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July 7, 2022 – The U.S. Trustee assigned to the Debtors' cases (the "U.S. Trustee") and the Debtors' Official Committee of Unsecured Creditors (the “Committee”) have each objected to the Debtors’ bidding procedures motion [Docket Nos. 85 and 86, respectively].
UPDATE: At a July 7th hearing, Judge J. Kate Stickles agreed with the arguments presented by the U.S. Trustee and the Committee in respect of the inappropriateness of providing bidder protections, including a $250k break-up fee and a $350k expense reimbursement to an entity recently created to serve as a stalking horse, noting that “The stalking horse bidder has every incentive to ensure that this sale is consummated.”
The U.S Trustee is taking issue with proposed bidder protections being offered to the Debtors' chosen stalking horse (which it emotively defines as the "Insider Purchaser," citing the considerable participation of the Debtors' existing management with the stalking horse and its bid) arguing that the break-up fee and expense reimbursement are inappropriate given the insider nature of the stalking horse which: (i) needs no incentives to perform the role (ie stalking horse) for which it was expressly created and (ii) that management, intimately familiar with their own company, should have neglible expenses absent any need to engage in due diligence.
The aggregate impact of the $250k break-up fee, $350k expense fee and a $200k minimum overbid, the U.S. Trustee argues is to add an $800k hurdle (to an existing $20.0mn credit bid) for any interested 3rd party acquiror thereby chilling the sale process. What the U.S. Trustee does not seem to address is the stalking horse's reserved right to credit bid the entirety of what is owed to it under a prepetition first lien term loan and a DIP facility which would lift its credit bid well past the $80.0mn mark.
The Committee's objection, in addition to concurring with the U.S. Trustee as to the inappropriateness of bidder protections for an insider buyer, argues that it has not had enough time to study the stalking horse bid and that the Debtors have been uncooperative in respect of turning over requested information (or otherwise ensuring that their rights to get that information would not be jeapordized by the Debtors' unacceptably accelerated sale timetable, which they otherwise want to see extended). The Committee is particularly interested in details surrounding the stalking horse's acquisition of the Debtors' first lien debt and whether management (to the extent involved with the stalking horse bid) otherwise frustrated a competitive prepetition marketing process in what is a not so subtle suggestion that they may have been conflicted and acting outside of their fiduciary duties.
On June 22, 2022, Gold Standard Baking LLC and two affiliated debtors (“GSB” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn ($140.0mn of funded debt).
At filing, the Debtors, “one of the largest industrial bakers in the United States” noted their intention to pursue an asset sale to 37 Baking Holdings, LLC, an entity formed to acquire the "First Lien Obligations" (see debt table below) by several investment funds and minority-owned by several current GSB employees. On April 26th, 37 Baking Holdings, LLC acquired all the rights/debt of the Debtors' prepetition senior lenders (the "Initial Lenders").
37 Baking Holdings, LLC has entered into a stalking horse agreement with the Debtors further to which it has agreed to purchase the Debtors' assets for an aggregate purchase price consisting of: (i) a credit bid in the amount of a portion of the First Lien Obligations in the amount of $20.0mn and (ii) assumption of certain assumed liabilities (including the DIP financing obligations).
U.S. Trustee’s Objection
The U.S Trustee's objection [Docket No. 85] states, “The Motion seeks approval of the sale of substantially all of the Debtors’ assets to a stalking horse bidder, 37 Bakery Holdings, LLC (‘Insider Purchaser’), an entity whose members include at least six management level employees of the Debtors, including the CEO. Insider Purchaser bought the First Lien Obligations on April 26, 2022 and has submitted a credit bid consisting of (i) the amount of the outstanding DIP financing and (ii) $20 million of the more than $88 million in First Lien Obligations owed by the Debtors.
