Following a Bankruptcy Reorganization: Dayton Superior
One of the keys to successful distressed debt investing and the foundations of good distressed debt research is following the bankruptcy reorganization process. As we talked about in our analysis of Idearc, we like to review the first day filings to be acquainted with the situation.
In reality though, a hedge fund investing in distressed debt will have been following the situation for quite some time. Maybe they own bonds, or maybe they are waiting to see how the situation plays out. The analyst at the fund will know the company, will have probably talked to the advisers, talked to other hedge fund or institutional investors, and at this point probably already made a decision.
Other times though, things just kind of fall into your lap. You haven't been following the company, in fact you do not know anything about the company at this point. All you see is something like this:
"XYZ Company Files for Chapter 11"
From that point, where do you start?
Well I am going to attempt to walk you through that right now using an example that I just pulled up. The company is Dayton Superior. As of earlier this week, I knew nothing about Dayton Superior. The headline was:
"Dayton Superior files for Chapter 11 protection"
And for those following along at home, here is the link to the Associated Press release: Dayton Superior AP release
I read that press release, and here are some things I take away from it:
- Dayton Superior makes products used in concrete construction
- The company received $165M in financing
- It tried to restructure outside bankruptcy but couldn't because credit markets are in such bad shape
- GE is providing the DIP, which will replace the existing $150 credit facility
- Filings occurred in U.S. Bankruptcy Court, Wilmington, Delaware
Ok. At this point we have about a 50,000 foot view. We still know nothing about the company, why it filed, what is happening at the company etc.
The next step: Google. I Google'd "Dayton Superior" to finds the company's home page. I click around to find investor relations. Eventually we will come back to the home page to learn more about the company (an often under-utilized tool by buy side and sell side professionals alike).
Again for you following at home: Dayton Superior's Investor Relations
At this point, I can go two ways. I can start reading the 10k and the company presentations. Or I can dive right into the bankruptcy filings. It all depends on your poison. I personally like to dive right into the filings. I click on the "Financial Restructure Information" link, and start looking for a more detailed press release, and I find it here: Dayton Superior Detailed Chapter 11 Press Release
From this press release, I take away a few more things:
- A more detailed explanation of what the company does: "...the leading North American provider of specialized products from the nonresidential concrete construction market."
- The DIP is $165M - 12 month maturity
- The company is seeking approval for the DIP (DIPs are hotly contested in the courts)
- The company is going to attempt to fulfill its employee, customer and supplier claims
- 2008 Operating Income was $45M of Net Sales of $476M. Sub 10% EBIT business. Tough. And that was a record!
- Bid activity up 20-30% due to the Federal infrastructure initiatives. Makes sense
- Liabilities include $161 in principal and accrued interest on the company's 13% Senior Subs due 2009 and $222M in borrowings outstanding under their senior secured credit facility
- And then a very detailed business description.
The next thing we do, is look for something relating to court documents or claims information. Found it: Dayton Superior Bankruptcy Docket
I click on the court docket link on the left navigation bar, to pull up the actual docket. This pop-up window is fairly self explanatory. We care about the dates, and the court docket number (as you see Court Docket #1 was the actual Voluntary Chapter 11 petition), and then subsequent filings increase in number. I worked on the Enron case and trust me, that docket number can get pretty large. Next to the docket number is the Document Name.
Do not let the document name scare you. Generally they are pretty self explanatory. Lots of them in the first few days of the case relate to the First Day filings, Notice of Appearances and Motion to Admit certain individuals to sit in and speak on their clients behalf, etc.
If you remember, we always like to read the affidavits or declarations in the beginning of the case. In this case, the we find it at Document #16, Document Name: "Declaration of Edward J. Puisis Support of Chapter 11 Petition and First Day Motions." Let's read through that, and see what we find:
- Edward Puisis is the CFO of Dayton Superior
- More business description: "The Debtor manufactures, markets, and distributed specialized products consumed in non-residential concrete construction..." You can read that part yourself
- 1104 employees, in which 325 are employed by collective bargaining agreements (unions)
- The corporate structure: Simple, one subsidiary, Dayton Superior Canada, which is not subject to any bankruptcy filings at the time. In general, if a U.S. subsidiary files for bankruptcy, many times the foreigns subs will not file.
- Pre-petition capital structure: $100M Term Loan, secured by substantially all the assets with certain priorities detailed later in the document. $103M outstanding at the filing date. $150M Revolver, secured by assets with priorities detailed below. $110M outstanding as of filing date, and ~$9M of Letters of Credit.
- The Term Loan and Revolver are governed by an intercreditor agreement that dictates collateral preference. Specifically, the Revolver has a first lien (claim) on working capital and a second lien on other portions of the as defined "Prepetition collateral." The Term Loans on the other hand, have a first lien on all prepetition collateral other than what the revolver has a first lien on (think PP&E) and have a second lien on the Revolver collateral. I know confusing, but just know Revolver = First on Working Capital, Term Loan = First on PPE.
