Register, or Login to view the article
August 18, 2022 – An Ad Hoc Group of Unsecured Noteholders (the “Unsecured Noteholder Group”) has filed a motion to terminate the Debtors’ exclusive periods [Docket No. 66] arguing that, in executing a restructuring support agreement with first lien creditors which will have those creditors credit bid first lien debt for the Debtors' assets, the Debtors have "explicitly ceded any opportunity to formulate, propose, and confirm a restructuring plan and, as such, creditors should have the opportunity to fill that void….The Debtors’ abdication of their role as plan proponents has created a vacuum that must be filled by creditors."
As to the RSA's impact on the Debtors' bankruptcy, the motion adds: "…the RSA contractually prohibits the Debtors from pursuing a plan of reorganization absent the exercise of their fiduciary out….Instead, the Debtors have committed to pursuing a section 363 sale of their entire business, which will leave de minimis value, if any, for potential distribution under a liquidating plan solely to pay expenses agreed to by the first lien creditors pursuant to a wind-down budget….Regardless of the semantics adopted in their papers, this is a liquidation—not a reorganization."
In pressing for the unsusual step of terminating debtor exclusivity only days into a bankruptcy (see below on statutory underpinnings), the Unsecured Noteholder Group argues that ample cause exists in these circumstances (where Debtors "have explicitly abandoned pursuit of a chapter 11 plan of reorganization") for Judge James L. Garrity, Jr. to redirect the Debtors to a Plan of reorganization; with the Unsecured Noteholder Group providing some initial thoughts as to how that Plan might shape up (see below) under their Plan.
The arguments in the motion to terminate largely track those in an August 10th press release filed on behalf of the Unsecured Noteholder Group by White & Case which had urged the Debtors not to pursue an "entirely unnecessary" bankruptcy path given recent indicia of robust operational and financial health, with the motion now taking into account that their advice was clearly ignored (see further on the press release below).
In that press release, and now in the motion to terminate, the Unsecured Noteholder Group argues that the Debtors have significantly and consistently underestimated performace in their pre-results guidance and that the Debtors' "consistent performance substantially in excess of its own projections necessarily calls into question the Company's forecasting abilities" and more generally the competence of the Debtors' management.
The Unsecured Noteholder Group has also filed an objection to the Debtors' cash collateral motion [Docket No. 65] which, while largely tracking the arguments in the motion to terminate exclusivity, adds further color as to how the Unsecured Noteholder Group is pressuring the Debtors and Judge Garrity. The objection notes: "By their acquiescence to their first lien creditors’ demands, the above-captioned debtors (the “Debtors” or “Endo”) have commenced these bankruptcy cases with a proposed course of action that reflects an extremely cynical take on the chapter 11 process and corporate governance generally [after citing financial/operational data it continues]….As such, there was no immediate driver for these chapter 11 filings, nor is there any compelling argument for a quick exit. Yet, in a move that is practically without precedent, the Debtors have announced out of the gate that they intend to enlist this Court in an effort to sell all of their assets via a 363 process that was designed by a bare majority of their first lien creditors and that threatens to leave junior creditors and equity holders with no recovery."
On August 16, 2022, Endo International plc and 75 affiliated Debtors (NASDAQ: ENDP; “Endo” or the “Debtors”) filed for Chapter 11 protection noting between 10,000 and 25,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn ($8.15bn of funded debt).
Earlier on August 16th, the Debtors entered into a restructuring support agreement (the “RSA”) with the Required Consenting First Lien Creditors, attached as Exhibit A to Docket. No. 20.
The Exclusivity Motion
The motion states, “The Debtors filed these cases to run a sale process, premised on a credit bid by the Debtors’ first lien creditors as stalking horse, that is the equivalent of a ‘judicial foreclosure’ through chapter 11. They cemented this process through a restructuring support agreement and a cash collateral order that each terminate if the Debtors do not go through with the sale. What is not contemplated is a plan of reorganization. The Debtors have explicitly ceded any opportunity to formulate, propose, and confirm a restructuring plan and, as such, creditors should have the opportunity to fill that void. This Motion does not seek to have this Court find that the Debtors cannot pursue their sale process; rather, what is being sought is merely an opportunity for creditors to do what the Debtors have contractually bound themselves not to do—pursue a plan of reorganization for the benefit of all stakeholders and not just a select few.