The U.S. Trustee objects to those portions of the Motion that propose to protect Insider Purchaser’s insider bid with (i) a Break-Up Fee of $250,000.00 and (ii) an Expense Reimbursement of up to $350,000. When the bid protections are added to the $200,000.00 minimum overbid, other interested bidders will have to bid at least $800,000.00 over Insider Purchaser’s bid of $20 million + in order for their bid to be considered. Further, the U.S. Trustee objects to the Debtors’ proposal to give the Insider Purchaser’s bid protections superpriority administrative claim status.
Bid protections are intended to provide an incentive for a party to expend the time and resources performing due diligence necessary to make a stalking horse bid. Here, Insider Purchaser did not need any additional incentive to place a bid; upon information and belief, the entity was formed and purchased the First Lien Obligations for this very purpose. Further, any additional due diligence was negligible, as members of Insider Purchaser were intimately involved with the Debtors, including the CEO of the Debtor Gold Standard Baking, LLC.
The U.S. Trustee also objects to the assumption of 2021 Employee Bonus Obligations by the Insider Purchaser, pursuant to the Stalking Horse Agreement, pending further clarity on the matter, as the proposed assumption presents potential Jevic or § 503(c)(3) issues.”
The Committee’s Objections
The Committee's objection [Docket No. 86] states, “[t]he Committee does not object to the Debtors’ efforts to engage in a process for the sale of their assets per se, the Committee does object to numerous provisions contained in the Bid Procedures and to the entry of an order approving the Bid Procedures (a ‘Bid Procedures Order’) unless the objectionable provisions are remedied as set forth herein.
The Committee was appointed on Friday, July 1, 2022, selected its proposed undersigned counsel on the same day, and selected its proposed financial advisors on Tuesday, July 5, 2022. The Committee and its advisors have worked diligently to review and analyze the key issues in this case and understand that the Debtors’ desire to sell substantially all of their assets to a Stalking Horse Bidder who recently acquired its first lien debt and is also the DIP lender in these Chapter 11 Cases in a very compressed timeframe. The Committee promptly made information and document requests from both the Debtors and the Stalking Horse Bidder that are critical for the Committee to make informed decisions about the relief requested in the Bid Procedures Motion. Among the information requested by the Committee was: (i) information concerning the newly formed Stalking Horse Bidder’s financial wherewithal and ability to close and fund its obligations under the Stalking Horse Agreement, including post-closing financial projections; (ii) information concerning the Debtors’ prepetition marketing efforts; (iii) the timing of payment by the Staking Horse Bidder of § 503(b)(9) claims and Ordinary Course Trade Payables; (iv) loan documents, security agreements, UCC filings and related information to allow the Committee to conduct a review of the validity, priority and extent of the Stalking Horse Bidder’s purported liens in the Debtors’ assets; and (v) information concerning the purchase price and other consideration paid by the Stalking Horse Bidder to acquire the Debtors’ first lien debt. The Committee is also concerned that the Stalking Horse Bidder may be an insider.
Given the desire of the Debtors and the Stalking Horse Bidder to conduct the § 363 sale process on such an accelerated pace, the Committee assumed that, at a minimum, this critical information would be readily available and promptly furnished to the Committee to allow to the Committee to conduct its due diligence and make an informed decision on the relief requested in the Bid Procedures Motion. Indeed, on July 2, 2022, the Debtors’ counsel committed to promptly provide the requested information to the Committee. Unfortunately, to date (in the late afternoon on July 6, 2022) only limited and insufficient information (some of which is in redacted form) in response to the Committee’s requests has been provided, which does not include information concerning the Stalking Horse Bidder’s financial wherewithal or the first lien loan documents.
In light of the Debtors’ and the Stalking Horse Bidder’s inability to timely provide the Committee with the information critical to the Committee’s analysis of the relief requested, the Committee, the Debtors and the Stalking Horse Bidder engaged in discussions to find a mutually agreeable structure that would permit entry of the Bidding Proceeding Order on the timeframe proposed by the Debtors and the Stalking Horse Bidder, while ensuring that the interests of the unsecured creditors were appropriately protected pending receipt and review of the requested information.
