Alpha Latam Management, LLC – Seeks Approval of $137.2 Stalking Horse Arrangements with Cerberus Affiliates; November 16th Sale Hearing Set

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September 22, 2021 – Further to the Court's September 15th bidding procedures order [Docket No. 198], the Debtors have now filed a motion seeking authority to enter into a stalking horse arrangements with Cerberus South American Investments, LLC ("Cerberus") in respect of the sale certain of "certain loans in the Sellers’ loan portfolio and certain contracts related to the operation of such portfolio (the 'Stalking Horse Package')" [Docket No. 209]. The Debtors value the Cerberus bid at $137.2mn. The Debtors have requested an October 1st hearing to consider the motion.

UPDATE: On Septembert 28th, the Debtors filed a draft of the Cerberus APA "to provide parties in interest with an opportunity to review the Stalking Horse APA in advance of the objection deadline for the hearing on the Stalking Horse Motion." The Debtors, who are pushing an expedited process for approving the APA, have committeed to providing a final version in advance of their scheduled October 1st hearing.

Although the motion refers to "certain loans" and "certain contracts," the documents otherwise provide that "the Debtors are offering substantially all of their operating assets for sale, which include (without limitation) their loan portfolio assets, trust rights, technology assets, employees, and any other material contracts (the 'Assets')" and refer to the "designation of Cerberus as the Stalking Horse Bidder for the Assets" which leaves the relationship between "Assets" and the "Stalking Horse Package" unclear.

The motion notes, “After identifying that a sale was the best path for maximizing the value of the Assets, the Debtors, through Rothschild & Co US Inc. and its affiliates, including Rothschild & Co Mexico S.A. de C.V., (‘Rothschild & Co’) as their investment banker, began a sale and marketing process over four months ago. Indeed, these Chapter 11 Cases (as defined below) were commenced to effectuate a sale of the Assets via section 363 of the Bankruptcy Code (the ‘Sale’). To that end, shortly after commencing these Chapter 11 Cases, the Debtors filed the Bid Procedures Motion (as defined below) and the Court hereafter entered the Bid Procedures Order. The Bid Procedures Order set key dates for the Debtors to obtain Bids on the Assets, conduct an Auction, and obtain this Court’s approval of a Sale Transaction. In tandem, the Debtors continued to conduct a competitive stalking horse bidding process and, as outlined in the Leclercq Declaration, received several stalking horse bids and continued to negotiate in good faith with such bidders. Ultimately, the Debtors were able to secure the Stalking Horse Bid (as defined below) on the material terms set forth herein. This Motion, therefore, represents the culmination of that process and the next significant milestone in the Sale process.

The Debtors and the Stalking Horse Bidder are actively negotiating and working expeditiously to finalize and file the asset purchase agreement (the ‘Stalking Horse APA’) on the docket to provide parties in interest with an opportunity to review the Stalking Horse APA in advance of the proposed objection deadline (the ‘Objection Deadline’) for a hearing on this Motion. The Debtors have also shared a term sheet containing the material terms to be memorialized in the Stalking Horse APA (the ‘Stalking Horse Bid’) on a confidential basis with the Office of the United States Trustee for the District of Delaware (the ‘U.S. Trustee’) and the advisors to the DIP Note Purchasers (as defined in the First Day Declaration).

The Stalking Horse Bid represents the highest and best offer received for the Stalking Horse Package, guarantees a sale of the Assets at an attractive price, and allows the Debtors to continue the Sale process as approved by the Court in the Bid Procedures Order. That process and the Bidding Procedures will allow a second opportunity to market all of the Assets in the Stalking Horse Package through a competitive auction process that will allow the Debtors to identify any higher and better offers that might exist. Because the Stalking Horse Bid not only locks in a purchase price that represents significant value for the Stalking Horse Package, but also allows the Debtors to test the market and see if they can secure an even better deal, the proposed transaction with the Stalking Horse Bidder, entry into the Stalking Horse APA, and approval of the Bid Protections clearly serve the best interests of the Debtors’ estates and their stakeholders. Indeed, the Ad Hoc Group (as defined in the First Day Declaration), including the DIP Note Purchasers, support the relief requested in this Motion.”

Key Terms of the Stalking Horse Bid:

  • Purchase Price: The Debtors estimate the aggregate purchase price, based on the pricing terms in the Stalking Horse Bid and the value of the loan portfolio as of June 30, 2021, to be approximately $137,245,051 plus any cure amount(s) (inclusive of any fees, expenses and/or related costs, the “Cure Costs”) related to executory contracts, unexpired leases, and other agreements designated by Buyer, in its sole discretion, to be assumed by the Sellers and assigned to Buyer pursuant to section 365 of the Bankruptcy Code.
  • Bid Protections and Overbid Protections: In consideration for, among other things, Buyer having expended considerable time and expense in connection with the Stalking Horse APA and the negotiation thereof and the identification and quantification of the Purchased Assets, the Sellers shall pay to Buyer, if and to the extent payable in accordance with the terms contained in the Stalking Horse APA and the Stalking Horse Order: (a) a break-up fee (the “Break-Up Fee”) in an amount equal to US$3,000,000 and (b) the reasonable and documented outof-pocket expenses of Buyer incurred in connection with the Proposed Transaction contemplated by the Stalking Horse APA up to an amount equal to US$1,000,000 (the “Expense Reimbursement”).

