LLC, have spent many years researching, developing and patenting a process to make high-quality MDF using annually renewable rice straw as the feedstock, the disposal of which has posed environmental issues in California for decades. It has worked extensively with machinery manufacturer Siempelkamp to develop a facility with production capabilities well-suited to the MDF markets the plant will be serving. CalPlant is the world’s first commercial-scale manufacturer of no-added-formaldehyde, rice straw-based MDF. For more information, please visit www.eurekamdf.com.”
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