Update: Distressed Debt News: Revel to File for Chapter 11 in The Last Two Weeks of the Month

Second Update: Bloomberg reports that Revel will file a pre-arranged bankruptcy in late two weeks of the month.

Update : Sources close to the company have told Distressed Debt Investing the filing timeline is still on or before March 15th. We will be providing some analysis on the valuation of the bank debt over the weekend.

Distressed Debt investing originally reported that Distressed casino operator Revel Entertainment is set to file for Ch. 11 protection within the next 24 to 48 hours, according to two sources familiar with the matter. The company announced Feb. 20 part of its restructuring support agreement with lenders required it to commence Ch. 11 proceedings on or before March 15, but has been able to complete the process a week in advance of the final deadline.

Revel disclosed last night a last-minute amendment to its credit agreement for a new required reserve amount associated with loans used to complete certain capital expenditures and to change some minimum liquidity thresholds.

The change was likely in order to ensure dissident holders could not claim there is a default, as certain holders in the term loan and delayed-draw facilities were not happy with the plan, according to sources.

Revel’s main term loan debt was last quoted in the 50/52 context, unchanged from Tuesday, according to a source. As Reorg Research reported on Tuesday, meaningful blocks of Revel Entertainment’s bank loan traded hands recently, with the last trades at 49 – a jump from 40 last week, according to sources, on a handful of developments leading up to the company’s formal Chapter 11 filing. One seller even tried to come to market as high as 54, according to sources.

As the company mentioned in its RSA, the restructuring details include:

• A consensual pre-packaged Chapter 11 filing
• Reduction in debt load by over $1 billion through an exchange of debt for equity
• Certain of Revel’s lenders will provide approximately $250 million in debtor-in-possession financing, approximately $45 million of which constitutes new money commitments and approximately $205 million of which constitutes prepetition debt
• Revel to continue normal business operations and honor obligations in the ordinary course of business

Lenders signed onto that agreement include funds of Capital Research, JP Morgan, Wells Fargo and Canyon Capital. The other biggest holders in the debt have been a mix of institutional investors and funds including Franklin Resources, Chatham Capital and Oppenheimer, sources said.

Revel appointed Alvarez & Marsal’s Dennis Stogsdill to serve as CRO, according to a Feb. 28 announcement.

Revel also is getting financial advice from Moelis and Kirkland & Ellis in connection with the restructuring; as well as Brown Rudnick as special counsel and Cooper Levinson as gaming counsel.

Revel’s $850 million term loan due 2017, at L+750 with a 1.5% LIBOR floor, was put in place via JP Morgan in February 2011 to back development. Then in the spring it added a $50 million delayed-draw term loan to and in August increased its revolving credit to $100 million. The $125 million rescue facility got priority over the debt already in place via an amendment to the credit facility, which included a $25 million increase to the revolver.

 - Max Frumes

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Distressed Debt News: McGraw-Hill Financing Creates Company at Different Comp, Cengage-Watchers Note

Details about the upcoming financing for McGraw-Hill Education’s buyout by Apollo Global Management could place pressure on Cengage’s capital structure, according to sources.

The financing, which consists of a $1 billion bond, a $560 million term loan and a $240 million revolver – and now $950 million in equity – now completely excludes the K-12 business, according to sources. There is no claim on that business, multiple sources said, and also the purchase price will solely be based on the higher education business. The pricing on the TL is L+650-800 with a 1.25% LIBOR floor and a 98 OID, and the revolver has a 99 OID, according to details presented on the call.

The K-12 portion will have its own cap structure, according to sources that were on the bank meeting call yesterday, which might be some asset-backed revolver, and new investors could possibly purchase equity in that separate business along with Apollo.

Cengage was mentioned frequently on the bank call from a competition standpoint, though there was nothing explicitly mentioned about any partnership or acquisition that could happen with the businesses - and idea debt investors have floated because Apollo also owns a portion of Cengage’s 12% notes. Cengage’s fate remains closely followed by distressed debt investors, and not without some head-scratching of late. The company’s bank debt took a dive prior to earnings being released as market participants feared poor results for the quarter ending Dec. 31. And those results were indeed poor as the company disclosed decreasing cash and cash equivalents of $33.5 million as of Dec. 31, down from $137 million at the same point year-prior, and adjusted EBITDA of $145.1 million for quarter, down 17% compared with the same quarter year-prior.