More Background

On September 15, 2021, the Court hearing the Alpha Latam Management cases issued an order approving (i) bidding procedures in respect of a sale of substantially all of the Debtors’ assets (the “Sale”) and (ii) a timetable culminating in an auction on October 28th and a sale hearing on November 16th [Docket No. 198].

As described further below, the Debtors, payday lenders with operations in Colombia and Mexico, filed for bankruptcy on August 1st after significant financial irregularities were uncovered in respect of their Mexican operations. From the outset, the Debtors (with $768.4mn of issued and/or guaranteed funded debt) have been focused on an in-Court sale of their apparently healthy Colombian operations. Notwithstanding a three-month prepetition sales effort, the result of which was a realization that any successful sales effort would have to continue in a Chapter 11 context, the Debtors do not have a stalking horse, although they "may be in a position to enter into a binding stalking horse agreement in short order."

The Debtors' bidding procedures and sale motion [Docket No. 113] reads: “The proposed Bidding Procedures allow the Debtors to continue and conclude the marketing process they began approximately three months ago in an appropriate timeframe through a competitive auction process. Even before the commencement of these Chapter 11 Cases, the proposed sale of the Assets was identified as the best path for maximizing the value of the Debtors’ estates. To test this thesis, the Debtors initiated a thoughtful process in May to solicit indications of interest for the Assets. During their prepetition negotiations and restructuring analysis, it became evident that the best way to maximize value for the Assets was to pursue an in-court sale via section 363 of the Bankruptcy Code, which was one of the reasons the Debtors commenced these Chapter 11 Cases

Since commencing the marketing process, the Debtors have received robust engagement, with several credible parties submitting indications of interest and progressing towards the submission of binding bids. The Debtors have been actively negotiating with various potential bidders and may be in a position to enter into a binding stalking horse agreement in short order. While the Debtors do not seek authority pursuant to this Motion to enter into one or more stalking horse agreements, they may do so on an expedited basis pursuant to a separate motion and order (including any bid protections that may be provided therein). Upon conclusion of the Auction and selection of the highest or otherwise best bid(s), the Debtors request that the Court hold the Sale Hearing and enter the Sale Order authorizing and approving the Sale free and clear of Interests (subject to the Successful APA).

As this Court is aware, on August 3, 2021, the Court authorized the Debtors to enter into a $45 million senior secured superpriority new money debtor-in-possession financing facility, of which $17.5 million was available upon interim approval (the ‘DIP Facility’). Order (I) Authorizing the Debtors to Obtain Debtor-In-Possession Financing and Granting Liens and Superpriority Administrative Claims and (II) Granting Related Relief [Dkt. No. 81] (the ‘Interim DIP Order’). The DIP Facility is secured by liens on and security interests in substantially all assets and property of the Debtors. The Debtors are expected to repay the DIP Facility with proceeds of a sale of substantially all of the Assets.”

Petition Date Highlights

  • Latin American (Mexican and Colombian operations) payday lender files for bankruptcy with $768.4mn of issued and/or guaranteed funded debt
  • Debtors specialize in providing loans (24.40% per annum interest) with repayment via payroll deduction (“PDLs”) to low income borrowers
  • Filing follows accounting irregularities at Mexican affiliates and subsequent (i) April 2021 announcement of intent to restate 2019 and 2019 financial statements, (ii) Senior Notes events of default, (iii) missed June Senior Notes interest payment and (iv) cessation of loan origination activities (no mention of COVID impact on borrowers and/or borrower default rates)
  • Debtors line up $45.0mn of DIP financing form holders of Senior Notes to fund sale of Colombian Assets (intentions for troubled Mexican Assets not specified)
  • Debtors expect to announce stalking horse(s) for Colombian Assets within days

In a press release announcing the filing, the Debtors advised that: “Alpha Holding [defined below] announced on April 20, 2021, that it would restate its financial statements for the years ended December 31, 2018, and 2019 (the 'Prior Period Financial Statements') to correct an error in Alpha Holding's accounting for its derivative positions.  Alpha Holding also identified additional accounting errors that it anticipates will result in a restatement of other assets and other accounts receivable in its financial statements for previous years, including the Prior Period Financial Statements, or a current write-down of other assets and other accounts receivable.  The accounting errors ultimately resulted in several defaults and events of default under the Company's funded debt obligations.  Though the Company endeavored to negotiate forbearance and waiver agreements with several of its lenders, such efforts were unsuccessful.  Given these events, the Company no longer had access to the new financing necessary to continue originating new loans, and accordingly has ceased its on-balance sheet origination activities. Today's actions became necessary despite the Company's best efforts to streamline the business by implementing significant cost-cutting measures. 

