Fusion Connect, Inc. – Files Third Amended 11 Plan and Revised Terms of $115mn Exit Facility and $225mn First Lien Facility, Confirmation Hearing Set for December 17th

Register, or to view the article

December 12, 2019 – The Debtors filed a Third Amended Plan which includes a blackline showing changes from the version of the Plan filed on November 8, 2019 [Docket No. 648]. In anticipation of a December 17th Plan confirmation hearing, the Debtors also filed (i) a Plan Supplement which includes revised exit financing documentation (terms detailed below); and details on directors and officers [Docket No. 656], (ii) the Debtors' memorandum in support of Plan confirmation [Docket No. 649] and (iii) Plan voting results [Docket No. 655].

Plan Overview

The memorandum in support of Plan confirmation provides the following overview: "The Third Amended Plan undoubtedly achieves the purposes of chapter 11 in that it allows the Debtors to significantly deleverage their balance sheets, continue to operate ona going-forward basis and maintain, with minimum disruption, valuable services to approximately 60,000 customers. Importantly, the Third Amended Plan extinguishes approximately $411 million of debt and, through a stronger balance sheet, will enable the Reorganized Debtors to compete more effectively against competitors in its industry segment.

Contemporaneously herewith, the Debtors have filed a revised Third Amended Plan (the ‘Revised Third Amended Plan’). As reflected in the Revised Third Amended Plan and the Soldan Declaration, the First Lien Lender Group will provide the Debtors with the New Exit Facility in an aggregate amount of $115 million. The New Exit Facility will provide the Debtors with the necessary financing to satisfy their financial obligations while maintaining sufficient liquidity post-emergence."

The following is a summary of classes, claims, voting rights and expected recoveries showing no changes to (Defined terms are as defined in the Plan and/or Disclosure Statement):

  • Class 1 (“Priority Non-Tax Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is 100.0%.
  • Class 2 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is 100.0%. 
  • Class 3 (“First Lien Claims”) is impaired and entitled to vote on the Plan. Aggregated allowed claims are $585.5mn and the estimated recovery is 60.0%–76.1%. Each holder will receive its pro rata share of (a) the First Lien Lender Equity Distribution; provided, that notwithstanding anything in the Second Amended Plan to the contrary, the distribution of the First Lien Lender Equity Distribution shall be made pursuant to, and subject to the terms and conditions of, the Equity Allocation Mechanism and (b) the loans under the New First Lien Credit Facility [NB: Cash in respect of any sale of the Canadian business has been removed]. According to the liquidation analysis: "The estimated recovery for Holders of First Lien Claims under the Plan is based on the valuation conclusions of the Debtors’ investment banker, PJT Partners, which estimated an enterprise value of $450 million to $550 million and a value of plan consideration to the First Lien lenders aggregating from $364 million to $462 million. The Debtors estimate that, using this valuation, Holders of First Lien Claims will receive a recovery ranging from 60% to 76% under the Plan. Under a chapter 7 liquidation it is estimated that Holders of First Lien Claims will receive a recovery ranging from 2% to 6%.”
  • Class 4 (“Second Lien Claims”) is impaired and entitled to vote on the Plan.  Aggregated allowed claims are $85.0mn and the estimated recovery is 4.0%–6.9%. Each such holder shall receive on the Effective Date such holder’s Pro Rata share of the Second Lien Lender Special Warrant Distribution. According to the liquidation analysis: "The estimated recovery for Holders of Second Lien Claims under the Plan is based on the valuation conclusions of the Debtors’ investment banker, PJT Partners, which estimated an enterprise value of $450 million to $550 million and a value of plan consideration to the Second Lien lenders aggregating from $3.6 million to $6.1 million. The Debtors estimate that, using this valuation, Holders of Second Lien Claims will receive a recovery ranging from 4% to 7% under the Plan. Under a chapter 7 liquidation, Holders of Second Lien Claims are expected to receive no recovery.”
  • Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is NA. According to the liquidation analysis: “Holders of General Unsecured Claims will realize a recovery through interests in the Litigation Trust received under the Plan. The amount and percentage recovery of the interests in the Litigation Trust cannot be estimated because the outcome and the amount and allocation of net proceeds cannot be predicted at this time. The estimated recovery for Holders of General Unsecured Claims under a hypothetical chapter 7 liquidation is 0%.”
  • Class 6 (“Intercompany Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is NA.
  • Class 7 (“Intercompany Interests”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is NA
  • Class 8 (“Parent Equity Interests”) is impaired, presumed to reject and not entitled to vote on the Plan. The estimated recovery is 0.0%.
  • Class 9 (“Subordinated Securities Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0.0%.