To this end, the Committee’s professionals negotiated a reservation of rights provision with the advisors to the Debtors and to the Stalking Horse Bidder (the ‘Committee Reservation of Rights’) for inclusion in the Bid Procedures Order. The Committee Reservation of Rights would have, among other things: (i) allowed the sale process to proceed in accordance with the Bid Procedures proposed by the Debtors; (ii) established a deadline by which the Debtors and the Stalking Horse Bidder must provide the requested due diligence information and documents to the Committee; (iii) allowed the Committee to raise any objections to the Bid Procedures at or before the hearing to consider approval of the Sale; and (iv) allowed the Committee to make an unopposed request for a hearing on three days’ notice in the event that the requested information was not timely produced and/or the Committee’s investigation uncovered information that impacts the Bid Procedures or the proposed Sale.
The Committee understood that there was an agreement in principle among the parties with respect to the inclusion of the Committee Reservation of Rights in the proposed Bid Procedures Order. Committee counsel drafted the proposed Committee Reservation of Rights provision and circulated it for comment among the parties…On the evening of July 6, 2022, counsel to the Stalking Horse Bidder advised Committee counsel that it would not agree to the including the Committee Reservation of Rights in Bid Procedures Order. No alternate language has been proposed to the Committee.
For the reasons set forth above, the Committee still believes that the Committee Reservation of Rights is the best way of ensuring the rights of unsecured creditors are protected pending receipt of the requested due diligence information. In light of the Stalking Horse Bidder’s refusal to agree to the Committee Reservation of Rights, and its failure to provide the Committee with the requested information, the Committee’s only reasonable alternative is to prosecute its objections to the Bid Procedures Motion at this time.
The Committee’s primary objections to the Bid Procedures are:
- The Court should not approve the Stalking Horse Bidder’s right to credit bid unless and until there is an evidentiary record concerning: (i) the circumstances of how the first lien debt was acquired by the Stalking Horse Bidder; (ii) whether the Stalking Horse Bidder acted to frustrate the competitive bidding process; (iii) the Debtors’ prepetition marketing process; (iv) the amount of the consideration paid by the Stalking Horse Bidder for first lien debt; (v) whether the Stalking Horse Bidder is an ‘insider’ or an ‘affiliate’ of the Debtors, as such terms are defined in the Bankruptcy Code; and (vi) a determination is made as to the validity, priority and extent of the Stalking Horse Bidder’s purported liens and security interests in the Debtors’ assets.
- The Stalking Horse Bidder is not entitled to the proposed Break-Up Fee and Expense Reimbursement in the event of a overbid because: (i) the Stalking Horse Bidder already performed the necessary due diligence of the Debtors in connection with its acquisition of the first lien debt; and (ii) the Stalking Horse Bidder’s position as a first lien lender, as well as its partial ownership by members of the Debtors’ management, already provide sufficient financial incentives for the Stalking Horse Bidder to acquire the Debtors’ assets, without the need for additional bid protections.
- The proposed Bankruptcy Court Milestones are unreasonably short, are not designed to foster a competitive auction and sale process, and must be extended.”
On June 22nd, the Debtors filed a motion requesting each of a bidding procedures order and a sale order which requested, inter alia, (i) authority to enter into stalking horse arrangements with 37 Baking Holdings, LLC ($20.0mn credit bid*) including in respect of bidder protections and (ii) approval of a proposed auction/sale timetable which culminates in a July 28, 2022 auction and an August 3, 2022 sale hearing [Docket No. 17]. The Stalking Horse APA is attached to the motion as Exhibit A to Exhibit C (p. 58).
* The stalking horse retains the right to "increase the Credit Bid up to the full amount of the First Priority Obligations and/or the DIP Obligations [ie @$75.0mn]; with the Debtors' investment banker noting as to the robustness of the stalking horse's credit bid, "such amount far exceeds any reasonable valuation of the Assets."