- Senior Sub Notes: $170M at 13% due 2009. Unsecured and subordinated. $161M outstanding at filing date.
- Why the company filed? Term Loan and Revolver were supposed to mature in March 2009. Tried to remedy the problem with a refinancing or sale of the company. Started negotiating. Couldn't reach a consensual solution regarding a out of court restructuring and then started negotiating a prepack.
- While they did agree to extend the original maturity to April 20th, unable to reach an agreement of the form of the prepack
- While negotiations were going on, the trade creditors (i.e. people selling them suppliers) started demanding cash up front and accelerated payments. This is why companies file for bankruptcy: They run out of money. To top it off, their Spring season is one of the busiest requiring substantial working capital investments. Up against the wall, they filed for bankruptcy.
- The document then goes on to list the first day motions. I am going to talk about these in the next post, as they are quite extensive.
At this point, we have a decent understanding of what is going. Let's see if we can find some more interesting information from the docket.
I want to read all the declarations and affidavits initially. In this case we see a few.
The first is the declaration of Mark Hootnick, a Managing Director at Moelis (a restructuring firm), in support of certain first day motions, specifically the DIP and the granting of adequate protection. This is an important document to read. One thing we take away is that Oaktree Capital Management, a very reputable hedge fund, is a significant holder of the Senior Sub Notes. We also learn about the negotiations that went into forming the DIP. The GECC DIP was finally chosen which as stated above will be $165M. $100M to repay prepetition Revolver obligations (which interestingly enough, GECC is the provider of), plus $35M for general corporate use. The remainder will be available upon the final Court order approving the DIP as revolving loans.
As mentioned above, DIP loans are hotly contested. Why? Because the more senior debt you layer in the worse the recovery for junior creditors. Initially the court will approve an interim DIP order, and then their will be arguments and fighting in the court until something is finally settled.
From here, now that we have a good understanding on what is going on, we need to due some company due diligence. Here are some links to get you started:
And it will probably help to know that the bonds are currently trading at in the upper 60s.
This will be an interesting distressed debt investing case to follow. In future posts we will examine credit agreements, covenants, DIP Terms, and a whole lot more to help you better understand distressed debt investing and distressed debt research.
1 comments:
It's going to be interesting on May 11th. The Court has scheduled a hearing on that date to make a final determination on the DIP, which is now only approved on an interim basis.
The Debtor has proposed, and been given interim permission, to enter into the DIP agreement with GECC. The economic terms of this agreement is substantially less attractive than those of the Bondholders (initially identified, by Mr. Hootnick, as Oaktree Capital, but now appearing to be Whippoorwill Associates, OCM Principal Opportunities, and Solus). A comparison of the economics was presented by the Bondholders in Exhibit B (page 139) of Objection of the Ad Hoc Committee of Bondholders to Debtor's Motion for an Interim and Final Order Authorizing the Debtor to Obtain Post-Petition Financing. .
The reason that Mr. Hootnick gave for preferring the GECC proposal was that acceptance of the bondholder proposal would have led to extensive litigation by GECC in relation to the liens.
As you well know, but may not be known by all your readers, one of the problems that companies are experiencing these days in obtaining DIP financing relative to the past is that capital structures have changed. It became common (partly because of the CLO and CDO structures that became popular) to borrow more from banks than in the past. This capital was cheaper than the mezzanine borrowings that had been more common, but were now a smaller part of the capital structure. This created a situation where many companies have given liens on all of their assets. As a result, there are no assets for an outside DIP lender to secure their loan. While DIPs have priority (and possibly super priority) as administrative obligations under Section 364(c) (and, therefore, must be paid before a company exits Chapter 11), unless there is exit financing available, the DIP lender will end up with equity - or be incentivized to keep the company in bankruptcy, rolling over the DIP (I'm not sure of a court's discretion to "cram down" a DIP lender) until exit financing becomes available or the company is liquidated or sold.
The bondholder proposal dealt with this issue by asking for liens on a pari passu basis with GECC's position. It would appear that the Debtor (or its advisers, Moelis) believe that the amount of GECC's loans equals or exceeds the value of their collateral. If the Bondholder DIP was issued pari passu with GECC, GECC would be undersecured (by 50% or more).
The court has limited discretion in this, because under Section 364(d)(1)(B) the Trustee (or Debtor) must prove that there is "adequate protection of the holder of the lien on the property of the estate on which such ... equal lien is proposed to be granted."
In other words, the Code says that the judge can't grant pari passu or senior liens if the existing secured debt exceeds the value of the collateral backing that debt.
Thus far, the Court has ruled in favor of the Debtor's proposal. Unless the bondholders accept a junior lien, it may not be possible for the judge to accept their proposal. It could make sense for the bondholders to accept a junior or unsecured position if they want a "loan to own" structure since the DIP would likely become the fulcrum security (they would end up with a controlling equity stake in the post-petition company).
I haven't researched any cases that might be relevant here, but as I said above, it's going to be interesting.
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