Vital Pharmaceuticals, Inc. – After Multiple Objections and Delays, Debtors Win Final (and Significantly Amended) DIP Financing Order

January 12, 2023 – The Court hearing the Vital Pharmaceuticals cases issued an order authorizing the Debtors to: (i) access a further $66.0mn of new money debtor-in-possession (“DIP”) financing being provided by prepetition lender Truist Bank (“Truist”), (ii) roll-up $235.0mn (reduced by $120.0mn) of amounts owed to Truist under an August 2020 Revolving Credit and Term Loan Facility and (iii) continue using cash collateral [Docket No. 638, with DIP credit agreement attached at Exhibit B].

On October 14, 2022, the Debtors had been given authority to access a first $34.0mn tranche of the new money DIP financing by an interim DIP order [Docket No. 120].

The final DIP order comes after a final DIP hearing that was delayed on multiple occassions (November 9th, to December 6th, to December 19th, to January 10) as the Debtors and Truist looked to resolve (now achieved) a barrage of objections*, notably from Monster Energy Company and their creditors' committee (the "Committee"). 

*The order provides: "The objections filed by Monster Energy Company [ECF Nos. 87 and 411]; (ii) Maricopa County Treasurer [ECF No. 220]; (iii) Faith Technologies, Inc. [ECF No. 256]; (iv) HACI Mechanical Contractors, Inc. [ECF No. 259]; (v) American Bottling Company [ECF No. 415]; (vi) the official committee of unsecured creditors [ECF No. 413]; (vii) Stellar Group, Inc. [ECF No. 412]; and, (viii) Hardrock Concrete Placement Co. [ECF No. 594] are resolved based on the terms of the Final Order. The objection of the United States Trustee [ECF No. 267] is overruled for the reasons announced on the record at the Final Hearing."

Key changes to the non-governance terms (there are also several corporate governance requirements as to independence, board composition, etc) of the DIP financing include:

• DIP Facility and Roll-Up: The Roll-Up as proposed in the DIP Motion was reduced from approximately $355.0mn to $235.0mn, with creeping roll-up mechanics eliminated . The new money component is still $100.0mn.
• Extension of Milestones: The DIP Lenders agreed to the addition of a new Milestone of January 13, 2023 as the deadline for the Debtors to have received at least one indication of interest regarding commitments for an Acceptable Financing and/or an acquisition of all or substantially all of the Debtors’ assets. In addition, the prior January 23, 2023 Milestone, by which the Debtors must provide a third- party investor commitment to consummate a refinancing transaction for the payment in full in cash of the DIP and prepetition obligations included in the original DIP Facility, was extended to March 13, 2023.
• The following additional Milestoneswere also extended and/or added:
  • Deadline to filing bid procedures motion: January 27, 2023 (was January 23, 2023)
  • Bid procedures hearing deadline:February 28, 2023, 2023 (was February 23)
  • Deadline for Approval of Stalking Horse: March 31, 2023 (was January 23, 2023)
  • Deadline for Auction: April 19, 2023 (was April 8, 2023)
  • Deadline to close  on an Acceptable Financing or Consummation of a Sale Transaction: May 17, 2023 (was May 1, 2023)
• Asset Sale Proceeds: While the Prepetition Secured Parties will receive a paydown of 100% of the net proceeds from the sale of the Lithia Springs real property and other non-debtor owned real property parcels, the Debtors will receive at closing in cash from each real property parcel’s sale proceeds the costs funded by the Debtors in respect of each such parcel since Petition Date.
• Adequate Protection: Subject to the passage of the Challenge Period and without a Challenge by the Committee, adequate protection in the form of cash pay interest on the Prepetition Obligations remaining after the Roll-Up (estimated to be $120 million) will be capped at the “Agreed Rate,” and additional amounts will only be paid under certain limited circumstances. The Agreed Rate means the Base Rate (currently 7%, which will continue to float) plus the applicable spread (6.5% as of December 1) plus the default rate (2%), but in any event not less than 15% in total.
• Lien Investigation:  The Committee’s investigation budget was increased from $50,000 to $100,000 to investigate the claims and/or liens of the Prepetition Secured Parties under the Prepetition Credit Documents and the Debtors’ Stipulations.
• Challenge Period: The Challenge Period was extended to January 16, 2023 as to all parties.
• Automatic Standing: The Creditors’ Committee shall be deemed to have standing to prosecute any Challenge to the amount, validity, extent, priority, or perfection of the mortgage, security interests, and liens of the Prepetition Agent with respect to the Prepetition Collateral owned by the Debtors.5
• Maturity Date: The outside maturity date of the DIP Facility was extended by two weeks to May 24, 2023.
• DIP Collateral/Superpriority Administrative Claims: Certain litigation claims (i.e., avoidance actions and commercial tort claims) are carved out from the DIP Collateral/Superpriority Administrative Claims.
• 506(c), 552, and Equities of the Case Exception: The Committee agreed to the requested waiver of the equitable doctrine of “marshaling”, and to waivers of the rights included in Bankruptcy Code section 506(c) and section 552’s equities of the case exception.