Key Terms of the Stalking Horse APA:
- Seller: Gold Standard Baking, LLC
- Buyer: 37 Baking Holdings, LLC
- Purchase Price: In consideration of the sale of the Assets to Purchaser, and upon the terms and subject to the conditions set forth herein, the aggregate consideration for the sale and transfer hereunder (the “Purchase Price”) shall consist of:
- A credit bid pursuant to section 363(k) of the Bankruptcy Code (the “Credit Bid”) of a portion of the First Priority Obligations held by Purchaser in the amount of Twenty Million Dollars ($20.0mn), provided, however, that Purchaser reserves the right, in its sole discretion, to increase the Credit Bid up to the full amount of the First Priority Obligations and/or the DIP Obligations; and
- The assumption by Purchaser of the Assumed Liabilities; and
- The assumption and assignment to Purchaser of the Assumed Contracts.
- Bid Protections:
- a break-up fee of $250k (the “Break-Up Fee”);
- expense reimbursement of the Stalking Horse Bidder’s actual, outof-pocket legal fees and hard costs incurred after execution of Stalking Horse Agreement of up to $350k (the “Expense Reimbursement”); and
- an initial overbid equal to the Break-Up Fee, plus the Expense Reimbursement, plus $200k (the “Initial Overbid” and, together with the Break-Up Fee and the Expense Reimbursement, the “Bid Protections”).
The bidding procedures motion [Docket No. 17] states, “Houlihan Lokey expended significant efforts prior to the Petition Date marketing the Assets for sale. Houlihan Lokey’s marketing process included significant mailings and calls to targeted, industry specific, potential buyers that Houlihan Lokey and the Debtors believed might be interested in discussing a potential purchase of the Assets. Specifically, on July 6, 2021, Houlihan spearheaded outreach to a broad universe of relevant strategic and financial parties to assess interest in an acquisition of the Company. Houlihan contacted approximately 102 parties, 71 of which negotiated and executed confidentiality agreements and, starting July 13, 2021, were provided with a CIM and access to a virtual data room containing detailed information about the Debtors’ business. Houlihan then held numerous calls with interested parties to respond to diligence and discuss the current situation and process.
The Debtors received six written indications of interest by the July 29, 2021 deadline, with three additional parties submitting a written indication of interest by August 6, 2021. Of these nine parties, four were strategic companies and five were financial investors. After reviewing all nine formal indications of interest and in consultation with their advisors, the Debtors’ management team invited six of the parties to further discuss the possibility of a potential transaction in advance of the deadline to submit a final bid on September 9, 2021. Subsequently, two of those parties submitted a formal letter of intent to purchase substantially all of the Debtors’ assets, one on September 9, 2021 and the other on September 15, 2021. Multiple additional parties indicated a potential interest in a sale transaction but did not submit a formal letter of intent.
As part of evaluating the received letters of intent as well as the formal and informal discussions with potential purchasers, it was apparent to the Debtors that certain potential purchasers were interested in purchasing only a portion of the Debtors’ business. As a result, the Debtors and their advisors determined that a sale of portions of the Debtors’ business to multiple purchasers could potentially maximize value as compared to the distributable value that would inure to the estates from any one purchaser of the Debtors’ full business operations. The Debtors’ advisors consulted with advisors to the Lenders and the holders of the Senior Subordinated Notes and determined to re-contact parties that had previously expressed informal and/or initial indications of interest to gauge interest in a potential purchase of some, but not all, of the Debtors’ business. The Debtors also re-engaged additional parties to further survey potential interest in a sale of all of the Debtors’ business.
While discussions with Arbor remained ongoing, the Debtors and their advisors continued to evaluate value-maximizing paths forward for the Chicago Facility. Over the last twenty-four months, the Debtors engaged in continuous communication with their lenders, entered into several rounds of forbearance negotiations, and evaluated multiple possible sale transactions and other out-of-court deals, including the shutdown of the Chicago Facility and piecemeal liquidation of its assets.
Through March and April of 2022, the Initial Lenders explored the potential for the sale of its First Lien Obligations and the assignment of the First Lien Documents. Ultimately, on April 26, 2022, 37 Baking Holdings, LLC acquired all the rights of the Initial Lenders and the Agent under the First Lien Credit Documents pursuant to that certain Loan and Collateral Purchase Agreement the Agent, Initial Lenders and 37 Baking Holdings, LLC dated as of April 26, 2022.
