December 14, 2020 – The Debtors notified the Court that their Second Amended Joint Chapter 11 Plan of Reorganization had become effective as of December 11, 2020 [Docket No. 807]. The Court had previously confirmed the Debtors’ Plan on October 20, 2020 [Docket No. 695].

On June 20, 2020, AAC Holdings, Inc. and 49 affiliated Debtors (NYSE: AAC, d/b/a American Addiction Centers; “AAC” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-11648. At filing, the Debtors, a leading provider of inpatient and outpatient substance abuse treatment services, noted estimated assets of $449,347,000; and estimated liabilities of $517,398,000.

The Debtors were represented by (i) Greenberg Traurig, LLP as  bankruptcy ounsel, (ii) Chipman Brown Cicero & Cole, LLP as conflicts counsel, (iii) Carl Marks Advisors as restructuring advisors, (iv) Cantor Fitzgerald as investment banker and (v) Donlin, Recano & Company, Inc. as claims agent.

An Administrative Claims Bar date and Professional Fee Claims Bar date have been set for January 10, 2021 and January 25, 2021, respectively.

In a press release announcing their exit from bankruptcy, AAC stated: "Having reduced debt by approximately $500 million, AAC emerges with a capital structure that will ignite the next phase of growth for the nation’s largest company solely focused on fighting the disease of substance abuse disorder and revolutionizing treatment. AAC also announced the appointment of Andrew McWilliams as Chief Executive Officer and the creation of a new Board of Directors with extensive behavioral healthcare experience led by Bowen Diehl as Chairman."

Overview of the Plan

The Debtors memorandum in support of Plan confirmation (the "Memorandum") [Docket No. 639] provides: "Prior to commencing these Chapter 11 Cases, the Debtors negotiated and entered into a Restructuring Support Agreement (the 'RSA' [attached to Docket No. 44]) with certain of their Prepetition Lenders that provides the framework for, and material terms of, the Plan. The RSA was signed, and is supported, by the ad hoc group of Prepetition Lenders (the 'Ad Hoc Group') holding in excess of 89% in aggregate principal amount of the loans outstanding under Prepetition Senior Lien Facility and 60% of loans outstanding under the Prepetition Junior Lien Facility.

Consistent with the RSA, the Debtors engaged in an extensive pre- and postpetition marketing process for the sale of substantially of their assets or a plan sponsorhip. Despite their efforts, the Debtors did not receive a bid that would satisfy in full the Senior Lender Claims and Junior Lender Claims or that was otherwise acceptable to the Requisite Consenting Lenders. The Requisite Consenting Lenders therefore notified the Debtors that they were electing to proceed with a Reorganization Transaction, as contemplated by the RSA and the Bidding Procedures Order. Accordingly, the Debtors filed a notice providing that the Debtors would seek to consummate and implement a Reorganization Transaction under the Plan."

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; projected recoveries are from the Debtors' Plan Supplement at Docket No. 582):

• Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $3,400,000 and expected recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $417,000 and expected recovery is 100%.
• Class 3 (“Senior Lender Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $55,698,866.82 (excludes post-petition interest) and expected recovery is 100%. Each Holder shall receive on the Effective Date: (i) Cash in the amount of the Senior Lender Unpaid Postpetition Interest Amount; and (ii) such Holder’s Pro Rata share of (A) the Exit Facility in the aggregate amount of the Converted Senior Facility Amount and (B) the New Warrants Senior Lender Allocation.
• Class 4 (“Junior Lender Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $450,593,283.62 (excludes post-petition interest) and expected recovery is 15-20% (recovery includes both the Junior Lender Secured Claims and the Junior Lender Deficiency Claims). Each Holder shall receive its Pro Rata share of (i) 100% of the Reorganized AAC Equity Interests, subject to dilution by the New Warrants and the Management Incentive Plan and (ii) the Class 1 Litigation Trust Interests. 
• Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $35,800,000 and expected recovery is 0%.  
• Class 6 (“Intercompany Claims”) is unimpaired/impaired and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 7 (“Subordinated Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is unknown and expected recovery is 0%.
• Class 8 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is unknown and expected recovery is N/A.
• Class 9 (“Interests in AAC Holdings”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is unknown and expected recovery is 0%.