Yet some of the developments were positive, which resulted in a relief rally in both the bank debt and 144A paper. Shortly after the Wall Street Journal reported last week that the company was going to hire – but had not yet hired – Alvarez & Marsal for restructuring options.

Financial sponsors Apax Partners have been snapping up the company’s first-lien debt, the company disclosed in its latest results: during the “three and six months ended December 31, 2012, funds advised by Apax that had previously invested in our equity made substantial purchases of our outstanding debt at a discount,” according to the note. But it’s not certain if Apax has been doing this in order to retain control in an in-court or out-of-court restructuring.

Apax, along with OMERS, purchased Cengage in July 2007 for $7.3 billion from Thomson Reuters, a deal that included about $5.6 billion in debt. Yet the owners have not been able to make any money on the acquisition except management fees, not being able to take out a dividend since that time.

It appeared the backers were trying to extend their optionality in July, when JP Morgan ran an exchange for Cengage in a deal privately negotiated between the company and some of the larger notholders including Apollo. The exchange put in new 12% 144A secured notes due 2019, effectively subordinating the remaining 10.5% notes due 2015, and leaving the company with no ability under its senior secured leverage ratio to incur any additional first- or second-lien debt. Sources at the time noted those who got left out of the exchange were left with less valuable debt. This allowed Apax to keep their options open to address the remaining maturities while hoping for an improvement. However, since that improvement did not materialize, both notes have become severely discounted with the 10.5% notes quoted in the 23 context and the 12% notes at 33.5.

The non-extended term loan was last quoted in a 78/79 context according to sources, while the extended portion is in the low to mid-70s.

The cap structure includes $1.527 billion on the 2014 term loan at L+225, $1.29 billion on the extended portion due 2017 at L+550; $551.2  million on the incremental term loan; $725 million in 11.5% senior secured First Lien Notes due 2020 725 million, $710 million in 12% Senior Secured Second Lien Notes due 2019, $328.8 million in 10.5% unsecured notes due 2015; $132 million in 13.25% subordinated discount notes due 2015; and $66.2 million 13.75% PIK notes due 2015 for a total of $5.36 billion, as of Dec. 31, according to the company.

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Gatehouse Media 10K Filing Set for Tomorrow to Answer Questions

Gatehouse Media management has been giving indications that “going concern” language is unlikely in the 10K set to be filed tomorrow, according to sources. If so, investors in deeply discounted $1.18 billion in bank debt may have to wait another year for a trigger to get return in a restructuring scenario.

Also, tomorrow, investors will look to see how much Fortress Investment Group's funds – which also own 39.6% of the common stock – have increased on their holdings of $124 million of the term debt last disclosed Sept. 30, according to financial filings. Fortress had been snapping up more of the term loan in secondary purchases since the last quarter, according to sources. Sources put the increased position of the distressed investing private equity giant at possibly a “significant” increase to its previously disclosed holding.

Funds of institutional investors Third Avenue Management, Eaton Vance, Neuberger Berman Management, Invesco, and Putnam owned smaller portions of the bank debt through the end of 2012, according to recent SEC disclosures, while additional holders had recently included GoldenTree Asset Management – once the largest holder - GE Capital, Ares and KKR, according to sources.

Under the company’s credit agreement “any going concern” or similar language is considered an event of default. In such a scenario the company would have 30 days to cure that default, according to the credit agreement.

On this uncertainty, about $30 million to $40 million of the term debt has traded down from 37 to where it is now quoted at 32/33 since an uncharacteristic filing of preliminary results, according to sources.

GateHouse’s capital structure was put in place in 2007, comprising a $690 million term loan and a $250 million delayed-draw term loan at L+200, a $275 million incremental term loan at L+225 and a revolver.

