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January 29, 2023 – Privately held Cleveland Integrity Services, Inc.and one affiliate debtor (“CIS“ or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 23-90052 (Judge Christopher M. Lopez). The Cleveland, Oklahoma based Debtors*, who offer "a complete range of services to assist in the construction and Implementation of pipeline, refinery, power plant and Mechanical Integrity projects," are represented by Aaron M. Kaufman of Gray Reed. Further board-authorized engagements include: (i) MACCO Restructuring Group as financial advisors, (ii) LLC Piper Sandler & Co. as financial advisors and investment bankers and (iii) Donlin Recano as claims agent.
*Via non-Debtor Eagle Infrastructure Services (which provides the Debtors with management-related services common to all of the operating companies sitting within Eagle), the Debtors are controlled by a fund managed by First Reserve, a private equity group based in Houston, Texas and Stamford, Connecticut (see structure chart below and portfolio list here).
The Debtors’ lead petition notes between 5,000 and 10,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $100.0mn and $500.0mn ($159.0mn of funded debt). Documents filed with the Court note that all but four of the Debtors' 30 largest unsecured creditors have disputed claims of "unknown" quantum related to personal injury and wrongful death lawsuits. Of the other four claims, one was for an "unknown"/disputed claim held by the IRS and three were trade claims, each less than $5k.
The Debtors' lead Petition notes that prepetition lenders have agreed to provide $30.0mn ($13.0mn new money) of DIP financing. Those prepetition lenders, parties to a restructuring support agreement (the "RSA") which has as it principal objective a going concern sale of the Debtors' assets, have also agreed to serve as a credit bidding stalking horse.
As to the solicitation of potential third party sources of DIP financing and the Debtors' decsion to ultimately engage with its prepetition lenders, the Debtors note: "Due to the meager showing by prospective bidders during Piper Sandler’s prepetition marketing efforts, the Debtors decided to engage with the Term Lenders to negotiate for a higher value through a base-line credit bid. The Term Lenders expressed a willingness to do so, but only through the chapter 11 sale process…"
Petition Date Highights
- Pipeline Construction and Servicing Company (controlled by First Reserve) Files for Bankruptcy with $157.0mn of Funded Debt
- Debtors Cite Failure to Recover from COVID after 25% Drop in Revenue from 2019 to 2020; also Note Rise of Uninsured Wage and Hour Litigation
- Debtors Agree RSA with Prepetition Lenders Led by Owl Rock which has Owl Rock Serving as Credit Bidding Stalking Horse for Debtors' Assets in Expedited 60-Day Sale Process
- Owl Rock Agrees to Provide $30.0mn of DIP Financing ($13.0mn New Money and $17.0mn Roll-up)
Recent Financial Performance
CIS recorded over $117.0mn in revenues and $8.8mn in EBITDA in 2013. By 2019, those number had steadily increased to more than $380.0mnn and $22.0mn, respectively. For 2020, however, the Debtors’ revenues and earnings dropped by approximately 25% from the prior year.
RSA and Plan Overview
The Kesner Declaration (defined below) provides: "…through periodic forbearance amendments, the Prepetition Secured Lenders were willing to grant the Debtors and their non-debtor affiliates short term extensions of the maturity dates under the Prepetition Credit Agreements.
The last such extension granted was through January 17, 2023.
In an effort to negotiate for long term extensions of such maturity dates, the Debtors, their non-debtor affiliates and the Prepetition Secured Lenders reached
agreements memorialized in an RSA, dated January 29, 2023. Under the RSA, Owl Rock (or its designee) will acquire the assets and/or equity of Applied, Encompass, and Perennial through out-of- court transactions.
To effectuate these transfers and ensure sufficient working capital for the businesses to be acquired by Owl Rock (or its designee), the ABL Administrative Agent agreed to amend the ABL Credit Facility to provide more working capital and grant a 30-month extension of the maturity date to June 17, 2025. Under this amendment, the Debtors resigned from the ABL Credit Facility, and the ABL Lenders released the Debtors from all obligations, claims and liens
arising thereunder. As a result of this amendment, the Debtors’ only remaining prepetition secured obligations are those owing to the Term Lenders under the now-matured [$157.0mn] Term Loan Credit Agreement.
Under the terms of the RSA, the Debtor and the Term Lenders have agreed to terms for a debtor in possession loan and a stalking horse asset purchase agreement (the 'APA'), laying the groundwork for an orderly chapter 11 filing and sale process.