After the acquisition of the First Lien Obligations and First Lien Documents by 37 Baking Holdings, LLC, discussions with the Company continued with respect to viable options for the Chicago Facility. Ultimately, 37 Baking Holdings, LLC agreed to serve as the stalking horse bidder (the ‘Stalking Horse Bidder’) pursuant to the terms of that certain asset purchase agreement, dated June 17, 2022 (the ‘Stalking Horse Agreement’) attached to the Sale Order as Exhibit A (the ‘Stalking Horse Agreement’) to acquire the Debtors’ remaining assets at the Chicago Facility as a going concern, to expose the staking horse agreement to higher and better offers through a chapter 11 process, and to support the process by agreeing to the Debtors’ use of cash collateral and providing needed debtor-in-possession financing. The culmination of the foregoing marketing process was the execution of the Stalking Horse Agreement.
The timeline for the formal marketing process was driven by parallel negotiations with the Prepetition Secured Party and the DIP Facility Lender as part of the prepetition restructuring process. As part of these negotiations, the Prepetition Secured Party and the DIP Facility Lender, among other things, insisted on the inclusion of ‘milestone’ dates by which the Debtors would be required to have completed certain aspects of the proposed sale process (the ‘Milestones’). These Milestones are intended to preserve the going-concern value of the business through a timely, efficient sale process that culminates in a closing by the middle of August 2022 to maximize value and avoid disruption and harm to the Debtors’ business.
Although the Debtors believe that the Assets were adequately marketed before the Petition Date, pursuant to the terms of the Stalking Horse Agreement, the Debtors and their investment banker have continued, and will continue, to market the Assets to likely potential buyers through and until the Bid Deadline (defined below). The Debtors and their investment banker believe that given the amount of the credit bid available to the Prepetition Secured Party and DIP Facility Lender (which such amount far exceeds any reasonable valuation of the Assets), the significant prepetition marketing effort, the number of parties that already have executed NDAs, the fact that the Assets were already marketed to the most likely bidders for Assets of the type being sold, and that the Debtors entered into a liquidation agreement for the Assets prior to the Stalking Horse Bidder’s willingness to enter into the Stalking Horse Agreement and buy the Assets as a going concern compared with other alternatives explored, the prepetition and postpetition marketing process leading up the Bid Deadline will be robust and adequate to achieve the greatest possible level of interest and consideration for the Assets in the Chapter 11 Cases.”
As of the Petition Date, the Debtors’ capital structure consists of outstanding funded debt obligations in the aggregate principal amount of approximately $140.0mn, including the Revolving Credit Facility, the First Lien Term Loan, the Second Lien Term Loan, and the Senior Subordinated Notes.
About the Debtors
According to the Debtors: “Gold Standard Baking is one of the largest industrial bakers in the United States. We deliver delicious products from laminated dough to a wide variety of finished foods. We’re strategically located in the center of the country with our main bakery in Chicago. GSB produces over 150 varieties of fully-baked croissants, danish and cinnamon rolls, feeding millions of people each week across the US and in Canada. All our finished foods are designed for the thaw and sell programs of our customer-partners in food service, retail, casual dining, health, education, and quick serve restaurants."
The Young Declaration adds: "The Debtors produce over 1.7 million pounds of fully-baked goods per week on average, including approximately 100 varieties of fully-baked croissants, Danishes, and cinnamon rolls. These goods are delivered to approximately 100 retail and other foodservice customers per week through a network of distributors. The Debtors offer fully-finished “thaw and serve” foods designed for ease of use to customers across a wide range of industries, including partners in food service, retail, casual dining, health, education, and quick service restaurants.
As of the Petition Date, the Debtors employ approximately 333 full-time employees. The Debtors also periodically retain temporary workers through various staffing
agencies to fulfill certain duties on a short- and long-term basis. Typically, at any given time the Debtors retain approximately 50 temporary staff."
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