Voting Results

Creditors of 19 individual Debtors were entitled to vote, in each case in respect of three classes comprised of holders of first lien claims (Class 3), second lien claims (Class 4) and general unsecured claims (Class 5). The voting in respect of Class 3 and Class 4 was identical (and unanimous) in respect of all 19 Debtors:

  • Class 3 (“First Lien Claims”) 111 holders, representing $572,297,206.69 (100%) in amount and 100% in number, accepted the Plan.
  • Class 4 (“Second Lien Claims”) 5 holders, representing $85,000,000.00 (100%) in amount and 100% in number, accepted the Plan.

As to class 5, the Plan was rejected in respect of the following Debtors: Bircan Holdings LLC, Fusion BCHI Acquisition LLC, Fusion CB Holdings Inc., Fusion Communications LLC, Fusion MPHC Group Inc., Fusion Management Services LLC, Fusion NBS Acquisition Corp., Fusion PM Holdings Inc., Fusion Telecom of Kansas LLC, Fusion Telecom of Missouri LLC, Fusion Telecom of Oklahoma LLC, Fusion Telecom LLC, Fusion Texas Holdings Inc. and Fusion MPHC Holding Corp Debtors have rejected the plan. A number of these rejections were de minimis in nature (ie a claim of $1 resulting in a rejection). The largest claim voting against the Plan was a $3.0mn claim voted in respect of Fusion BCHI Acquisition LLC.

The Plan was accepted, however, in respect of the following Debtors: Fusion Cloud Co., LLC, Fusion Cloud Services LLC, Fusion Connect, Fusion LLC and Fusion Telecom of Texas Ltd. 

Exit Financing

The Plan Supplement attaches revised term sheets (and related blacklines) in respect of the Debtors' proposed (i) New First Lien Facility and (ii) New Exit Facility; the terms of which are summarized as follows:

New First Lien Facility

  • Borrower: Reorganized FCI (the “Borrower” or the “Company”).
  • Guarantors: All of the obligations of the Borrower under the New First Lien Credit Agreement shall be guaranteed by each of the Reorganized Debtors and each of their non-Debtor subsidiaries (subject, in the case of non-domestic subsidiaries, to limitations consistent with the New Exit Facility) (collectively, the “Guarantors”; and Guarantors, together with the Borrower, the “Loan Parties”).
  • Facility: A junior secured term loan credit facility in an aggregate principal amount of $225.0mn (the loans made thereunder, the “New First Lien Term Loans").
  • Maturity Date: The date that is 5.5 years after the Closing Date (ie the Plan effectiveness date).
  • Interest Rates: Interest shall be paid at the LIBOR Rate plus the Margin. “Margin” means 8.00% per annum. The term “LIBOR Rate” will have a meaning customary for financings of this type (and in no event shall be less than 2.00%), and the basis for calculating accrued interest and the interest periods for loans bearing interest at the LIBOR Rate will be customary for financings of this type. During the continuance of a payment event of default, any overdue amount under the New First Lien Credit Documents, and during the continuance of a bankruptcy event of default, the New First Lien Term Loans and all other outstanding obligations will bear interest at an additional 2.00% per annum above the otherwise applicable interest rate. Any payment of interest will be subject to the requirements of the New Exit Facility as described in the New Exit Facility Term Sheet.
  • Amortization: None.
  • Collateral: The New First Lien Term Loans will be secured by a senior priority perfected security interest (junior to the liens securing the New Exit Facility Credit Agreement other than with respect to the Vector Subordinated Note Collateral) in substantially all present and after acquired property (whether tangible, intangible, real, personal or mixed) of the Loan Parties, wherever located, including, without limitation, all accounts, inventory, equipment, capital stock in subsidiaries of the Loan Parties, investment property, instruments, chattel paper, real estate, leasehold interests, contracts, patents, copyrights, trademarks and other general intangibles, and all products and proceeds thereof, subject to certain exceptions and materiality thresholds reasonably acceptable to the Requisite New First Lien Lenders (collectively, the ‘Collateral’).
  • Mandatory Prepayments: Customary for facilities of this type and reasonably acceptable to the Requisite New First Lien Lenders. Mandatory prepayments will, subject to the requirements of the New Exit Facility as described in the New Exit Facility Term Sheet, be required from 75% of Excess Cash Flow (to be defined), with step downs to 50% if the Leverage Ratio (to be defined as the ratio of total funded indebtedness, including capital leases, to EBITDA) is below 3.50:1.00 and 25% if the Leverage Ratio is below 2.75:1.00.
  • Financial Covenants: Customary for facilities of this type and reasonably acceptable to the Requisite New First Lien Lenders, but in any event to include a minimum EBITDA covenant, a maximum capital expenditures covenant and a maximum Leverage Ratio covenant, in each case with a 25% cushion to the then approved forecast.