For the fourth quarter, Gatehouse expects revenues of about $125.6 million and adjusted EBITDA of $22.3 million to $23.3 million, according to its preliminary results, both down compared with $144.4 million in revenue and $32.9 million in EBITDA the same quarter from the previous year.  For year-end Adjusted EBITDA of $80 million to $81 million would make the debt-to-EBITDA ratio would be nearly 15x.

Prior to the Feb. 11 announcement, Gatehouse had never given preliminary results before. The company felt compelled to do so because of some additional difficulties that it had experienced throughout the quarter it felt might have impacted results. The company wrote in the preliminary results that the fourth quarter declines were “slightly worse” than recent quarterly reports due to Massachusetts legislation slowing the foreclosure process leading to large delays in the timing of foreclosure revenues, a soft economic climate for small businesses due to fiscal cliff issues pulling back on advertising spend and increased sales force hiring and training to ramp up digital service products.

Ernst & Young LLP is the company’s independent registered public accounting firm for the year ending December 30, 2012.

Moelis & Co. and Milbank, Tweed, Hadley & McCloy LLP have been representing lenders and agent Gleacher in relation to the deal.

Fortress declined to comment. Gatehouse did not respond to request for comment by press time. - Max Frumes

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Announcing Reorg Research

For as long as I can remember, research and analysis of distressed debt has been an archaic process involving tedious and manual work, pulling information from a variety of disparate, untimely and incomplete sources. Thousands upon thousands of hours are wasted by the buy side and sell side searching and locating specific dockets in numerous cases which currently entails a painful process where oftentimes important updates to bankruptcy cases are missed. Time that should be spent analyzing is instead time spent wasted looking for answers.

In July 2009, I wrote on the blog:

"I check Pacer and various Court Dockets so many times it makes me sick: No seriously. It is such a tedious process. If anyone knows a way to automate this or wants to start a company that automates this with me, let me know. This is important because rulings move markets, new information from court filings move markets, you want to be ahead of the news."

I searched far and wide for solutions to my problems. The option set was limited at best, and most were very heavy modules targeted to the legal community. None were designed with a finance professional in mind: what information we need, when we need, how we would use it.

So I built it myself.

Beginning in the 1Q 2012, I worked with a variety of people in the U.S. Government along with an incredible set of developers to build what I think is a complete game-changer for the distressed debt industry. In 4Q 2012, I invited a group comprised of DDIC members, some of the largest distressed funds in the world, as well as leading investment banks and financial advisors to the closed beta. Feedback has been overwhelmingly positive. Currently approximately 100 firms are using the site on a daily basis. And now I'm ready to open the site to the public:

I encourage all who are interested in testing the site to request a trial on the site here: Reorg Research Trial Page.

To give you a quick sample here are just a few of the benefits from our Docket service:

 

(click to enlarge)

What are Some of the Features of Reorg Research Docket Product?

• Ability to track many bankruptcies dockets in one location
• Near real time alerts to new docket entries for the cases you are following
• A filtering mechansim I built myself that reduces some of the noise inherent in bankrupcy dockets (pro hac vice admissions, certificates of mailing, etc)
• Ability to download documents directly from Pacer with a simple click of a button
• One of the most powerful search functions ever created in bankruptcy. Want to search what Elliott is buying in the claims space? We can do that:

• Or maybe you want to do a fee comp study for an engagement you are working on as banker? We can do that in minutes. You can search across all cases or just one case at a time. You will be able to find information faster than ever.
• A daily summary email option: Not involved in a case but want to stay on top of it? We will send you the docket items (with filtering) on the cases on a daily basis
• Are you a hedge fund that wants to follow a docket but doesn't want others to see it on Reorg Research? I am fulfilling the request daily for funds. With the ability to track SO many case in one spot, hedge funds are able to leverage their analysts better and look at more opportunities in smaller cases.

