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March 29, 2021 – The Debtor requested each of a bidding procedures order and a sale order in respect of the sale of its ownership interests in Finacity Corporation (the “Finacity Equity”) (the “Sale”) [Docket No. 19]. The requested bidding procedures order would (i) authorize the Debtor to enter into stalking horse arrangements with the Katz Parties (defined below, the “Stalking Horse Bidder,” $24.0mn bid of which only $3.0mn is cash), (ii) approve bidder protections for the Stalking Horse Bidder and (iii) approve a proposed timetable culminating in an April 23, 2021 auction and an April 27, 2021 sale hearing. The sale order would approve the Sale.
The Stalking Horse Purchase Agreement is attached to the motion as Exhibit B.
The Stalking Horse Bidder is comprised of Finacity Corporation ("Financity," ie the issuer of the equity being sold) and members of the Katz family (the "Katz Parties") led by Finacity CEO Adrian Katz. Finacity was purchased by Greensill in 2019.
In addition to the $3.0mn of cash, the Stalking Horse Bidder's bid includes the release of liabilities relating to earn-outs allegedly owed members of the Katz family which the Debtor values at $21.0mn. Three-fourths of this nominal earnout are for calendar years 2021-2023, with only one of four $5,304,000 annual payments actually already earned (that in respect of 2020, with an earlier payment in respect of 2019 made back in June 2020). The Debtor (at least until a higher cash bid appears) argues that the release of the earn-outs provides real value to the Debtor's estate, given that the unpaid earn-outs would otherwise sit with claims of general unsecured creditors and dilute those claims (the Debtor estimates that their are $5.0mn to $7.0mn of such claims).
A second unusual feature of the bid as structured (in addition to the treatment of unearned earnouts, that would otherwise sit as general unsecured claims, as both earned and legitimate consideration) is the Debtor's argument that Adrian Katz is not an insider; "Rather, Mr. Katz is an insider of Finacity, the Debtor’s asset that is being marketed and sold pursuant to the Sale Process. As an insider of the asset but not the seller, Mr. Katz is in a particular position to properly value the Debtor’s interest in the Finacity Equity and set the floor as a Stalking Horse Bidder, but at the same time, has no conflicts in relation to the Debtor or its officers that would raise suspicions about the legitimacy or impartiality of the Sale Process."
The motion states, “The Debtor intends to use this Chapter 11 Case to preserve and maximize value for the benefit of all creditors in connection with the winding up of its affairs. In that regard, the Debtor stated that it was its intention to pursue a sale of its equity interests in Finacity pursuant to an orderly sale and marketing process overseen by this Court (the ‘Sale Process’).
In furtherance of the Sale Process, on March 26, 2021, the Debtor engaged GLC Advisors & Co., LLC, as its investment banker (‘GLC’). The Debtor believes that with the benefit of a robust marketing process with the assistance of GLC, the Debtor will be able to maximize the value of its key asset and pay a significant portion of general unsecured and priority claims.
In connection with the Debtor’s sale efforts to date, the Debtor received a bid for the Finacity Equity from the Katz Parties. After extensive negotiations among the Debtor, the Katz Parties, Finacity, and their respective advisors, the parties have reached agreement on the Stalking Horse Purchase Agreement. Pursuant to the Stalking Horse Purchase Agreement, the Katz Parties will serve as the initial ‘stalking horse’ bidder for the Finacity Equity, which will be subject to the auction and marketing process overseen by the Court pursuant to the proposed Bidding Procedures.
The Katz Parties are in a unique position to provide value to the Debtor in their capacity as the Stalking Horse Bidder because Mr. Katz is the founder and current CEO of Finacity. Notably, Mr. Katz has no control over the Debtor or any of its parent or sister entities. Rather, Mr. Katz is an insider of Finacity, the Debtor’s asset that is being marketed and sold pursuant to the Sale Process. As an insider of the asset but not the seller, Mr. Katz is in a particular position to properly value the Debtor’s interest in the Finacity Equity and set the floor as a Stalking Horse Bidder, but at the same time, has no conflicts in relation to the Debtor or its officers that would raise suspicions about the legitimacy or impartiality of the Sale Process.
The Stalking Horse Purchase Agreement provides for total consideration of approximately $24 million consisting of: (1) $3,000,000 in cash (the ‘Cash Component’), which will be paid directly to the Debtor’s estate; and (2) the release of all liabilities stemming from the Earn-Out Payments, against the Debtor and the guarantors, and of all other claims held by the Katz Parties against the Debtor (the ‘Releases’), which, if allowed in their full amounts could aggregate to more than $21,000,000 in general unsecured claims against the Debtor’s estateFN.