The Debtors' affiliates operating in Mexico, including Alpha Holding, S.A. de C.V. ('Alpha Holding'…) are not included in the chapter 11 filing.”

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Castellano Declaration”), John Castellano, a Managing Director with the Debtors' financial advisors AlixPartners, detailed the events leading to Alpha Latam’s Chapter 11 filing. The Castellano Declaration provides: “In connection with an internal accounting review, the Company identified certain accounting errors with respect to the Mexican segment of its business, and on March 13, 2021, formally presented a preliminary report of such accounting errors to the board of managers of ALM (the 'ALM Board'). As a result, a special committee, comprised of non-management members of the ALM Board (the 'Special Committee'), was formed and hired independent counsel to provide advice in connection with the investigation of the accounting errors. The Special Committee’s legal counsel retained a forensic accounting firm to assist legal counsel in providing advice to the Special Committee. The Special Committee is chaired by the Board’s independent manager. 

On April 20, 2021, the Company publicly announced errors in the Company's accounting for its derivative positions and the need to restate its financial statements for the years ending 2018 and 2019. The Company also disclosed additional accounting errors relating to the Company’s: (i) allowance for loan losses; (ii) reserves for certain accounts receivables; and (iii) amortization of certain capitalized expenses. Shortly after the Company’s announcement, certain creditors sent notices of default to the Company for, among other things, failure to accurately report financial statements. Though the Company and its advisors tried to negotiate forbearance and waivers with these creditors, these efforts proved unsuccessful. As a result, the Company was unable to continue raising capital to continue to originate new Alpha Loans ["In Colombia, the Debtors have historically focused on providing PDLs to current and former governmental, union, and private sector employees, pensioners, and retirees (the 'Alpha Loans' and the borrowers thereunder, the 'Alpha Borrowers') using the Vive brand'.]"

The Company’s advisors also began analyzing the Company’s liquidity position. As part of that process, the Company determined that due to several factors, including the variability in loan collections, it needed to preserve cash. As a consequence, the Company, based on advice from its advisors and with a view toward maximizing value in the best interests of the Company and all relevant stakeholders, determined that the Company would cease making any new loan originations and would elect to exercise the grace period under the Senior Notes…by not making the June 19, 2021 interest payment.

Starting in May 2021, with Rothschild’s assistance, the Company began to market the Company’s unencumbered Colombian loan portfolio (the “Colombian Assets”) in an effort to bolster its cash position. As the Company’s liquidity position tightened, and negotiations with key stakeholders progressed, it became evident that the best path for a restructuring of the Company was a sale of substantially all of the Debtors’ Colombian Assets pursuant to section 363 of title 11 of the United States Code (the “Bankruptcy Code”). To that end, the Company began preparing for the commencement of these Chapter 11 Cases in parallel with negotiating a stalking horse bid and soliciting a $45 million debtor-in-possession financing (“DIP Financing”) to provide the bridge necessary for the Debtors to effectuate a sale of the Colombian Assets.”

About the Debtors

According to the Castellano Declaration : “The Debtors, together with their Mexican non-Debtor affiliates (the 'Mexican Affiliates') and certain other affiliated non-Debtors…operate a specialty finance business that offers consumer and small business lending services to underserved communities in Mexico and Colombia. 

The Company was founded in 2011 with the mission of improving the quality of life of individuals in the low-income segment of the population and promoting the growth of small and midsize enterprises ('SMEs') in Mexico by offering these populations greater access to credit. The Company began its consumer lending operations by providing loans with repayment via payroll deduction, or 'PDLs,' to federal and state government employees in Mexico and, over the next ten years, grew into a leading financial technology company. In 2015, the Company expanded its operations into the Colombian marketplace with creation of the Vive brand, a platform providing PDLs, and acquired TotalCredit, a Mexico-based PDL lender that partners with various employers across Mexico. In 2016, the Company launched Alcanza Capital, a leasing and factoring initiative and also acquired Crediamigo, a pioneer in the discount credit industry utilizing income advancement for government employees. In 2018, the Company expanded its technological platforms by launching its first mobile application, AXS, to offer instant loans to its customers. In 2019, the Company launched Bontu, a credit platform for SMEs based on new internet sales models, and completed the 100% digitization of the business for its consumers from origination to collection of each loan.

The Debtors’ target borrowers have a monthly gross income ranging from COP 700,000 to COP 10,000,000 ($181 to $2,591 USD) and ages ranging from 31 to 84. On average, a PDL has an initial term of approximately 108.9 months and an initial principal amount of COP 18.03 million or $4,900 USD. The average interest rates for PDLs is 24.40% per annum, which complies with Colombian interest rate regulations. As of May 31, 2021, the Debtors had approximately 36,800 PDLs outstanding with an aggregate principal amount of COPs 647.8 billion or $174.4 million USD."

Corporate Structure Chart

 

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