And that's just the the docket product: Other features of Reorg Research

• Calendar of all bankruptcy hearings, with attached agenda items, for the cases in our system that you are tracking
• A relational database with every professional firm involved in a case along with professional level detail (banker's name, email address, and phone number) for those actively on the case
• Monthly operating reports in Excel format for you to easily download instead of recreating the wheel
• Key filings (First day affidavit, plan or reorgs, disclosure statement) in one convenient space

As we move through the first quarter, Reorg Research's services and offering will be expanding: As some of you saw, I have been actively hiring distressed debt analysts and reporters to cover situations in and out of the court room. Our first full time reporter, Max Frumes, was most recently at S&P LCD covering pre-bankruptcy situations. Max will be out there breaking stories in the pre bankruptcy space and most of his content will be going on Reorg Research (he's writing there as we speak). In addition to reporting, me and my team of analysts will be providing opinions on distressed situations, tear sheets so you can quickly get up to speed on cases, real time alerts on court proceedings and important decisions, legal analysis on vital bankruptcy dockets and the potential affects on securities valuation, and a portfolio manager summary that highlights the main drivers of value in a case.

For questions on Reorg Research, please reach out to me with an email or a call. I am actively visiting clients or talking with them on the phone on a daily basis and walking them through some of the features and benefits on the site.

Simply put: Reorg Research is a game changer for professionals in the distressed debt space. We are saving our subscribers precious time and money and streamlining their research process in revolutionary ways.

For more information or to request a trial, visit our home page here: Reorg Research

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Distressed Debt: OSG Tax Issues

Update: The diligent analysts, going through the Schedules found this: http://www.reorg-research.com/pdf/64783.pdf - the SOFA for ST Holdings LLC. See page 27: $115M interco payable directly to holdco...

Distressed Debt Investing has written multiple times on the OSG case. The case began heating up again when the IRS filed their tax claim in the case (priority claim for $463,013,177.63). Since then many parties have discussed what the ultimate tax issues will play out in the case. More information may come out during a bankruptcy hearing on March 5th where contested matters include both application for entries for an order for retention of PWC and Deloitte as Independent Audtior, Accountant, and Tax Advisor and Tax Advisors respectively to the company (responses have been received by the indenture trustee, the U.S. trustee, and the Official Committe). And today a notice of withdrawal for no objection also hit the docket in regards to the employment of PWC - so things could get interesting.

The objection from Wilmington Trust (Docket item 672) is actually a pretty good read. This is one of the better quotes: "Although the Debtors seek to retain Deloitte Tax LLP (“Deloitte”) as tax advisors to the Debtors and apparently intend to transition the Debtors’ tax work from PWC to Deloitte, the Debtors nevertheless fail to explain in their Motion why it is appropriate for them to retain as their auditor the very same auditors who audited the financial statements of the Debtors which have to be restated." Solid burn. The objection goes on to note that PWC may not be a disinterested party  according to the code, a professional firm can only be retained if they are 'disinterested').

This got me thinking: Has anyone done any work on the Deloitte retention documents (Docket 534)? As those following case know the tax issue is this (From the docket):

"As noted in the First Day Declaration, OSG has publicly announced that it is in the
process of reviewing a tax issue arising from the fact that OSG is domiciled in the United States but has substantial international operations, in relation to the interpretation of certain provisions contained in OSG’s loan agreements (the “International Tax Issues”)."

Deloitte is effectively being retained to work through these issues for OSG as debtor in possession. The proposed work order states that Deloitte will "assist clients with the computation of its entries required to adjust the income tax account balances such that they are consistent with the tax return filed for the years ended..." for 2011, 2012, and 2013.  The Tax Compliance Work Order states that the "target date for completion of federal tax returns is August 31, 2013."  What's interesting here is that if you look at the "Tax Due" from the above claim it looks like this:

With a huge penalty apparently from the 2010 returns...Who is looking at those returns? Also - how is it possible that 2010 and 2011 penalties are identical when net income is all over the place for both foreign and domestic operations of OSG? Does it have something to do with the guarantee side of the bank debt?

I know many funds have gone out of their way to figure out what the tax penalty entails as it is a huge swing factor for bonds at issued out of the holding company. To me the play all along has been bank debt holders (DK, GS, and a few other prominent ones) to do a rights offering to pay down European banks holding this bank debt on their book (probably marked too high), and cram down the bonds. But that will be a lot harder to do if the tax claims in much less or even pari with the bonds.

I'll add some more information after the hearing on the 5th.

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