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November 25, 2020 – The Court hearing the Northwest Hardwoods cases issued an order approving the Debtors’ (i) proposed Plan solicitation and voting procedures and (ii) a proposed timetable culminating in a January 6th combined hearing [Docket No. 64]. As standard with most prepackaged Chapter 11 cases, the order also conditionally waives (a) the Debtors' obligation to hold a creditors meeting and (b) file financial statements (SOFAs) and Schedules A/B.
On November 23rd, Northwest Hardwoods, Inc. and two affiliated Debtors (“NWH” or the “Debtors”) filed a prepackaged Chapter 11 Plan (solicitation had begun on November 13th) with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-13005. At filing, the Debtors, the largest United States manufacturer of North American hardwood lumber (based on sawmill capacity), noted estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn ($421.0mn of funded debt). The Debtors, who filed with the support of holders of 95% of Secured Notes Claims and 94% of the Debtors’ outstanding common stock, cited the double blow of Chinese tariffs and COVID-19 as necessitating the Chapter 11 filings.
- Plan Supplement Filing Deadline: December 16, 2020
- Voting Deadline: December 23, 2020
- Plan/Disclosure Statement Objection Deadline: December 23, 2020
- Combined Hearing: January 6, 2020
RSA and Plan Overview
On October 21, 2020, the Debtors entered into a restructuring support agreement (the “RSA,” a copy of which is attached as to the Jeppson Declaration at Exhibit A) with certain Holders of the Secured Notes Claims (the “Ad Hoc Noteholder Group”) and (b) certain affiliates of Littlejohn & Co. LLC (collectively, the “Sponsor Equityholder”). Subsequently, Forest Field Limited (together with the Sponsor Equityholder and the Ad Hoc Noteholder Group, the “Consenting Stakeholders”) signed the RSA. The Consenting Stakeholders collectively hold more than 95% of the Secured Notes Claims and approximately 94% of the Debtors’ outstanding common stock. RSA milestones include (i) Plan confirmation within 45 days of the Petition Date and (ii) Plan effectiveness within 60 days of the Petition Date.
On November 13, 2020, the Debtors began soliciting votes from holders of Class 4 Secured Notes Claims and Class 9 Existing Equity Interests; as of the Petition Date, the Debtors had received votes to accept to Plan from approximately 83% in amount of Class 4 and approximately 98% in amount of Class 9, respectively.
Among other things, the restructuring transactions contemplated by the RSA and Plan will:
- Provide the Company with access to a new asset-based revolving credit facility on favorable terms and with a commitment of $100 million;
- Deleverage the Company’s balance sheet by nearly $270 million, with significantly reduced annual debt service costs on a go-forward basis; and
- Provide for satisfaction of claims held by the Debtors’ employees, vendors, suppliers, trade, and other general unsecured creditors in full in the ordinary course of business.
The Jeppson Declaration provides further detail: "More specifically, the RSA and the Plan provide for the following:
- ABL Lender Recovery and Exit ABL Facility. On the Effective Date of the Plan (the 'Effective Date), the reorganized Debtors (the 'Reorganized Debtors') will enter into a senior secured asset-based revolving credit facility with a commitment of $100 million (the “Exit ABL Facility”), the terms of which shall be acceptable to the Debtors and members of the Ad Hoc Group holding a majority in outstanding principal amount of the Secured Notes held by the Ad Hoc Noteholder Group (the 'Required Consenting Noteholders). The Exit ABL Facility will be secured by a first lien on the ABL Priority Collateral and a second lien on all other assets of the Reorganized Debtors (the 'Notes Priority Collateral'). Holders of Allowed ABL Claims shall be paid in full in cash with the proceeds of the Exit ABL Facility on the Effective Date.
- Noteholder Recovery. On the Effective Date, holders of Secured Notes Claims will receive their pro rata shares of (i) of 99% of the common stock of reorganized HHI (the 'New Common Stock'), subject to dilution from the Management Incentive Plan (as defined below) and (ii) a $110 million senior secured term loan facility (the 'Exit Take- Back Term Loan Facility').
- Exit Take-Back Term Loan Facility. On the Effective Date, the Reorganized Debtors will become borrowers under the Exit-Take Back Term Loan Facility, which will be secured by a first lien on the Notes Priority Collateral and a second lien on the ABL Priority Collateral. The Exit Take-Back term Loan Facility will have a five (5) year maturity with either 7.5% cash interest or 9.5% PIK interest (at the option of the Reorganized Debtors), and will otherwise be consistent with the terms provided in the RSA.
- Equity Recovery. Holders Holdings Interests will receive their pro rata share of 1% of the New Common Stock, subject to dilution from the Management Incentive Plan (as defined below).
- General Unsecured Claims Against the Debtors. General unsecured claims will be unimpaired. At the option of the Debtors and with the consent of the Required Consenting Noteholders, each holder of an allowed general unsecured claim shall (i) either be paid in full in cash on the Effective Date if such general unsecured claim was due and payable on or before the Effective Date, or be paid in the ordinary course of business consistent with past practices if not due and payable on or before the Effective Date, or (ii) receive such other treatment as may be agreed upon by the Debtors, the Required Consenting Noteholders and the holder of such general unsecured claim.
- Management Incentive Plan. Within sixty (60) days of the occurrence of the Effective Date the Reorganized Debtors shall enter into an incentive program for the officers and other management of the Reorganized Debtors (the 'Management Incentive Plan'), the terms of which shall be consistent with terms provided in the RSA."
