July 1, 2021 – Certain of the Debtors' prepetition lenders (the "Senior Lenders*") have reacted quickly to the Debtors' motion for Court authority to replace its former, Court-approved, stalking horse (Monarch Alternative Capital LP, or “Monarch”) with DIP lender JMB Capital Partners Lending, LLC (“JMB” or the “Stalking Horse Bidder”) [Docket No. 547], arguing that the terms of the new stalking horse arrangements include (i) an inappropriately low ($43.5mn) purchase price and (ii) a rushed, bid-chilling, sale timetable that stands to reward JMB at the expense of the Senior Lenders: "Indeed, the DIP Credit Bid provides no recoveries to any party besides the DIP Lender and the Port, and leaves nothing for the Senior Secured Lender…[and] poses a significant risk to the estate maximizing value, and may result in the DIP Lender owning the property at a bargain price."

* The Senior Lenders are comprised of: (i) George Washington Bridge Bus Station and Infrastructure Development Fund LLC (the “Senior Secured Lender”), (ii) George Washington Bridge Bus Station and Infrastructure Development Fund, Phase II, LLC, and (iii) their manager, New York City Regional Center, LLC (“NYCRC”, and together with the Senior Secured Lender and George Washington Bridge Bus Station and Infrastructure Development Fund, Phase II, LLC)

In their June 28th motion [Docket No. 544], the Debtors touted the "significant benefits" of the JMB stalking horse arrangements (see more below on the resolution of a ground lease impasse which doomed the Monarch transaction), with the unimpressed Senior Lenders understandably focusing on the dramatic drop in sale price (a large portion of which would have been used to repay their claims; Monarch's $92.0mn bid being comprised of $18.0mn of cash to repay the JMB DIP and the assumption of $72.0mn of prepetition senior debt) as compared to the Debtors' focus on the resolution of ground lease issues and the resulting deal certainty.

This may be something of a tough sell for the Senior Lenders given that the proposed timetable culminates with an auction on August 10, 2021 and a sale hearing on August 12, 2021 in respect of assets that have been on the auction block since at least the Debtors' March 25, 2021 selection of Monarch as its the stalking horse, but arguably much further back than that (it was a threatened foreclosure sale that pushed them into bankruptcy back in October 2019 in the first place). The switch in stalking horses has some clear winners, the Port (as defined below) and probably JMB, but also has a clear loser, the Senior Lenders; but unless Monarch comes back to the table, or a third-party bidder becomes tempted by the now halved price and the arguably improving business environment; JMB's offer is the only one on the table. 

The Senior Lenders' would seemingly have a decent argument as to the inappropriateness of $1.7mn of bidder protections for JMB as bid chilling (and because JMB is a credit bidding DIP lender), but seemingly undercuts that argument by simultaneously pushing an argument that the Debtors and JMB are setting an "artificially low floor." To wit: "Accordingly, there is no reasonable business justification for agreeing to incentivize the DIP Lender in its self-help maneuver with $1.7 million of bid protections to submit its DIP Credit Bid, which is likely to discourage value-maximizing bidding by setting an artificially low floor, and which is aggravated by the Debtor’s tight sale process timeline.” An unusual argument.

The Senior Lenders' objection notes, “The Debtor was last before this Court in April 2021 seeking approval to solicit votes on a chapter 11 plan that contemplated, among other things, a sale of the Debtor’s assets to Monarch Alternative Capital LP (‘Monarch’). That transaction would have provided up to approximately $100 million of consideration to the Debtor and its creditors in the aggregate, including the repayment in full of the DIP loan provided by JMB Capital Partners Lending LLC (the ‘DIP Lender’), funding for administrative expense claims and wind-down costs, and the assumption by Monarch of $72 million of indebtedness owed to the Senior Secured Lender.

Following the disclosure statement hearing, the Port Authority of New York and New Jersey (the ‘Port’) indicated that it would not consent to the transaction unless Monarch provided an additional $17 million as adequate assurance into an escrow account to address certain alleged defaults, including asserting that the property’s elevators do not comply with applicable law and safety requirements. Unfortunately, Monarch was unwilling to proceed with the transaction, confirmation, or consummation of the Plan, and the Debtor was forced to terminate its agreement with Monarch on June 23, 2021.

