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March 16, 2021 – The Court hearing the PBS Brand Co cases issued an order approving the sale of substantially all of the Debtors’ assets to prepetition and debtor-in-possession (“DIP”) lender CrowdOut Capital, LLC (“CrowdOut” or the “Stalking Horse Bidder”) [Docket No. 409]. The asset purchase agreement governing the terms of the $32.4mn sale has finally been filed and is attached to the order as Exhibit 1. The purchase price is comprised of a credit bid ($21.2mn of prepetition debt and up to $11.2mn of DIP debt) and CrowdOut has also committed to providing $500k for general unsecured creditors and $500k for wind-down expenses.
On March 4th, absent the receipt of any further qualified bids, the Debtors canceled the auction scheduled for March 8th and designated CrowdOut as the successful bidder [Docket No. 360].
CrowdOut, which allows individuals to invest in particular projects (the Debtors referred to as "Project Play") note that it "was born out of a desire to improve the credit market for middle market companies, while offering private investment access to an otherwise walled-off segment of the economy."
See further below on the Debtors' sometimes fractious relationship with middle market lender CrowdOut, including as to CrowdOut's Damoclean foreclosure action (with public sale scheduled for December 28, 2020) which was the Debtors' catalyst for filing Chapter 11 in the first place.
Key Terms of the Stalking Horse APA
- Seller: PBS Brandco, Inc. and each of its subsidiaries (which includes all of the Debtors).
- Buyer: CrowdOut Capital LLC or its designee, or a party that submits a bid materially higher than CrowdOut’s Qualified Bid.
- Purchase Price: The aggregate consideration for the sale and transfer of the Purchased Assets (the “Purchase Price”) shall be composed of the following: (i) the Base Purchase Price; (ii) the GUC Trust Amounts; and (iii) the assumption by Buyer of the Assumed Liabilities, where
- “Base Purchase Price” means the sum of (i) $21,194,462.39, representing Buyer’s estimate of Prepetition Obligations under the Loan Agreement as of March 19, 2021 (as an assumed Closing Date), plus (ii) $11,212,000, representing the Buyer’s estimate of the DIP Obligations as of April 30, 2021 (as an assumed Plan effective date).
- “GUC Trust Amounts” means (i) the GUC [Trust] (sic) Distributable Cash, (ii) the GUC Trust Participation Funding, (iii) the amounts payable under Section 6.10, if any, and (iv) the Ongoing Trade Claim Surplus, if any.
- “GUC Trust Distributable Cash” means a carve out of the Supporting Lender’s secured claim in the amount of $500,000, which shall be escrowed by the GUC Trustee solely for distributions to unsecured creditors.
- “GUC Trust Participation Funding” means a carve out of the Supporting Lender’s secured claim in the amount of $500,000 for wind-down and litigation funding for the GUC Trust.
- Bidder Protections: Consist of a break-up fee equal to 2% of the total amount (including anticipated draws) under the DIP Facility if the Sale or the Plan Sponsor Transaction results in net proceeds to the Debtors’ estates in excess of the Stalking Horse Bid, plus up to $250,000 in reimbursement of actual expenses
- GUC Recovery and Wind-down Expenses: As noted above, (i) Cash from CrowdOut in the amount of $500k (the “GUC Trust Distributable Cash”), which shall be escrowed by the GUC Trustee and used solely for distributions to unsecured creditors and (ii) Cash from CrowdOut in the amount of $500k for wind-down and litigation funding
Marketing Process and CrowdOut Stalking Horse Role
The Debtors’ requesting motion [Docket No. 197] states, “In fall 2020, prior to the Petition Date, the Debtors’ former investment banker, PJ Solomon (‘PJS’) ran a robust marketing process (the “Prepetition Marketing Process”). Indeed, PJS contacted 168 parties with information regarding the sale of the Debtors’ Assets. At that time, six (6) parties submitted indications of interest with respect to the Assets.
