October 23, 2022 – The Debtor requested Court authority to: (i) enter into debtor-in-possession (“DIP”) financing arrangements with prepetition lender JMB Capital Partners Lending, LLC ("JMB" or the “DIP Lender”) and (ii) access cash collateral [Docket No. 9, with the DIP Credit Agreement attached as Exhibit B].
The DIP financing is comprised of: (a) $5.9mn in new money ($2.9mn accessible with interim DIP order) and (b) a $9.1mn roll-up of amounts owed to JMB in respect of the Debtor's prepetition first lien debt ($2.8mn) and bridge financing made available to the Debtor in the run-up to its Chapter 11 filing ($6.25mn). JMB purchased the first lien debt at the beginning of October from Silicon Valley Bank ("SVB") when SVB balked at playing a DIP financing role. Although JMB has the standard right to credit bid amounts owed it in any auction/sale process, it does not appear pursuing a loan-to own strategy given that the Debtor has otherwise stated that it has a "large, well-capitalized pharmaceutical company" in the wings to play a stalking horse role. JMB is, however, in line for 14% interest and fees of @7%.
On October 23, 2022, PhaseBio Pharmaceuticals, Inc. (Nasdaq: PHAS, “PhaseBio” or the “Debtor”) filed for Chapter 11 protection noting estimated assets of $18.0mn; and estimated liabilities of $21.3mn. At filing, the Debtor, “engaged in the research and development of specialized, highly innovative therapies for patients with serious cardiovascular disease,” cited efforts by investor SFJ Pharmaceuticals, X, ("SFJ") to force a transfer of the Debtor's bentracimab assets as compelling the need to seek bankruptcy shelter. See our Petition date coverage for more on the pivotal bentracimba assets and the Debtor's fight with SFJ over their ownership.
The DIP Motion
The DIP motion [Docket No. 9] notes, “…the Debtor seeks entry of the DIP Orders, and initially, the Interim Order that: (i) authorizes the Debtor to obtain postpetition financing on a secured superpriority basis, consisting of a new money term loan facility (the 'DIP Facility,' and the loans issued thereunder, the 'DIP Loans') in an aggregate principal amount of up to $15,000,000 (the “DIP Loan Commitment”), consisting of: (a) A superpriority senior secured multiple draw term loan credit facility in the principal amount of $15,000,000, less the amount of the Roll-Up Loan (the 'New Money Loan'), of which (x) upon entry of the Interim Order, $12,000,000 less the amount of the Roll-Up Loan (the 'Interim Advance') shall be made available to the Debtor and may be drawn in a single draw, and (y) subject to entry of the proposed Final Order, any amounts above the Interim Advance shall be made available to the Debtor in the amount set forth in the DIP Credit Agreement; (b) A superpriority term loan facility in the outstanding principal amount of not less than approximately $9.1 million (the 'Roll-Up Loan')…"
….The Debtor has an urgent and immediate need to obtain postpetition financing. The Debtor does not have sufficient funds on hand or generated from its business to fund operations. Without the DIP Facility and the use of cash collateral that will be provided under the DIP Credit Agreement and the DIP Orders, the Debtor will have insufficient cash to operate its business, fund its ordinary course expenditures such as paying its employees, or pay the expenses necessary to administer the Chapter 11 Case and pursue a value-maximizing sale process.”
In a declaration in support of the DIP motion [Docket No. 10], Alexander V. Rohan of Miller Buckfire, LLC, the Debtor's investment banker, states, “Within days of receiving the Program Transfer Notice, the Debtor, with the assistance of Miller Buckfire, commenced an accelerated outreach to SVB seeking near-term and debtor-in-possession financing. The Debtor was advised that SVB was unwilling to provide incremental financing and would not consent to being primed but was willing to assign its Prepetition Term Loan to a third party. In order to avoid a costly and likely contentious priming fight, the Debtor, with the assistance of Miller Buckfire, reached out to multiple financial and strategic parties to explore interest in acquiring the Prepetition Term Loan and providing incremental near-term and debtor-in-possession financing.
Of the parties contacted by the Debtor and its advisors, one financial party executed a non-disclosure agreement (‘NDA’) and began expedited diligence. Two strategic parties contacted were already subject to an NDA in connection with the Debtor’s prior marketing process and quickly engaged in a series of discussions with the Debtor and its advisors regarding a potential financing. In parallel, discussions with SFJ re-started and were focused on implementing the Program Transfer through a consensual chapter 11 process.