Although the Senior Lenders were disappointed by the loss of the Monarch transaction, they were also encouraged by the recent lifting of all COVID-19 related restrictions in New York City and the opportunity for the Debtor to remarket its property in an improving commercial real estate market. However, without remarketing the property to potential stalking horse bidders, on the same day it terminated the Monarch transaction, the Debtor informed the Senior Lenders it would be entering into a stalking horse agreement with the DIP Lender. The Debtor now seeks approval of a fast-tracked credit bid stalking horse agreement that contemplates the sale of substantially all of its assets to the DIP Lender (the ‘DIP Credit Bid’) in a transaction that, despite its headline price of $43.5 million, may actually provide less than $23 million in consideration—merely a waiver of the DIP loan and some limited funding for administrative and wind-down expenses.

The Senior Lenders object to the DIP Credit Bid given the proposed consideration is markedly lower than the consideration provided under the Monarch transaction (up to approximately $100 million), as well as the cash bids received by the Debtor in the heart of the pandemic. The artificially low floor set by the DIP Credit Bid combined with the Debtor’s proposed truncated bidding process over the Summer (without the Debtor obtaining any clarity on the closing cost issues that plagued the Monarch transaction) poses a significant risk to the estate maximizing value, and may result in the DIP Lender owning the property at a bargain price.

Indeed, the DIP Credit Bid provides no recoveries to any party besides the DIP Lender and the Port, and leaves nothing for the Senior Secured Lender, who has vigorously defended its prepetition first-lien position in this case for the benefit of its 144 individual investors. If approved by the Court, the Debtor’s decision to pursue the DIP Credit Bid may mean that the Senior Lenders’ herculean effort to preserve the value of their collateral for nearly two years in the face of the COVID-19 pandemic and value-destructive litigation with the Port and Tutor Perini Building Corp. (‘Tutor Perini’) will have been in vain, and each individual investor’s $500,000 investment will be lost.

Even if the DIP Credit Bid is topped, significant value will be eroded by the proposed $1.7 million of proposed bid protections, which are not needed to incentivize the DIP Lender to bid. At bottom, the DIP Credit Bid is a foreclosure bid whereby the DIP Lender has agreed to take its collateral in satisfaction of the DIP loan and pay the minimum and necessary costs to acquire the property, including the Debtor’s professional fees and cure costs and adequate assurance requirements asserted by the Port, each of which the DIP Lender would be required to do in the event of a foreclosure. If no other bidders come forward, the DIP Lender will be forced to make effectively the exact same bid as the DIP Credit Bid at a later date. Accordingly, there is no reasonable business justification for agreeing to incentivize the DIP Lender in its self-help maneuver with $1.7 million of bid protections to submit its DIP Credit Bid, which is likely to discourage value-maximizing bidding by setting an artificially low floor, and which is aggravated by the Debtor’s tight sale process timeline.”

Revised Key Dates:

• Deadline to File Objections to the Sale, the Stalking Horse Bidder, and the Sale Order: August 5, 2021
• Bid Deadline: August 6, 2021
• Auction (if required): August 10, 2021
• Sale Hearing August 12, 2021

Background

On June 28th, the Debtor filed a supplemental motion seeking Court authority (i) to replace its existing, Court-approved, stalking horse (Monarch Alternative Capital LP, or “Monarch”) with DIP lender JMB Capital Partners Lending, LLC (“JMB” or the “Stalking Horse Bidder”), (ii) approve bidder protections for JMB and (iii) amend its auction/sale timetable to schedule an auction for August 10, 2021 and a sale hearing for August 12, 2021 [Docket No. 544]. The JMB stalking horse asset purchase agreement (the “APA”), memorializing mixed credit/cash consideration the Debtor values at $43.5mn, is attached to the supplemental motion as Exhibit A.

The Debtor's switch in stalking horses follows a breakdown in negotiations amongst the Debtor, Monarch, the Port Authority, and New York City Regional Center LLC, ("NYCRC") relating to Monarch's insistence on amendments to the ground lease for the George Washington Bridge Bus Station; with JMB (as DIP lender listening in as the negotiations stumbled) willing to proceed without Monarch's ground lease requirements. 

On June 23rd, the Debtor informed Monarch that it was exercising its right to terminate that APA "as the Debtor had determined that proceeding with the transactions contemplated therein would be inconsistent with its fiduciary duties under applicable law…" That letter followed communications from Monarch that reserved Monarch's right to exit their APA; although whether those communications reflected Monarch's desire to exit their transaction or were part of negotiations is not entirely clear (see below). Monarch's bidder protections included a break-up fee of $600k and an expense reimbursement of up to $400k should their transaction not close by June 30th, although the parties had agreed that if that deadline was not met  "because the form of the Required Ground Lease Amendment is not reasonably acceptable to Purchaser, then Purchaser will only be entitled to receive the Expense Reimbursement."