In a statement in support in support of the final DIP order, the Committee notes [Docket No. 627]: "The Proposed Final DIP Order is the culmination of months of good faith and hard fought negotiations between and among the Committee, the Debtors, and the DIP Lenders. While the Committee had expressed deep concerns, both publicly and privately, about several aspects of the originally proposed DIP Facility, the Committee has now resolved all of its open issues. From a non-governance perspective, among other things, the amended DIP Facility materially reduces the originally above-market Roll-Up, extends the Milestones and Maturity Date to allow for a more robust and thorough marketing process, modifies and narrows the scope of the DIP Lenders’ liens and superpriority claims, and provides the Committee with more meaningful Challenge rights. Most critically, the DIP Facility now imposes certain corporate governance changes on the Debtors to truly ensure that the Board remains independent through the pendency of these Chapter 11 Cases. At this juncture, because of these changes, among others, the Committee now believes that the DIP Facility and current Board composition will no longer be an impediment to the maximization of value for unsecured creditors and all of the Debtors’ other stakeholders. Therefore, the Committee supports the approval of the DIP Motion on a final basis, and respectfully requests the Court’s entry of the Proposed Final DIP Order."

Updated Key Terms of the DIP Facility

• Borrower: Vital Pharmaceuticals, Inc., as debtor-in-possession in these chapter 11 cases (the “Borrower” or “Vital Pharmaceuticals”)
• Guarantor(s): The subsidiaries and affiliates of the Borrower identified in the DIP Credit Agreement (collectively, the “Guarantors”), which are comprised of the Debtors.
• DIP Agent: Truist Bank (“Administrative Agent” or “Prepetition Agent”)
• DIP Lenders: The lenders from time to time party to the DIP Credit Agreement.
• Commitment: Extensions of credit in the maximum principal amount of $335.0mn, which amount is composed of the sum of (a) $100.0mn of new money and (b) $235.0mn of additional “Roll Up” commitments.
• New Money: $100.0mn ($34.0mn Interim)
• Roll-Up: $235.0mn (downsized from $354.7mn)
• Interest Rates: The DIP Loans will bear the following interest: 1-month SOFR (secured overnight financing rate) + 8.50% or Base Rate + 7.50%, at the election of the Borrower.
• Term: [as noted above, The outside maturity date of the DIP Facility was extended by two weeks to May 24, 2023.] The DIP Loans would be repaid in full, and the DIP Loan Commitment would terminate on, the earliest to occur of the following:

1. unless the Final Order shall have been entered, the date that is thirty (30) calendar days after the date of entry of the Interim Order: provided. that, the date contemplated in this clause (a) may be extended with the consent of the Administrative Agent and the Required Lenders (as defined in the DIP Credit Agreement) to a date that is no later than sixty (60) calendar days after entry of the Interim Order;
2. the date upon which any plan of reorganization or Sale Transaction (as defined in the Interim Order) becomes effective;
3. the date that is the seven (7) month anniversary of the Petition Date; and
4. acceleration by the DIP Agent following an Event of Default.