The Disclosure Statement [Docket No. 16] adds: “The Restructuring Support Agreement contemplates a comprehensive financial restructuring of the Debtors that will result in the deleveraging of the Debtors’ balance sheet. The Restructuring Support Agreement contemplates the implementation of the Restructuring Transactions through a chapter 11 process. The key components of the Restructuring Transactions contemplate that, on the date on which a notice of effectiveness is filed with the Bankruptcy Court confirming that (a) all conditions in Article IX.A of the Plan have been satisfied or waived as provided for in Article IX.B and (b) consummation of the Restructuring Transactions has occurred (the “Effective Date”):
- All Allowed Administrative Claims, Allowed Priority Tax Claims, Allowed Other Priority Claims, and Allowed Other Secured Claims shall be paid in full in Cash or receive such other treatment that renders such Claims Unimpaired;
- Each Holder of an Allowed ABL Claim shall be paid in full in Cash with the proceeds of the Exit ABL Facility or Cash from the Debtors’ bank accounts;
- Each Holder of an Allowed Secured Notes Claim shall receive its pro rata share of: (a) Exit Take Back Debt in an aggregate principal amount equal to $110 million; and (b) 99.00% of the New Common Stock, subject to dilution;
- All outstanding and undisputed General Unsecured Claims will be Unimpaired by the restructuring unless otherwise agreed to by the Holder of such General Unsecured Claim;
- Holders of Section 510(b) Claims shall not receive or retain any other property or interests under the Plan;
- All Intercompany Claims shall be (i) Unimpaired and Reinstated or (ii) Impaired and canceled and released without any distribution; and
- Each Holder of an Allowed Existing Common Equity Interest shall receive its Pro Rata share of: 1.00% of the New Common Stock, subject to dilution.
- The Consenting Stakeholders have agreed pursuant to the Restructuring Support Agreement to support and vote in favor of the Plan. This consensus will save the Debtors material delay, expense, and value degradation that could have resulted from a non-consensual restructuring process."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Jeppson Declaration”), Nathan Jeppson, the Debtors’ President and Chairman, detailed the events leading to NWH's Chapter 11 filing. The Jeppson Declaration provides the following on what was a crippling double blow from the Chinese, tariffs and COVID-19: “[T]he Company has been disproportionately impacted by the trade disputes between the United States and China, and has also faced operational challenges resulting from the COVID-19 pandemic. As a result, the Company’s sales and profits have fallen short of expectations, which has made it challenging for the Company to continue servicing its current funded debt.
The funded debt in the Debtors’ current capital structure is the result of two material acquisitions. First, in connection with the Sponsor Equityholder’s acquisition of the Company in July 2014, the Company issued $300 million in 2014 Notes. Second, in connection with the Company’s acquisition of ITL Corp. in February 2015, the Company issued an additional $135 million in 2015 Notes.
Since 2018, the Company’s ability to continue servicing its funded debt has been hampered by significant and unanticipated hurdles resulting from increasingly aggressive trade restrictions between the U.S. and China. As described above, a material portion of the Company’s sales have recently come from the Chinese market and sales projections over the past several years have been tied to an uptick in Chinese demand.
In recent years, in response to trade practices by certain of its international trading partners, the U.S. has imposed greater general trade restrictions and significant increases on tariffs for certain imported goods, particularly those from China. In September 2018, in retaliation for tariffs imposed by the U.S., China began placing tariffs ranging from 10% to 20% on U.S. wood products, among other goods.
Due to the escalation of these trade tensions, and the resulting decline of North American hardwood lumber sales in China, a surplus of hardwood lumber accumulated in the U.S. market, causing a drop in domestic pricing and in overall sales volumes. The Company has not been immune to these industry forces and, due to lower demand, has closed certain of its facilities, including those in Mount Vernon, Washington; Maury River, Virginia; Garibaldi, Oregon (sawmill only); Coos Bay, Oregon; and Front Royal, Virginia.
The Company’s financial distress has been further exacerbated by the COVID-19 pandemic. Stay-at-home orders issued across the U.S. brought the operations of many of the Company’s customers to a halt, reducing demand for the Company’s products."
About the Debtors
According to the Debtors: “The Company is one of the largest hardwood lumber manufacturers in North America, with production facilities, warehouses, and distribution centers scattered across the United States. Since its founding more than 50 years ago, the Company has grown from one small sawmill to a large multinational corporation serving more than 2,000 customers worldwide, and selling a variety of domestic hardwood lumber, exotic hardwood lumber, hardwood plywood panel products, and other wood products.
The Company, which conducts its business primarily through NWH OpCo, is the largest United States-based manufacturer of North American hardwood lumber based on sawmill capacity, with a current estimated annual hardwood lumber capacity of approximately 320 million board feet. Its North America operations include twenty (20) facilities that produce over twenty (20) species of domestic hardwoods. The Company’s facilities are strategically located near high production timber baskets and key shipping ports in the Western, Glacial, and Appalachian regions of the United States. The Company also owns and operates three distribution centers/warehouses and operates thirteen (13) leased inventory warehouses scattered throughout the country. In addition to its domestic hardwoods lumber business, the Company imports and distributes over eighteen (18) species of exotic hardwood lumber, and sells hardwood plywood panel products and engineered wood products."
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