Voting Results

On October 9, 2020, the Debtors' claims agent notified the Court of Plan voting results [Docket No. 640] which included the following:

• Class 3 (“Senior Lender Claims”): 13 claim holders, representing $32,115,000.26 in amount and 100% in number, accepted the Plan
• Class 4/5 (“Junior Lender Secured Claims and Junior Lender Deficiency Claims”): 13 claim holders, representing $148,696,617.81 in amount and 100% in number, accepted the Plan.

Committee/Lender Settlement 

The Memorandum provides: "after extensive negotiations led by the Special Restructuring Committee, the Debtors very recently reached a global resolution in principle with the Committee and the Ad Hoc Group (the 'Committee/Lender Settlement') to resolve the Committee’s objections to confirmation of the Plan. The material terms are set forth in the term sheet attached hereto as Exhibit B (the 'Committee/Lender Term Sheet')…the Committee/Lender Settlement provides for the establishment of a litigation trust (the 'Litigation Trust') for the benefit of Holders of Allowed General Unsecured Claims, including Junior Lender Deficiency Claims. The Litigation Trust will be funded with approximately $2 million, comprised of $500,000 plus the unused portion of the DIP Budget allocated for payment of the Committee’s professionals. Certain causes of action against Non-Released Debtor D&Os (as defined in the Committtee/Lender Term Sheet) will be excluded from the Debtor Release in Article X.E of the Plan and transferred to the Litigation Trust. Additionally, the Debtor Release will be revised to provide for a 'full release' for the Released Debtor D&Os…"

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the "Cambell Declaration”), J. Jette Campbell, the Debtors’ Chief Restructuring Officer, detailed the events leading to AAC’s Chapter 11 filing. The Campbell Declaration provides: “While AAC has had ongoing financial difficulties, 2019 was a particularly difficult year. Specifically, changes in liquidity had a material adverse effect on AAC’s assets, business, cash flow, financial condition, prospects, and the results of operations despite AAC implementing cost-savings initiatives, targeting to sell the company’s real estate, exploring potential recapitalization, and obtaining additional financing.

AC has historically relied on debt financing to partially fund its acquisitions, de novo projects, facility expansions, and operations. AAC’s level of indebtedness has made it more difficult for AAC to satisfy its obligations with respect to its indebtedness, resulting in defaults on, and acceleration of, such indebtedness. In addition, dedicating a substantial portion of its cash flows from operations to debt service obligations has reduced the availability of such cash flows to fund working capital, capital expenditures, and other general corporate requirements and to carry out other aspects of its business.

AAC is currently unable to pay all of its debts that matured, including the Prepetition Senior Lien Facility in the aggregate principal amount of $47,000,000, and the Forbearance Agreements have expired. As a result, the Prepetition Loan Obligations are immediately due and payable. AAC’s current level of cash on hand, internally generated cash flows, and borrowings under its credit facilities are not sufficient to fund its working capital needs, debt service and repayment obligations, and capital expenditures, especially without anticipated proceeds from sale-leaseback transactions and limited access to debt and capital markets due to its leverage capacity, existing debt agreements, credit ratings, and general market conditions.

Beginning in late March and early April of 2020, AAC faced challenges due to the Coronavirus Disease 2019 pandemic (‘COVID-19’). AAC experienced a decline in inpatient admissions and outpatient visits as a result of the virus and the measures undertaken to combat the virus, including mandatory stay-at-home orders, restrictions on travel, supply chain disruptions, and preventive measures to ensure that facilities remain coronavirus-free, have had and will continue to have an adverse impact on the Debtors. While cash on hand became more limited and access to credit became more restricted, AAC’s costs rose during this difficult economic time. AAC expended significant time and resources in ensuring that its facilities remained open and had sufficient staff and personal protective equipment to keep their patients and staff safe during the pandemic.”

Prepetition Indebtedness

As of the Petition date, the Debtors had prepetition secured indebtedness in the aggregate principal amount in excess of $363.6mn, plus accrued and unpaid interest and fees, consisting of two credit facilities (together, the “Prepetition Credit Facilities”).