• Fees: The DIP Facility includes the following fees:

• DIP Structuring Fee: A one-time fee of $300,000 payable to the Administrative Agent, non-refundable and payable in cash out of the proceeds of the initial funding of the DIP Facility.
• Upfront Fee: A one-time fee of $2,500,000, non-refundable and payable in cash out of the proceeds of the initial funding of the DIP Facility and shared ratably by the DIP Lenders.
• Commitment Fee: A fee equal to 0.50% per annum on the unused amount of the DIP Loan Commitment that constitutes the DIP Facility Available Amount, non-refundable and payable monthly in arrears on the last day of each month during the term of the DIP Facility and shared ratably by the DIP Lenders holding any portion of the DIP Loan Commitment.

• Use of Proceeds:The Debtors shall use the proceeds of the DIP Facility and any Cash Collateral, in accordance with the Approved Budget, solely as follows:
  1. on the Effective Date (as defined in the DIP Credit Agreement), to pay costs and expenses associated with the closing of the transactions under the DIP Credit Agreement, including those required to be paid pursuant to the DIP Credit Agreement; and
  2. on or after the Effective Date, to fund the Cases in accordance with the Approved Budget or as otherwise set forth in this Interim Order and for the financing of Debtors’ ordinary working capital and other general corporate needs, including certain fees and expenses of professionals retained by the Debtors and for certain other prepetition and pre-filing expenses that are approved by this Court and permitted by the Approved Budget (subject to Permitted Variances) and including, after the entry of the Final Order, for the Roll Up to the extent provided for therein and the payment of the Prepetition Obligations as described therein. The Debtors shall not be permitted to use the proceeds of the DIP Facility or any Cash Collateral in contravention of the provisions of the DIP Documents, this Interim Order or the Bankruptcy Code, including any restrictions or limitations on the use of proceeds contained therein.
• Milestones:
  • Deadline for at least one financing or sale indication of interest: January 13, 2023
  • Deadline to filing bid procedures motion: January 27, 2023 (was January 23, 2023)
  • Bid procedures hearing deadline:February 28, 2023, 2023 (was February 23)
  • Deadline to provide 3rd party commitment to consummate a refinancing transaction that repays DIP and prepetition obligations (March 13, 20023 was January 23, 2023)
  • Deadline for Approval of Stalking Horse: March 31, 2023 (was January 23, 2023)
  • Deadline for Auction: April 19, 2023 (was April 8, 2023)
  • Deadline to close  on an Acceptable Financing or Consummation of a Sale Transaction: May 17, 2023 (was May 1, 2023)

Marketing Efforts

In a declaration in support of the DIP motion [Docket No. 25], Homer Parkhill, Co-Head of Restructuring with the Debtors’ investment bankers Rothschild & Co US Inc., states, “In June 2022, the Debtors commenced an initial marketing process, seeking proposals for secured debt financing or a minority equity investment (the ‘Initial Marketing Process’), with a specific focus on completing an out-of-court transaction intended to stabilize the Debtors in the face of ongoing defaults and liquidity concerns and the overhang from contingent, unliquidated, and disputed liabilities, including amounts potentially necessary to post a supersedeas bond in the event that an adverse judgment was entered in the OBI District Court Action. Beginning in April 2022, Rothschild & Co assisted with the preparation and planning of the Initial Marketing Process.