The Debtor had valued the Monarch transaction at $92.0mn, including $18.0mn of cash to repay the JMB DIP and the assumption of $72.0mn of prepetition debt.

The Debtor's motion provides as to the JMB transaction: "Pursuant to the Stalking Horse APA, JMB will acquire substantially all of the Debtor’s assets in exchange for consideration of approximately $43,500,000 in aggregate value to the Debtor’s estate. The proposed transaction (the 'Stalking Horse Bid') provides significant benefits, including (i) the continuation of the Debtor’s business as a going concern, (ii) the credit bid of the Indebtedness in satisfaction of all amounts outstanding under the $18,000,000 DIP facility, (iii) the provision of cash proceeds sufficient to satisfy the administrative expense claims in this chapter 11 case, in each case as contemplated by the Stalking Horse APA, and (iv) no less than a $17 million escrow (in a final amount to be agreed to by the Purchaser and the Port Authority) to provide the Port Authority with adequate assurance of future performance to ensure that any non-monetary defaults would be cured promptly after assumption and the leased premises would be brought into compliance with law, if necessary, and maintained in compliance therewith."

Key Terms of the Stalking Horse APA:

Pursuant to the Stalking Horse APA, JMB will acquire substantially all of the Debtor’s assets in exchange for consideration of approximately $43,500,000 in aggregate value to the Debtor’s estate.

• Stalking Horse Bidder: JMB Capital Partners Lending, LLC
• Consideration: The consideration for the Assets shall be (i) a sum in the amount set forth on Schedule 3 to the Stalking Horse APA at Closing (the “Closing Payment”) provided, however, the Closing Payment shall not exceed $8.5mn, (ii) a credit bid in an amount equal to 100% of the the Debtor’s DIP Indebtedness (ie $18.0mn, the “Credit Bid"); (iii) no less than $17.0mn (the “Ground Lease Escrow”) to be funded to an escrow account, in a final amount to be agreed to by the Purchaser and the Port Authority, to be used solely in connection with curing any non-monetary defaults under the Ground Lease, including bringing the Property into compliance with law, if necessary, and maintaining it in compliance therewith; and (iv) the assumption of the Assumed Liabilities 
• Bid Protections: If Seller’s sale process generates an all cash bid of at least Forty Five Million and 00/100 Dollars ($45,000,000.00) (such bid, an “Alternative Bid”), then Seller shall have the right to pursue such Alternative Bid; provided, however, that if Seller closes on such Alternative Bid, then the Deposit shall be promptly refunded to Purchaser and Seller shall pay to Purchaser, as a breakup fee, an amount equal to 3.0% of the Closing Payment, the Credit Bid, and the Ground Lease Escrow (the “Breakup Fee”) and reimburse Purchaser for its expenses in an amount not to exceed Three Hundred Fifty Thousand and 00/100 Dollars ($350,000.00) (the “Expense Reimbursement,” and with the Breakup Fee shall be referred to herein collectively as, the “Bid Protections”).

The Purchaser may credit bid the Bid Protections in the event the Seller conducts an auction for the Purchased Assets. 

More Background

The supplemental motion continues, “In the nearly three months since the Monarch APA was signed, the Debtor has worked tirelessly with the Monarch Purchaser, the Port Authority, and New York City Regional Center LLC, on behalf of itself and its managed funds George Washington Bridge Bus Station and Infrastructure Development Fund, LLC and George Washington Bridge Bus Station and Infrastructure Fund, Phase II, LLC (‘NYCRC’) to negotiate the documents ancillary to the Monarch APA, including the Required Ground Lease Amendment, which would modify the economics of the Ground Lease in certain respects, and the Ground Lease Estoppel, which Monarch Purchaser insisted could only reference certain defaults. Throughout these negotiations, the Monarch Purchaser insisted that it was unwilling to close on a sale pursuant to the terms of the Monarch APA unless the Required Ground Lease Amendment and clean Ground Lease Estoppel were delivered. At the same time, the Port Authority held to its position that it was not obligated to modify the Ground Lease and that the leased premises needed to be brought into compliance with law at the time of assumption, if necessary, and maintained in compliance with law thereafter. The Port Authority also provided information regarding potentially acceptable forms of adequate assurance in connection with the assumption of the Ground Lease that had not been contemplated in the Monarch APA.

