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December 16, 2020 – The Debtors requested Court authority to (i) access $30.3mn in debtor-in-possession (“DIP”) financing consisting of (i) a new money multi-draw term loan facility in an aggregate principal amount of $15.3mn ($5.1mn to be made available with an interim DIP order), (ii) upon issuance of a final DIP order, “roll-up” of $15.0mn of the Debtors’ prepetition first loan obligations (the “Prepetition First Lien Obligations”) and (iii) use cash collateral [Docket No. 13].
The DIP financing is to be provided by private equity house Aquiline Capital Partners ("Aquiline") which is also part of a group that will be serving as a stalking horse in a section 363 auction/sale process. As discussed below, that group includes the Debtors' former CEO Paul Rothbard and Aquiline will be credit bidding (recently acquired) prepetition debt and outstandings under the proposed DIP facility.
Milestones in the proposed facility include 80 days to complete the sale.
The Debtors' DIP motion notes, “The Debtors intend to finance these Chapter 11 Cases with cash generated by their operations, the continued use of Cash Collateral, and post-petition financing incurred pursuant to sections 363, 364(c), and 364(d) of the Bankruptcy Code, up to the principal amount of $30,300,000, inclusive of roll-up funding.
The goal of these chapter 11 cases is to consummate a sale of the Debtors’ assets (the 'Proposed Sale') that will maximize recoveries for the Debtors’ estates, maintain a viable business, and ensure the continued employment of dozens of current employees of the Debtors’ facilities, as described in more detail in the First Day Declarations. Absent the agreement of the Prepetition First Lien Lenders to serve as a stalking horse bidder and to provide the DIP Facility and access to cash collateral to fund the sale process and working capital needs pending a sale, the Debtors would have been forced to cease operations, close their locations, and lay off their remaining employees.
The Debtors believe that it is appropriate, at the time the Final Order is heard, for the DIP Lenders to roll up certain of the Prepetition First Lien Obligations to the DIP Lenders according to the terms set forth herein. But for the DIP Lenders’ provision of the DIP Facility, the Debtors would have been wholly unable to operate their business, make payroll and conduct an orderly sale. The roll-up is a condition that is necessary to assure the DIP Lenders’ willingness to advance funds and for the estate to maximize the value of its assets. As an integrated part of the DIP Lenders’ package, the Debtors submit that this Court should order the roll-up at the hearing on the Final Order.”
Key Terms of DIP Facility
- Borrower: In-Shape Health Clubs, LLC
- DIP Lenders: ACOF AIV AL.P. and Solutions Investment Group, LLC
- DIP Agent: Administrative agent to be determined
- Guarantors: In-Shape Holdings, LLC; In-Shape Personal Training, LLC
- DIP Facility: Senior secured, super-priority debtor-in-possession loan and security agreement consisting of a $15,300,000 term loan that will be funded in a series of draws (the Initial DIP Term Loans and the Delayed Draw DIP Term Loans), plus (subject to entry of the Final Order) the RollUp Loans of $15,000,000, plus accrued interest and other fees and amounts owing under the respective loan documents. DIP Credit Agreement, § 2.01(b). Amounts repaid may not be reborrowed.
- New Money: $15.3mn
- Roll-Up: $15.0mn with final DIP order
- Maturity Date: Means the first to occur of: (a) April 16, 2021, (b) the consummation of a sale or other disposition of all or substantially all assets of the Debtors under the section 363 of the Bankruptcy Code, and (c) the date on which the Obligations hereunder shall be accelerated in accordance with the provisions of this Agreement.
- Interest Rate: Each loan will bear interest at the Applicable Rate which equals in the case of: (x) any Senior Loans, 9.00% per annum, (y) any Junior Loans, 10.00% per annum; provided, that such amount shall be payable solely in “payment in kind” interest that accrues and is added to the principal balance of the applicable outstanding Loans (the “PIK Interest”) and (z) any Roll-Up Loans, 6.50% per annum; provided, that such amount shall be payable solely in PIK Interest.