In the furtherance of the Initial Marketing Process, Rothschild & Co, in concert with and on behalf of the Debtors, contacted 30 parties, which included sophisticated asset managers with industry-specific and distressed company expertise as well as strategic counterparties. Of those parties contacted, 23 executed non-disclosure agreements (‘NDAs’) and the Debtors and their advisors, including Rothschild & Co, provided those parties under NDA with access to a virtual data room and responded to numerous diligence requests to enable interested parties to formulate proposals.

Despite months of effort, the Debtors could not effectuate a secured debt financing transaction that would sufficiently recapitalize their business. Additionally, no parties were willing to consider a minority equity investment that would provide sufficient capital for the Debtors to address their needs.

The Debtors found themselves facing many challenges. The Debtors continued to be in default under the Prepetition Credit Agreement, and the Prepetition Secured Parties were unwilling to extend forbearance agreements indefinitely. The Initial Marketing Process had proven unfruitful, and the Debtors faced constrained liquidity—all amidst the backdrop of the Debtors’ distribution network transition and crucial contractual negotiations. The Prepetition Secured Parties continued to support the Debtors and after several rounds of negotiations, agreed to provide the Debtors with the DIP Facility, as further discussed below. Given these challenges and in parallel with the negotiations with the Prepetition Secured Parties, in mid-September 2022 the Debtors and their advisors launched a formal marketing process to (a) solicit bids for debtor-in-possession financing (on a priming or junior lien basis) in anticipation of a potential chapter 11 filing, (b) resolicit bids for secured take-out financing, and (c) solicit bids for out-of-court bridge financing to obtain a short term extension of liquidity runway.

To leverage the efforts of the Initial Marketing Process and to limit speculation in the market that could cause irreparable harm to the Debtors’ business during a critical period of transition, the Debtors and their advisors reached out to 15 parties who were already under NDA as part of the Initial Marketing Process. Based on my experience, I believe that these parties encompass the entities that reasonably would likely be interested and able to provide financing of this kind – including debtor-in-possession financing. During its outreach to these 15 parties, Rothschild & Co and the Debtors solicited proposals for debtor-in-possession financing either (i) secured by liens junior to those securing the Debtors’ prepetition debt, or (ii) secured by priming liens senior to those securing the Debtors’ prepetition debt. In parallel, the Debtors and their advisors reached out to a limited subset of five new financing parties who executed an NDA with the Debtors in an effort to solicit their interest in providing either take-out financing or out-of-court bridge financing.

After engaging with a number of parties and providing those potential lenders with additional access to diligence materials—including an investor presentation, weekly and monthly cash flow analyses, information on the proposed collateral, and access to additional information contained within a virtual data room—the Debtors received no debtor-in-possession financing proposals other than the DIP Facility.”

Moving onto the terms, Parkhill stresses that not only is the prepetition-turned DIP lender the only possible source of financing, even here, where prepetition lenders are defending their existing exposure, the Debtors’ dire credit profile merits some rather hefty fees and protections (although Parkhill does his best to cast the argument the other way). He continues: “Given the financial and operating condition of the Debtors, the timing, cost, and risk of administering these Chapter 11 Cases, the fact that there are no viable alternatives, and based on my experience and knowledge of the debtor-in-possession financing market, the fees are consistent with the market and are reasonable and appropriate under the circumstances. Particularly in light of the credit profile of the Debtors, the nature and extent of the collateral securing the facility, the state of the global economy, and the Debtors’ industry, and the relevant risks associated with lending in the postpetition financing context, I believe that the proposed fees and interest should be approved.

Additionally, the Debtors and their advisors considered the fees described above when determining, in their sound business judgment, that the DIP Facility constituted the best and only means for the Debtors to obtain the postpetition financing necessary to continue their operations, prosecute their cases, and maximize the value of the Debtors’ estates.