In the meantime, in late May 2021, JMB, in its capacity as the Debtor’s DIP lender, learned that the Monarch Purchaser’s insistence on the Required Ground Lease Amendment and clean Ground Lease Estoppel and the Port Authority’s adequate assurance request had become stumbling blocks in the negotiations among the Debtor, the Monarch Purchaser, the Port Authority, and NYCRC. Thereafter, JMB approached the Debtor and indicated that it would be willing to serve as a stalking horse bidder in lieu of the Monarch Purchaser by, among other things, credit bidding 100% of the Debtor’s Indebtedness to it under that certain Superpriority Senior Secured Debtor-in-Possession Loan Agreement by and among the Debtor and JMB dated August 15, 2020. JMB advised the Debtor that it would not condition any sale on the closing conditions that made the Monarch Purchaser unlikely to close on the Monarch APA and that it would be able to demonstrate adequate assurance in a manner acceptable to the Port Authority. Specifically, JMB agreed that it would bring the leased premises in compliance with law, if necessary, and would thereafter maintain it in compliance therewith and would establish an escrow to fund any such obligations and any other remediations necessary to cure any other non-monetary defaults under the Ground Lease.

JMB reiterated its interest in serving as a stalking horse bidder on several occasions in late May and early June 2021 as the negotiations between the Debtor, the Monarch Purchaser, the Port Authority, and NYCRC continued to stall. Indeed, by early June, it was increasingly evident to the Debtor and JMB that there was no clear path to closing on the Monarch APA in light of the ongoing disputes as described above.

On June 14, 2021, JMB presented the Debtor with a non-binding term sheet for the purchase of substantially all of the Debtor’s assets. JMB’s term sheet did not require the Debtor to provide a Ground Lease amendment, did not require the Port Authority to deliver a clean estoppel, and contemplated an escrow of no less than $17 million to be used to cure any non-monetary defaults under the Ground Lease, bring the leased premises in compliance with law, if necessary, and maintain it in compliance therewith. Thereafter, the Debtor and JMB negotiated the Stalking Horse APA in good faith and at arm’s length.

On June 17, 2021, the Monarch Purchaser sent the Debtor a Notice of Reservation of Purchaser’s Rights (the ‘ROR Letter’) in which it alleged that it was entitled to terminate the APA in light of the fact that the Debtor had failed to (i) deliver the Required Ground Lease Amendment within the timeframe prescribed in the APA, as set forth in Section 5(c)(vi) thereof, and (ii) satisfy the Plan Milestone requiring it to secure a confirmation order by June 4, 2021, subject to the Court’s availability, with the Court having been available for a hearing on June 16, 2021 but no confirmation hearing having taken place and no Order having been entered, as set forth in more detail in Section 5(c)(x) of the APA. The Monarch Purchaser concluded the ROR Letter with the following: ‘at this time Purchaser intends to continue working with [the Debtor], the Senior Secured Lender and the Port Authority to try to find a mutually agreeable resolution to the issues that have arisen with respect to the transactions contemplated by the APA.’ Thereafter, on June 23, 2021, the Debtor received an email from counsel to the Monarch Purchaser (the ‘June 23rd Email’) informing the Debtor that ‘[the Purchaser] is not currently willing to agree to Debtor’s proposed extension of the deadlines under the APA or the bankruptcy case’ and concluding that although ‘Monarch [Purchaser] remains committed to the original deal that was struck in the [Monarch] APA . . . it is difficult to see how that deal can move forward.’

At this time, having reviewed the Monarch APA, the ROR Letter, the June 23rd Email, and the Stalking Horse APA, the Debtor has determined that the Stalking Horse APA represents the highest and best offer for the Debtor’s assets in light of the fact that it does not present the closing risks that the Monarch APA presented. Accordingly, on June 23, 2021, the Debtor sent the Monarch Purchaser a letter exercising its right, pursuant to Article 11 of the Monarch APA, to terminate the Monarch APA as the Debtor had determined that proceeding with the transactions contemplated therein would be inconsistent with its fiduciary duties under applicable law. Thereafter, on June 25, 2021, the Debtor and JMB signed the Stalking Horse APA."

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