The key terms of the Transaction Documents include:
- Under the DIP Credit Agreement, the Loan Parties (as defined in the DIP Credit Agreement) will provide the Debtors with a $30 million super-priority senior secured priming term loan facility, comprised of $13 million in new money loans and an $17 million of roll-up;
- No later than fifty-five (55) calendar days after the Petition Date, the Debtors shall have obtained entry of an order authorizing a 363 Sale
Transaction, which order shall be in form and substance acceptable to the Administrative Agent and Required Lenders in their sole discretion; and no later than sixty (60) calendar days after the Petition Date, the Debtors shall have consummated the 363 Sale Transaction in accordance with the Bidding Procedures Order that is approved by the Bankruptcy Court.
- An acquisition entity formed by the Term Loan Agent will serve as Purchaser and proposed Stalking Horse Bidder under the terms of the APA, which provides for the acquisition of substantially all assets of the Debtors….The baseline Purchase Price under the APA includes a dollar-for-dollar credit bid for the full amount of the $30 million DIP Facility obligations, payment of Accrued Payroll obligations and the assumption of the Assumed Liabilities (including payment of Cure Costs). In the event additional Qualified Bids are received and an auction is conducted, the Term Loan Agent will be able to credit bid a portion of its prepetition Term Loan debt, in the Term Loan Agent’s sole discretion.
- The APA also provides for the Purchaser to leave behind a Wind Down Amount, which the Debtors believe is sufficient to allow the Debtors to pay accrued, unpaid and allowed administrative expense claims, payroll, and otherwise wind down these chapter 11 cases.
Events Leading to the Chapter 11 Filing
In a declaration in support of first day filings (the “Kesner Declaration”) [Docket No. 16], Matt Kesner , the Debtor’s President and Chief Operating Officer provides: “The Debtors have been adversely impacted in recent years by an industry-wide decline in demand for services. As a result of the drop in commodity prices during 2020 and the wide-reaching impacts of the global pandemic, the Debtors noticed a sharp decline in their customers’ capital expenditures resulting in fewer new projects requiring the Debtors’ construction and inspection services….the return of commodity prices, customer spending and demand simply have not returned to their pre-2020 levels.
Litigation Hurdles. Compounding these negative market trends are other factors, such as notable increases in litigation and related insurance costs over the past few years, presenting additional hurdles to the Debtors’ long-term growth. Over the past few years, the Debtors and their competitors within the inspection industry have seen a marked uptick in online and social media outreach by certain contingency fee plaintiff attorneys offering their services and targeting the Debtors’ Inspectors. Such efforts have resulted in wage and hour claims being filed against the Debtors and their non-debtor affiliates, customers and senior employees. While the Debtors maintain comprehensive insurance policies to protect against most commercial incidents and losses, those insurance policies generally do not cover wage and hour claims. As a result, the Debtors’ litigation costs have increased steadily over the past few years to defend these claims and to honor indemnity obligations to employees and customers.
Before the Petition Date, the Debtors were able to negotiate a settlement with one of the contingency fee plaintiff attorney firms, representing approximately 57 claimants. The settlement resolved most of the known wage and hour claims asserted against the Debtors. Absent the settlement, however, the Debtors would have incurred significant legal expense to defend several claims that were set for final hearings.
In addition to the uptick in wage and hour claims and corresponding litigation costs, and despite the recent settlement that resolved most of the pending arbitrations, the Debtors remain parties to over 15 other commercial lawsuits, most of which are covered under various commercial general liability policies.
While the bankruptcy filing may temporarily stay these lawsuits, I anticipate that the Debtors will ultimately be amenable to lifting the stay to allow the actions to continue, provided the claimants look solely to available insurance policy proceeds, as applicable, and provided further that the Debtors are not obligated to pay deductibles or self-insured retentions.
In addition to these commercial liability claims, the Debtors have incurred significant legal expense over the past year responding to the IRS’s NOPAs [ie Notices of Proposed Adjustment] . As of the Petition Date, no additional payroll taxes have been assessed, and the Debtors continue to work closely with their outside tax advisers to minimize any such assessments. Regardless of the ultimate outcome, the process alone has required the Debtors to incur significant legal expenses, representing yet another hurdle to the Debtors’ long-term growth.
Looming Maturity Dates and Covenant Defaults. As noted above, the Company’s Prepetition Credit Agreements were scheduled to mature on September 8, 2022. CIS therefore began calendar year 2022 on a negative note, with revenues still lagging behind prior years’ performances, litigation costs rising, and having received NOPAs from the IRS on December 9, 2021. As a result of these factors, CIS was unable to comply with a financial covenant under the Term Loan Documents for the testing period ending December 31, 2021, triggering a default under the Term Loan Documents and a cross-default under the ABL Loan Documents. As required under the Prepetition Credit Agreements, the Debtors notified the Prepetition Secured Lenders of such non-compliance on February 15, 2022.