Additionally, based on the negotiations, I understand that the Roll Up was a necessary inducement for the Prepetition Secured Lenders to provide a DIP Facility with this tenor, and in a sufficient amount, and consent to use of Cash Collateral, each of which is essential to the viability of the Chapter 11 Cases and the Debtors’ ultimate reorganization. The Roll Up also provides an economic benefit to the Debtors because it results in repayment of the prepetition debt on more favorable terms than previously available. Moreover, I understand that the Debtors are not seeking approval of any Roll Up on an interim basis.”

DIP Financing Background

The DIP financing motion [Docket No. 24] states, “The Debtors require immediate access to the DIP Facility in addition to continued use of the Cash Collateral in order to satisfy near-term and long-term expenses critical to the business and their chapter 11 efforts, which, in turn, will preserve and maximize the Debtors’ enterprise value. The Debtors are unable to generate sufficient levels of operating cash flow in the ordinary course of business to cover their operating and capital costs and the projected costs of these Chapter 11 Cases absent immediate funding.

The Debtors require the funding available from the DIP Facility in order to, among other things, fund working capital, meet payroll obligations, pay suppliers, cover overhead costs, and make any other payments that are essential for the continued management, operation, and preservation of the Debtors’ business. The ability to make these payments when due is essential to the continued operation of the Debtors’ business during the pendency of these Chapter 11 Cases. If the Debtors cannot quickly access the DIP Facility, based on the Debtors’ financial forecasts and the Approved Budget, the Debtors will not be able to operate their business in the ordinary course until the hearing on the Final Order. In turn, this would negatively impact the Debtors’ revenue, jeopardize the Debtors’ stakeholders’ confidence in the Debtors’ business, and harm the value of the Debtors’ estates to the detriment of all stakeholders. See id. Based on the Debtors’ financial forecasts and the Approved Budget, the liquidity provided by the DIP Facility should allow the Debtors to implement their business plan while they focus on a refinancing process to pay their prepetition lenders in full.

Therefore, absent immediate access to the DIP Facility and Cash Collateral, the Debtors could: (a) face a severe interruption of their businesses; (b) lose the support of key constituencies, including the Debtors’ workforce, key marketing partners, and customers; and (c) be forced to significantly modify, or shut down entirely, their operations. To avoid those outcomes, it is imperative that the Debtors have access to the DIP Facility from the outset of these cases in order to signal to the Debtors’ stakeholders, including their employees, marketing partners, vendors, and customers, that despite the filing the outlook for the Debtors and their stakeholders is strong, and that they have the liquidity necessary to meet their obligations in the ordinary course until the business is able to emerge from the chapter 11 process.”

Prepetition Indebtedness

Debtor Vital Pharmaceuticals, as borrower, and certain subsidiaries and affiliates of Vital Pharmaceuticals, as guarantors, are parties to an August 2020 Revolving Credit and Term Loan Facility with Truist Bank serving as administrative agent, swingline lender and issuing bank.

The Credit Agreement provides two separate credit facilities, each maturing on August 14, 2025: (a) a revolving credit facility (the “Prepetition Revolving Credit Facility”) and (b) a term loan A (the “Prepetition Term Loan” and together with the Prepetition Revolving Credit Facility and all other obligations arising under the Prepetition Credit Agreement, the “Prepetition Loans”).

As of the Petition Date, the Prepetition Lenders are owed on account of the Prepetition Loans:

1. $240,000,000.00 in revolving loan principal obligations, 
2. $104,190,218.45 in term loan principal obligations, 
3. $6,349,912.27 in respect of unpaid interest accrued through October 9, 2022, 
4. $4,188,187.51 in respect of unpaid forbearance fees accrued through October 9, 2022, and 
5. $41,883.33 in respect of unpaid commitment fees accrued through October 9, 2022.

The Debtors have no funded unsecured debt and incur trade debt in connection with the operation of their businesses. In the ordinary course, the Debtors also incur trade debt with certain vendors and suppliers in connection with the operation of their businesses. As of the Petition date, the Debtors have approximately $83.0mn in trade payables outstanding.

Revised Budget (see Docket No. 638]

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