Significantly, the Debtor’s potential liability on account of the EarnOut Payments is larger than the Debtor’s estimated general unsecured claims pool ($21,126,000—which includes the Maximum Earn-Out Payment payable in June 2021 and amounts due if Mr. Katz becomes entitled to the Maximum Earn-Out Payments for the next three years—versus approximately $5-7 million in general unsecured claims, excluding intercompany claims). The transaction contemplated by the Stalking Horse Purchase Agreement is therefore also beneficial in that it serves to simplify and resolve potential unsecured claims against the Debtor. If the claims on account of the Earn-Out Payments were allowed against the Debtor in the amounts asserted by Mr. Katz, the resulting dilution to the general unsecured claims would likely reduce creditor recoveries significantly. Simply put, the purchase price in the Stalking Horse Purchase Agreement provides more relative value to the estate than simply the Cash Component. In addition, as the Earn-Out Payments are guaranteed by Finacity, any portion of the Earn-Out Payments, if allowed or valid, would potentially reduce the value of Finacity by increasing its own liabilities, thereby reducing the value of the Finacity Equity.
In order to incentivize the Stalking Horse Bidder to serve as the initial floor bid for the Sale Process, the Stalking Horse Purchase Agreement provides for a break-up fee of $500,000 (i.e., approximately 2% of the total consideration) in the event that the Finacity Equity is sold to a party other than the Stalking Horse Bidder (the ‘Break-Up Fee’) and an expense reimbursement not to exceed $100,000 (the ‘Expense Reimbursement’ and together with the Break-Up Fee, the ‘Bid Protections’). Importantly, the Break-Up Fee is only payable by the Debtor if the Debtor consummates a sale of the Finacity Equity to a third party other than the Stalking Horse Bidder and under no other circumstances (e.g., the breach or termination of the Stalking Horse Purchase Agreement by the Debtor or the exercise of a ‘fiduciary out’).”
FN: At the closing of the transactions contemplated by the Stalking Horse Purchase Agreement, GC UK has agreed to accept from Finacity Corporation and/or its subsidiaries approximately $4.5mn in full and final satisfaction and release of an $10.0mn intercompany loan balance outstanding between GC UK and Neely Funding, LLC, a wholly owned subsidiary of Finacity Corporation.
The Stalking Horse Purchase Agreement
- Seller: Greensill Capital Inc.
- Purchaser: Finacity Corporation (the “Company”), and Adrian Katz, Dana Katz, and the Katz Family Trust, as purchasers (each, a “Katz Party” and collectively, the “Katz Parties”).
- Purchase Price: (a) the release by the Katz Parties of Greensill US, Greensill Australiaand the Company from their obligations with respect to the Katz Parties under the 2019 SPA and the Guarantees (which the debtors and Katz value at $21.0mn), and (b) a cash amount equal to $3.0mn (the “Cash Component”) (the foregoing (a) and (b), collectively, the “Purchase Consideration”).
- Bidder Protections: (i) a break-up fee of $500,000 (i.e., approximately 2% of the total consideration, ie including the nominal value of the earnout releases) in the event that the Finacity Equity is sold to a party other than the Stalking Horse Bidder, (ii) an expense reimbursement not to exceed $100k and (iii) a $250k minimum bid increment
- Bid Deadline: April 20, 2021
- Auction (to be held virtually): April 23, 2021
- Sale Objection Deadline: April 26, 2021
- Sale Hearing: April 27, 2021
About the Debtors
According to the Debtors: “The Company was founded by [Alexander (Lex) D.] Greensill in 2011 as a financial services company to provide supply chain financing, working capital solutions and related services. Until the appointment of the Administrators, the Company also operated a bank through a German subsidiary. The Company arranged factoring and reverse factoring programs for clients globally….
Historically, the Debtor served as the base for the Company’s sales force in the United States and the Americas and employed more than 70 employees across 13 states as of January 1, 2021. The vast majority of the Debtor’s employees were located at the NY Office. The Debtor’s employees sold the Company’s products and services to clients and investors in the Americas and all revenue arising therefrom went directly to Greensill Capital (UK) Limited (‘GCUK’). In June 2019, the Debtor acquired Finacity Corporation and its subsidiaries (collectively, ‘Finacity’). Finacity is a leader in the structuring and provision of asset-backed working capital funding solutions, consumer receivables financing, supplier and payables financing, back-up servicing and transaction reporting around the world.”
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