On March 31, 2022, the Debtors and their non-debtor affiliates entered into the first of many forbearance amendments to the Prepetition Credit Agreements with the Prepetition Secured Lenders."
The Kesner Declaration provides: "Funded Debt. To fund their operations and growth, the Eagle Organization has utilized two separate credit facilities.
First, each entity within the Eagle Organization is party to a Credit Agreement, dated September 8, 2016 (as amended, restated, supplemented or otherwise modified from time to time, the 'Term Loan Credit Agreement'), with Owl Rock Capital Corporation ('Owl Rock'), as administrative agent and collateral agent (the 'Term Loan Agent”) for the lenders time to time parties thereto (collectively, the “Term Lenders”). The obligations under the Term Loan Credit Agreement and related loan documents (collectively, the 'Term Loan Documents') are secured by first priority liens on substantially all of the Eagle Organization
entities’ respective assets.
As of the Petition Date, the aggregate principal amount outstanding under the Term Loan Credit Agreement (excluding accrued and unpaid interest, any fees,
expenses, disbursements, indemnifications and other charges) is approximately $159,000,000.00 (the 'Prepetition Obligations').
In addition to the Term Loan Credit Agreement, the entities in the Eagle Organization are parties to an asset based lending Credit Agreement, dated November 10, 2016 (as amended, restated, supplemented or otherwise modified from time to time, the 'ABL Credit Agreement,' and together with the Term Loan Credit Agreement, the 'Prepetition Credit Agreements'), with Wells Fargo Bank, National Association ('Wells Fargo'), as administrative agent (in such capacity with its successors and assigns in such capacity, the 'ABL Administrative Agent') for each member of the Lender Group and Bank Product Providers (each as defined in the ABL Credit Agreement, the 'ABL Lenders,' and together with the Term Lenders, the 'Prepetition Secured Lenders').
Under the ABL Credit Agreement, the Debtors and their non-debtor affiliates had access to a revolving credit facility (the 'ABL Credit Facility'), which was paid down on a daily basis through overnight account sweeps from of each Operating Company’s customer collection account. As with the Term Loan Documents, under the terms of the ABL Credit Agreement and related loan documents (collectively, the 'ABL Loan Documents'), the Debtors granted liens on substantially all of their assets in favor of the ABL Lenders. Pursuant to an intercreditor agreement among the Prepetition Secured Lenders, the Term Lenders agreed to subordinate their liens on the ABL Priority Collateral (as defined in the Term Loan Credit Agreement) to those granted in favor of the ABL Lenders."
Unsecured Debt. As of the Petition Date, the Debtors are generally current with their vendors and, as such, do not anticipate that they will have a significant number of trade creditors. Accordingly, the Debtors’ unsecured debts may include a small of amount of potential outstanding trade claims (likely, less than $100,000), as well as several unliquidated litigation claims and an unliquidated payroll tax claim stemming from a payroll tax audit by the Internal Revenue Service."
About the Debtors
According to the Debtors: “Cleveland Integrity Services offers clients a complete range of services to assist in the construction and Implementation of pipeline, refinery, power plant and Mechanical Integrity projects. These services are dedicated to successfully converting conceptual plans to safe operating facilities based on the field engineering, construction management, and inspection skills of the field staff. The scope of these services range from planning and estimating to surveying, development, management, inspection, startup, and commissioning. We have the capability and experience to assume total responsibility for all these functions, or to staff specific assignments needed to meet client requirements that represent part of a broader effort. We believe our proven methodologies, experience and selection of seasoned professionals with established track records demonstrate the capability of Cleveland Integrity Services to organize, manage and execute a construction management and inspection services program.”
The Kesner Declaration adds: "CIS is a leading provider of inspection services and integrity management solutions for gathering, transmission, and distribution pipelines and related oil and gas industry infrastructure. CIS operates throughout the continental United States providing services to many of the top midstream operators and a growing number of utilities. CIS’s projects span hundreds of miles across state lines."
Corporate History and Structure
CIS was founded in 2010 by F.D. Curtis and a group of investors outside of Tulsa, Oklahoma. Its principal headquarters are in Cleveland, Oklahoma, and it maintains field offices in Houston and Dallas, Texas and Stanwood, Michigan. Over the years following its founding, the Company was acquired by other investor groups and is presently owned, indirectly, by a fund managed by First Reserve, a private equity group based in Houston, Texas and Stamford, Connecticut. The Company is part of group of entities owned directly by Eagle Infrastructure Services, Inc. (“Eagle”). A current illustration of the Eagle organization is as follows:
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