- Fees: The Debtors will pay an upfront fee of 2.0% of the aggregate principal amount of New Money DIP Commitments (the “Upfront Fee”), which shall be structured as original issue discount against the New Money DIP Loans when advanced. DIP Credit Agreement § 2.09. The Debtors will also pay an agency fee of $10,000 per annum to the DIP Agent on account of managing agency and administrative costs (the “Agency Fee”).
- Deadline to file DIP motion and enter Stalking Horse APA: The Petition date.
- Deadline for interim DIP order: Five calendar days after the Petition date
- Deadline to file bidding procedures motion: Three business days after the Petition date
- Deadline for bidding procedures order: 30 days after the Petition date
- Deadline for final DIP order: 30 days after the Petition date
- Deadline for occurrence of bid deadline: 58 days after the Petition date
- Deadline for auction: 60 days after the Petition date
- Deadline for sale hearing and sale order: 65 days after the Petition date
- Deadline to close sale: 80 days after the Petition date
Proposed Asset Sale
On December 16, 2020, the Debtors entered into the Asset Purchase Agreement (the “APA” attached to the Debtors’ bidding procedures motion at Exhibit C) with In-Shape Acquisitions 2021, LLC (the “Purchaser”). The Purchaser is an acquisition entity created by a group that includes Paul Rothbard, a former CEO of the Debtors and son of the Debtors’ founder, and Aquiline which recently purchased the entirety of the Debtors’ prepetition senior debt from Bank of America, N.A on October 30, 2020. The sale process in respect of that debt was apparently at the insistence of the Bank of America. Pursuant to the APA, the Purchaser will, subject to the requirements of Debtors’ intended section 363 sale/auction process, purchase substantially all of the Debtors’ assets and will assume the leases relating to up to 45 clubs and pay any associated cure costs.
The Debtors are party to a “Prepetition First Lien Credit Agreement” with Aquiline (as successor to Bank of America, N.A.) as Administrative Agent and Collateral Agent, and certain lenders identified therein (the "Prepetition First Lien Lenders') and which consists of a revolving commitment in the aggregate of up to $17.0mn and a term loan commitment in the aggregate of up to $53.0mn as well as certain letters of credit. Aquiline purchased the entirety of the debt outstanding under these facilities on October 30, 2020.
As of the Petition date, the Debtors owe not less than $64,686,197 under the Prepetition First Lien Credit Agreement including (i) $14,030,000 in principal amount of revolving loans, (ii) approximately $49,356,250 in principal amounts of term loans and (iii) approximately $1,299,947 of interest.
About the Debtors
According to the Debtors: “For over 35 years, In-Shape has created places of belonging and connection that motivate its communities to stay healthy, fit and happy. As the premier community destination for health and fitness, In-Shape provides functional training, free weights, indoor and outdoor pools, a cardio theatre, pickleball, tennis, and racquetball courts. Plus, In-Shape offers all the latest studio classes like barre, yoga and cycle and the best personal trainers. That’s the #inshapeattitude."
The Maloney Declaration adds: "In-Shape is a regional health club operator. Before the outbreak of COVID-19, In-Shape operated 65 clubs with over 470,000 members. Its clubs offer premium amenities and member-focused community club experiences at tiered pricing levels in secondary markets around California where many high-end health club operators do not have a presence.
ISHC is a wholly-owned subsidiary of In-Shape Holdings, LLC. In-Shape Personal Training, LLC is a wholly-owned subsidiary of ISHC.
In-Shape was founded in 1981 by Mort Rothbard. Mort Rothbard’s son, Paul Rothbard (“Mr. Rothbard”), was the chief executive officer of In-Shape.
In 2012, Fremont Group purchased 78% of the Company from the Rothbards and their co-investors. Mr. Rothbard continued on as chief executive officer until 2016, after which he remained on ISHC’s board until September 10, 2020. Fremont Group remains the majority equity owner of ISHC.
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