• The Prepetition Junior Lien Facility. AAC Holdings is party to a June 2017 “Prepetition Junior Lien Credit Agreement” with Ankura (as successor by assignment to Credit Suisse AG) as administrative and collateral agent. The Prepetition Junior Lien Facility initially provided for (a) a term loan (the “Junior Lien Term Loan”) in the aggregate principal amount of $210.0mn with a stated maturity of June 30, 2023, and (b) a revolving line of credit (the “Junior Lien Revolver”) in the aggregate principal amount of $40.0mn with a stated maturity of June 30, 2022. The Prepetition Junior Lien Facility also provides for standby letters of credit in an aggregate undrawn amount not to exceed $7.0mn. 

As of the Petition date, the Debtors were indebted to the Junior Lenders under the Prepetition Junior Lien Facility in the aggregate principal amount of $316,612,692.97 plus accrued but unpaid interest, 

• The Prepetition Senior Lien Facility. AAC Holdings is party to a March 2019 “Prepetition Senior Lien Credit Agreement” with Ankura (as successor by assignment to Credit Suisse AG), as administrative agent and collateral agent. The Prepetition Senior Lien Facility initially provided for a term loan in the principal amount of $30.0mn and matured on its original term on April 15, 2020. 

As of the Petition Date, the Debtors were indebted to the Senior Lenders under the Prepetition Senior Lien Facility in the aggregate principal amount of $47.0mn plus accrued but unpaid interest.

• Financing Lease Obligation. On August 9, 2017, AAC closed on a sale-leaseback transaction with MedEquities Realty Operating Partnership, LP, a subsidiary of MedEquities Realty Trust, Inc. for $25.0mn (the “2017 Sale-Leaseback”), in which MedEquities purchased from subsidiaries of AAC two drug and alcohol rehabilitation outpatient facilities and two sober living facilities: the Desert Hope Facility and Resolutions Las Vegas, each located in Las Vegas, Nevada, and the Greenhouse Facility and Resolutions Arlington, each located in Arlington, Texas (collectively, the “Sale-Leaseback Facilities”).
• Capital Lease Obligations. AAC has capital leases with third party leasing companies for vehicles, copiers, and equipment. The capital leases have maturity dates in July 2021 and January 2024. The total obligations under the capital leases as of March 31, 2020 were approximately $485,281, of which $138,015 was included in the current portion of long-term debt
• Subordinated Note. On March 1, 2018, in conjunction with the AdCare Acquisition, AAC issued the AdCare Note to the seller in the original principal amount of $9.6mn, with a stated maturity of September 29, 2023 and accrues interest at a fixed rate per annum equal to 5.0%, compounded annually. Payments of principal and interest pursuant to the AdCare Note commenced on April 30, 2018. The obligations under the AdCare Note are not guaranteed by any of the other Debtors.

The Debtors filed Plan Supplements at Docket Nos. 582 and 651 which attached the following documents:

[Docket No. 582] 

• Exhibit A: Exit Facility Documents
• Exhibit B: New Organizational Documents Exhibit  
• Exhibit C: New Board Composition (to be filed at a later date) 
• Exhibit D: New Stockholders’ Agreement
• Exhibit E: New Warrant Agreement
• Exhibit F: Schedule of Rejected Executory Contracts and Unexpired Leases
• Exhibit G: Projected Creditor Recoveries

[Docket No. 651]

• Exhibit C: New Board Composition
• Exhibit D: Revised Stockholders’ Agreement (Clean and Redlined Versions)
• Exhibit F-1: Supplement to the Schedule of Rejected Executory Contracts and Unexpired Leases
• Exhibit H: Valuation Summary
• Exhibit I: Identity and Compensation of Litigation Trustee

Liquidation Analysis (see Exhibit to the Disclosure Statement [Docket No. 582] for notes)

About the Debtors

According to the Debtors: "American Addiction Centers is a leading provider of inpatient and outpatient substance abuse treatment services. We treat clients who are struggling with drug addiction, alcohol addiction, and co-occurring mental/behavioral health issues. We currently operate substance abuse treatment facilities located throughout the United States. These facilities are focused on delivering effective clinical care and treatment solutions.

Corporate Structure Chart

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