That said, these cases are not the typical situation where the Debtors have no choice but to seek the immediate sale of their assets. The Debtors have more than $1 billion of cash on hand, do not require post-petition financing and, by their own financial projections (which may be substantially understated), are expected to generate material unlevered free cash flow during bankruptcy and beyond. Therefore, the Debtors’ assets are not the paradigm of the ‘melting ice cube’ that require emergency action to preserve value. Instead, these cases should be resolved with a true reorganization process where creditors are provided with standard rights under the Bankruptcy Code, such as the right to adequate information with respect to a plan, the right to vote on that plan, the right to be classified under a plan with similarly situated creditors who will be treated similarly, and the assurance that any plan will be confirmed only with their class’s consent or otherwise be fair and equitable.
Here, the Debtors have completely upended the careful balance embodied in the Bankruptcy Code, seeking to deprive creditors of these fundamental rights while the Debtors seek to retain for themselves the shields of the automatic stay and exclusivity with management aiming to further enrich itself. Immediately upon filing these cases, the Debtors proudly abandoned the reorganization process, announcing instead that they intend to hand the company over to their first lien creditors through a credit bid without the fundamental protections of a plan of reorganization. As a result, the Debtors have demonstrated that they cannot be an effective counterweight to their first lien creditors and, as such, creditors and other stakeholders should be permitted to negotiate and formulate a chapter 11 plan.
The facts of these cases naturally invite such a plan. Based on what the Debtors have revealed in their first day pleadings and other public filings, it appears that a plan could be devised that would (i) refinance the first lien revolver, (ii) reinstate other first lien debt/notes, (iii) give second lien noteholders an option to be reinstated or to equitize, (iv) equitize unsecured debt/notes, (v) build off the existing opioid settlement proposal and (vi) give equity holders an opportunity to reinvest in the Debtors at a valuation that contemplates full payment to creditors. Under this scenario, the first lien creditors would be unimpaired and retain the benefit of their bargain. Moreover, all other stakeholders would indisputably make out better, with second lien noteholders, unsecured creditors, and potentially even equity holders getting something instead of nothing. This, and other potential plan constructs, should be pursued as a crucial alternative to the Debtors’ proposed sale process in the hopes that a true, successful reorganization can be obtained in these cases. Any such plan will take time to craft and pursue. For the confirmation of any such plan to be considered at the same time as the Debtors’ proposed sale, time is of the essence. As such, exclusivity should be terminated immediately.”
The Bankruptcy Code and Exclusivity
The Ad Hoc Group's motion to terminate provides a useful reminder as to the statutory underpinnings of a debtor's right to exclusivity: "Section 1121(b) of the Bankruptcy Code provides for an initial period of 120 days after the commencement of a chapter 11 case during which a debtor has the exclusive right to file a chapter 11 plan. Section 1121(c)(3) of the Bankruptcy Code provides that, if a debtor files a plan within that 120-day exclusive filing period, it has an exclusive period of 180 days from the petition date to obtain acceptances of its plan. Section 1121(d)(1) of the Bankruptcy Code provides that the Court 'may for cause reduce or increase the 120-day period or the 180-day period.' 11 U.S.C. § 1121(d)(1).
Termination during the initial exclusive periods is typically reserved for instances “where the debtor appears to be unable to negotiate a plan because of internal conflicts, or is mismanaging the bankruptcy case short of the need to replace management, or is otherwise using exclusivity in a way that Congress didn’t contemplate when it gave debtors in possession the exclusive time to propose and obtain confirmation of a plan.” In re Excel Maritime Carriers Ltd."
Cause to Terminate
The motion continues: "By entering into the RSA and publicly announcing its commitment to the related sale process, the Debtors have explicitly abandoned pursuit of a chapter 11 plan of reorganization. In fact, the RSA contractually prohibits the Debtors from pursuing a plan of reorganization absent the exercise of their fiduciary out. RSA § 4(b)(vii) (prohibiting the Debtors from filing any pleading that could reasonably be expected to frustrate the consummation of the sale). Instead, the Debtors have committed to pursuing a section 363 sale of their entire business, which will leave de minimis value, if any, for potential distribution under a liquidating plan solely to pay expenses agreed to by the first lien creditors pursuant to a wind-down budget. RSA Ex. A at 12– Regardless of the semantics adopted in their papers, this is a liquidation—not a reorganization. RSA Ex. A (labeling the RSA term sheet as a 'Restructuring Term Sheet' notwithstanding that it speaks only to a section 363 sale)."
Plausibility of Reorganization
The motion continues: "The Debtors’ abdication of their role as plan proponents has created a vacuum that must be filled by creditors. While the Unsecured Noteholder Group stands ready to do just that, additional diligence will be required, and it is unclear at this moment exactly how much additional time would be needed to prepare and file a confirmable plan. Beginning that process now ensures that any such plans are ready by the time the Debtors attempt to consummate their sale process.