The Debtor, with the assistance of its advisors, determined that the maximum amount of prepetition and postpetition financing it could obtain on a senior basis without a potential priming fight pursuant to the Subordination Agreement would be $15.0 million (subject to fees and other costs). Based on cash flow projections developed by the Debtor and SierraConstellation Partners LLC, its financial advisor, it was determined that this amount plus the Debtor’s existing cash balance, would be sufficient to fund the Debtor through a chapter 11 sale process.
After intense discussions with certain financial and strategic parties, the Debtor received proposals from JMB (the ‘DIP Lender’) and SFJ to provide financing in connection with a chapter 11 filing. No other parties submitted proposals. The JMB proposal provided for total financing (the ‘DIP Facility’) of up to $15.0 million including approximately $9.0 million on a prepetition basis to be followed by postpetition availability of approximately $5.9 million and a ‘roll-up’ of the prepetition amount. The $9.0 million of prepetition loans consist of (i) $2.8 million to acquire the Outstanding SVB Loan; and (ii) $6.25 million of new-money advances (the ‘Prepetition Advance’), which resulted in net proceeds of approximately $5.0 million after accounting for the original issue discount of 20%, which the Debtor borrowed effective as of October 4, 2022. The Prepetition Advance allowed the Debtor to continue its operations and avoid a potential value-destructive free fall into bankruptcy or chapter 7 liquidation. In addition, the Prepetition Advance provided the Debtor with the liquidity necessary to find a stalking horse and pursue a value maximizing sale process. The terms of the DIP Facility were subject to vigorous, arms’ length negotiations which ultimately resulted in a reduction of the interest rate, elimination of certain fees, and other enhancements.
… the Debtor engaged in a series of good faith discussions with SFJ prior to the Petition Date and SFJ proposed $8.5 million of financing (the ‘SFJ Financing’), however, the terms of the SFJ Financing were incomplete and not executable. Among other things, the SFJ Financing would not have provided the Debtor with a path to reorganize and emerge from chapter 11. In addition, the SFJ Financing would have required the Debtor to turn over parts of the bentracimab program and transfer key employees to SFJ prior to the commencement of a chapter 11 filing, without a marketing process or approval of the program transfer by the Debtor’s stockholders.
As a result, the Debtor, with the assistance of its advisors, determined that the SFJ Financing was not a viable option and that the DIP Facility provided the best and only source of liquidity to allow the Debtor to fund its imminent cash needs, enter chapter 11 and pursue a valuemaximizing transaction for the benefit all of the Debtor’s stakeholders.”
Key Terms of the DIP Facility:
- Borrower: PhaseBio Pharmaceuticals, Inc.
- DIP Lender: JMB Capital Partners Lending, LLC
- DIP Facility: $15.0mn
- New Money: $6.0mn
- Roll-Up: $9.0mn comprised of (i) $2.8mn to acquire the SVB loan; and (ii) $6.25 million of new-money advances made prior to filing
- Use of Proceeds:The DIP Loans shall not be used for any purpose other than:
- to pay in full the outstanding Prepetition First Lien Lender Secured Obligations with proceeds of the Roll-Up Loan, and
- to fund payments related to the: (a) working capital and other general corporate purposes of the Borrower, including the payment of the DIP Fees, the Lender Expenses and professional fees and expenses; and (b) bankruptcy-related expenses subject to, and within the categories and limitations contained in the DIP Orders and the Approved Budget (subject to Permitted Variances).
- Interest Rate: The DIP Loans shall bear and interest on the daily balance thereof at a rate equal to 14.00% per annum, accruing monthly, payable in arrears.
- Default Rate: 5.00% plus the then applicable interest rate upon notice from the DIP Lender of its election to impose interest at the default rate.
- Commitment Fee: 2.00% of the DIP Loan Commitment, which fee shall be earned on the Effective Date and which shall be due and payable to the DIP Lender on the Closing Date from the proceeds of the Interim Advance.
- Exit Fee: 5.00% of the DIP Loan Commitment, payable in cash as follows: (i) with respect to any prepayment, the Exit Fee shall be applicable to the outstanding principal being prepaid and paid at the time of such prepayment; and (ii) at Maturity, the Exit Fee shall be applicable to the aggregate DIP Loan Commitment, less any Exit Fee paid pursuant to clause (i).
- Maturity:The “Maturity Date” shall be earliest of:
- June 30, 2023,
- the substantial consummation (as defined in section 1101 of the Bankruptcy Code and which for purposes hereof shall be no later than the “effective date” thereof) of a plan of reorganization filed in the Chapter 11 Case that is confirmed pursuant to an order entered by the Bankruptcy Court,
- the consummation of a sale or other disposition of all or substantially all of the assets of the Borrower under Section 363 of the Bankruptcy Code,
- entry of an order converting the Chapter 11 Case to a case under chapter 7 of the Bankruptcy Code or dismissing the Chapter 11 Case; and
- the acceleration of the outstanding Obligations under the DIP Credit Agreement and termination of the DIP Loan Commitment as a result of the occurrence and continuation of an Event of Default.