New Exit Facility

  • Borrower: Fusion Connect, Inc., as reorganized pursuant to the Chapter 11 bankruptcy proceedings (the “Company”).
  • Guarantors: Each of the existing and future direct, indirect and wholly-owned subsidiaries of the Company and the direct parent company of the Company (subject, in the case of non-domestic subsidiaries, to certain limitations as reasonably acceptable to the Lenders) (the “Guarantors”). Lenders: Certain lenders to be identified (collectively, the “Lenders”). Administrative Agent: To be acceptable to the Lenders (the “Agent”).
  • Exit Term Loan: $115.0mn Exit Term Loan (the “Exit Term Loan”) with the right (with Lenders’ approval) to increase the size of the Exit Term Loans to $150.0mn.
  • Use of Proceeds: The proceeds of the Exit Term Loan shall be applied (i) to refinance the DIP Facilities, (ii) to pay transaction fees and expenses, (iii) to pay vendor payments and other Chapter 11 exit costs, and (iv) for working capital and other general corporate purposes. 
  • Maturity Date: The date that is 5 years after the Closing Date (the “Maturity Date,” with the Closing Date being the date that the Plan is declared effective).
  • Interest Rates: A floating rate of LIBOR + 9.50% with a 2.00% LIBOR floor, payable up to quarterly for LIBOR borrowings. 
  • Fees:
    • Facility Fee: 2.75% of the amount of the Exit Term Loan, payable to the Lenders on the Closing Date (the “Facility Fee”). The Facility Fee will be deducted from the proceeds of the Exit Term Loan as original issue discount. 
    • Administration Fee: As agreed with the Agent, payable to the Agent annually in advance on the Closing Date and on each anniversary thereof. 
  • Amortization: Exit Term Loan: Amortization of principal in equal quarterly installments in an amount equal to 10.00% per annum of the initial funded balance of the Exit Term Loan, with the outstanding amount due and payable on the Maturity Date.
  • Collateral: First lien on substantially all tangible and intangible assets and equity interests of the Company and each of the Guarantors, subject to customary permitted liens and subject to certain customary exceptions and materiality thresholds to be mutually agreed and excluding the Vector. Subordinated Note Collateral (as defined in the Company’s Final DIP Order (Docket No. 160), entered by the Bankruptcy Court on July 3, 2019). 
  • Financial Covenants: Customary for facilities of this type and reasonably acceptable to the Lenders, but in any event to include a minimum EBITDA covenant, a maximum capital expenditures covenant and a maximum Gross Leverage Ratio covenant, in each case with a 202% cushion to the approved forecast provided by the Company’s management and acceptable to the Required Lenders.

Plan Supplement

The Supplement attached the following documents:

  • Exhibit A-1: New First Lien Facility Term Sheet.
  • Exhibit A-2: Redline of New First Lien Facility Term Sheet.
  • Exhibit B-1: New Exit Facility Term Sheet.
  • Exhibit B-2: Redline of New Exit Facility Term Sheet.
  • Exhibit C: Directors and Officers of Reorganized Debtors.
  • Exhibit D: Rosen Consulting Agreement.

Read more Bankruptcy News