One such idea is a straightforward plan that would refinance the revolver, reinstate and unimpair the other first lien debt/notes, reinstate or equitize the second lien notes, and equitize the unsecured notes. That plan appears feasible even accepting for argument purposes that the Debtors’ projections are accurate. The Debtors recently disclosed $471 million in EBITDA in the first half of 2022 and, for the second half of the year, the Debtors project another $301 million, in EBITDA, bringing the total projected 2022 EBITDA to $772 million.
At the same time, the Debtors today are liable on just over $5.8 billion in first lien debt at a blended rate of 7%, meaning approximately $420 million in annual first lien interest payments. Even including the annual interest expense on the existing second lien debt (another $90 million), the combined annual interest payments on reinstated first lien and second lien debt would be substantially exceeded by the Debtors’ projected $772 million in 2022 EBITDA less 2 Because the Debtors have consistently and inexplicably under-forecast the business, including in its most recent quarter, there is reason to believe that the Debtors’ projections materially understate the earnings power of the enterprise. In the most recent quarter, the Debtors beat adjusted EBITDA guidance (excluding in-process research and development) by nearly 50% and under-forecast every element of the business. Additionally, the Debtors have exceeded the midpoint of adjusted EBITDA guidance in each of the past four years.
A realistic and achievable plan could in theory also include an alternative treatment for those second lien noteholders who prefer to recover equity rather than reinstated notes. In the same way, the pro forma equity in the reorganized Debtors could be split between electing second lien noteholders and general unsecured creditors. Equity holders could also be afforded the opportunity to acquire a portion of the new equity in the reorganized Debtors at a price that contemplates all creditors being paid in full. These possible plan constructs could additionally incorporate settlements with the opioid claimants, including the recently announced opioid trust framework. All of these constituencies—second lien noteholders, unsecured creditors, equity holders, and opioid claimants that have not yet settled—could reasonably be expected to be supportive of such constructs. After all, the sale process contemplated by the RSA appears designed to wipe them all out without recovery.
August 10th Press Release
In pressing Endo not to choose a bankruptcy path, the Unsecured Noteholder Group stressed that recent Endo results "demonstrate that the Company materially under-projected performance" and that the Debtors' relative operational health should dramatically shift strategic planning. Their press release provides: " Institutional investors managing in excess of $20 billion have organized a group (the 'Group') of holders of unsecured notes (the 'Unsecured Notes') issued by certain subsidiaries of Endo International plc ('Endo' or the 'Company'). As set forth in its June 27, 2022 press release, the Group is prepared to engage constructively with the Company on solutions for the benefit of all of its stakeholders, including its equity holders, creditors, employees and litigation claimants.
The Group emphasizes that a near-term bankruptcy filing is entirely unnecessary. Endo's recently announced second quarter results underscore this point while calling into question the Company's forecasting abilities. Indeed, the latest results demonstrate that the Company materially under-projected performance notwithstanding that, at the time of its guidance, the second quarter was nearly 40% complete. The table below summarizes the extent of Endo's outperformance:
The Company's outperformance was not merely deep but also broad, as the Company under-forecast almost every element of its business. Its adjusted cost of goods sold and operating expenses were better than projected, and as highlighted below, each of its four segments generated more revenue than Endo had forecast:
As a result, Endo ended up producing nearly 50% more adjusted EBITDA ex-IPRD than it had projected. On an annualized basis, the miss translates into an approximately $300 million understatement. This is a substantial sum for Endo, which has a track record of handily beating guidance. In fact, the Company has exceeded the midpoint of its adjusted EBITDA guidance in each of the past four years, and it outperformed its adjusted EBITDA guidance in the first quarter of 2022 by nearly 25% even though it delivered this forecast with the quarter nearly two-thirds complete.
Endo's consistent performance substantially in excess of its own projections necessarily calls into question the Company's forecasting abilities. In the Group's view, this raises serious further questions about the Company's choice to file for bankruptcy and its ability to consummate a plan of reorganization if it does file."
As of the Petition Date, the Debtors’ consolidated long-term debt obligations totaled approximately $8.15 billion arising under (a) one credit agreement, which consists of a revolving credit facility and a term loan facility, (b) four series of secured notes, and (c) four series of unsecured notes. The following is a summary of the Debtors’ funded debt obligations as of the Petition Date:
About the Debtors
According to the Debtors: “Endo (NASDAQ: ENDP) is a specialty pharmaceutical company committed to helping everyone we serve live their best life through the delivery of quality, life-enhancing therapies. Our decades of proven success come from passionate team members around the globe collaborating to bring the best treatments forward. Together, we boldly transform insights into treatments benefiting those who need them, when they need them.”
Simplified Corporate Structure (see Docket No. 19 for full structure)
Read more Bankruptcy News