- Milestones: None
- Prepetition First Lien Loan and Security Agreement. As of the Petition date, the Debtor has approximately $9.1mn in total funded debt obligations with the entirety of that amount arising under a March 2019 loan and security agreement (the "Prepetition First Lien Loan and Security Agreement") with Silicon Valley Bank (“SVB”) as administrative agent, collateral agent and lender. Pursuant to the Prepetition First Lien Loan and Security Agreement, the Debtor could borrow up to $15.0mn issuable in three separate tranches (a) of $7.5mn, which was issued upon execution of the Prepetition Term Loan, (b) $2.5mn, which was issued in May 2019, and (c) $5.0mn, which was issued in October 2019.
The maturity date of the Prepetition Term Loan is March 1, 2023. The Debtor’s obligations under the Prepetition First Lien Loan and Security Agreement are secured by a first-priority security interest in substantially all of the Debtor’s assets pursuant to that certain Intellectual Property Security Agreement, dated as of March 19, 2020, by and among the Debtor and the Prepetition First Lien Lender (the “IP Security Agreement”). The Debtor is also obligated to comply with various other customary covenants, including restrictions on the Debtor’s ability to encumber its intellectual property assets.
On October 3, 2022, the Prepetition First Lien Lender and JMB entered into a Non-Recourse Loan Document Sale and Assignment Agreement (the “Assignment Agreement”), pursuant to which SVB sold and assigned to JMB all of the Prepetition First Lien Lender’s right, title, interest and obligations under the Prepetition First Lien Loan and Security Agreement. Pursuant to the Assignment Agreement, SVB resigned as Prepetition First Lien Agent and JMB became the successor Prepetition First Lien Agent. As of the Petition Date, the aggregate principal amount, plus accrued interest, owing by the Debtor under the Prepetition Term Loan (including the Tranche A Growth Capital Advances) is approximately $9.1mn. Notably, this debt is senior to any amounts owed to SFJ.
- Prepetition SFJ Asserted and Subordinated Liens [NB: The Debtor has stated its intention to ask the Court recharacterize the SFJ investment as equity.] In January 2020, the Debtor entered into a Co-Development Agreement (the “CDA”) with SFJ to obtain the investment funds needed to support the global development of bentracimab, the Debtor’s lead drug candidate. Pursuant to the CDA, SFJ agreed to provide up to a $120.0mn investment, comprised of (a) $90.0mn in initial funding, and (b) up to $30.0mn in additional funding. The Debtor was eligible and elected to receive the full $30.0mn in additional funding on December 15, 2021, having met certain clinical development milestones, and SFJ has invested approximately $11.3 million of that amount to date. Accordingly, as of the Petition Date, SFJ has invested a total of approximately $101.3 million with the Debtor pursuant to the CDA. The CDA provides that SFJ will receive highly lucrative, return-on-investment payments only if the Debtor receives future regulatory approvals (collectively, the 'Contingent Return-On-Investment Payments').
In an attempt to secure the Contingent Return-On-Investment Payments, the Debtor was required to grant SFJ a security interest in all of its assets. This security interest covers not only all assets of the Debtor that are necessary for the manufacture, use or sale of bentracimab, but also all intellectual property and other assets related to the Debtor’s other clinical development programs, such as PB6440. Under the Subordination Agreement, SFJ’s security interest and ability to receive the Contingent Return-On-Investment Payments are subordinated to the Prepetition First Lien Lenders’ right to payment in full on their senior secured liens.
- Trade Debt. The Debtor also has outstanding trade debt totaling approximately $36.0mn.
Proposed Budget [See Docket No. 9]
About the Debtor
According to the Debtor: "PhaseBio Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapies for cardiovascular diseases. The Company’s pipeline includes: bentracimab (PB2452), a novel reversal agent for the antiplatelet therapy ticagrelor; and PB6440, an oral agent for the treatment of resistant hypertension. PhaseBio’s proprietary elastin-like polypeptide technology platform enables the development of therapies with potential for less-frequent dosing and improved pharmacokinetics, and drives both internal and partnership drug-development opportunities."
PhaseBio is located in Malvern, PA, and San Diego, CA.
The Perkins Declaration adds: "Founded in 2002, PhaseBio is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapies for cardiovascular diseases.
PhaseBio’s business strategy is to identify, develop and commercialize novel therapies for cardiovascular diseases. Its portfolio of products includes a number of clinical and pre-clinical candidates that are currently in varying stages of development, none of which has received regulatory approval to date."
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