On January 7, 2021, the Debtors retained SSG Advisors LLC (‘SSG’) as the Debtors’ investment banker….SSG and will continue to market the Debtors; assets for acquisition, either through a sale under Section 363 or through a plan.
Since the Petition Date, the key constituencies in these cases have worked diligently to formulate a path forward which is acceptable to all parties. Following extensive negotiations with these constituencies, including the Official Committee of Unsecured Creditors (the ‘Committee’) and CrowdOut Capital LLC (‘CrowdOut’), the Debtors’ prepetition and pospetition secured lender, with respect to a process for the sale of the Debtors’ Assets….The Debtors, the Committee and CrowdOut have agreed that, absent receipt of a better bid by February 17, 2021, that will provide a materially higher and better offer and otherwise qualifies as a Qualified Bid as set forth herein, Crowd Out’s bid, which shall automatically be deemed qualified as a Qualified Bid, will serve as the Stalking Horse Bidder, by and through which CrowdOut will provide the Debtors with a floor price for the Debtors’ Assets which may draw other bidders to the process and which guarantees a distribution to unsecured creditors as agreed between the Committee and CrowdOut.
Even if the Debtors are unable to locate a Stalking Horse Bidder other than CrowdOut or its designee, the Debtors, with the support of the Committee, believe that a robust marketing and sale process will benefit the estates by bringing additional bidders to an auction. The relief requested in this Motion is essential to ensure that the process is as competitive and robust as possible, and that the Debtors receive top dollar for their Assets. CrowdOut, has agreed on a term sheet (the ‘Stalking Horse Term Sheet’) with the Debtors and the Committee which provides for a floor bid for substantially all of the Debtors; assets. The Term Sheet allows for the Debtors to continue to market their Assets and obtain the highest and best offer. Should the Debtors not receive further bids, CrowdOut shall either (i) close the sale as set forth in the Stalking Horse Bid or (ii), at its sole election, opt to consummate the transaction through a debt for equity swap chapter 11 plan of reorganization on materially similar terms (the ‘Supporting Lender Plan Election’)… Ideally, the Debtors will be presented with a robust auction for their assets but even in the event that the marketing process does not result in additional bids, the Debtors will be able to consummate a sale to the Stalking Horse Bidder either though sale or a debt for equity swap plan of reorganization. Under any of these circumstances, the Debtors, their creditors, and their estates are being provided the maximum value for the Debtors’ assets.”
The Switch to CrowdOut as DIP Lender
[As previously reported] December 24, 2020 – The Court hearing the PBS Brand cases issued an interim debtor-in-possession (“DIP”) financing order authorizing the Debtors to (i) access $2.5mn of new money DIP financing and (iii) use cash collateral [Docket No. 43].
It was all change as to DIP financing for the Debtors following the receipt of an objection from prepetition lender CrowdOut Capital LLC (“CrowdOut”) which argued that it was: "highly unusual, if not unthinkable…to file a chapter 11 case without having at least some dialogue with a senior secured lender. The Debtors’ failure to engage with CrowdOut in any manner regarding these chapter 11 cases is particularly glaring when, as here, the Debtors improperly seek approval of a non-consensual priming DIP loan" [Docket No. 25 filed on December 23rd].
CrowdOut did, however (in its own view), offer a carrot along with its objecting stick, noting that it "stands ready, willing, and able, to consummate DIP financing on terms that are markedly better and more favorable to the Debtors than the legally impermissible proposal presently before the Court."
The Debtors will have had a slightly different take on the clearly strained dialogue with Crowdout; CrowdOut having initiated a foreclosure action against the Debtors on December 10, 2020. It was this, awkward communication, announcing a "public sale to be held on December 28, 2020" which pushed the Debtors into their Chapter 11 filings.
On December 22nd, 2020, the Debtors requested Court authority to access $6.5mn of DIP financing (including up to $1.5mn on an interim basis) from PBS DIP Lender, LLC (an affiliate of Sortis Holdings, Inc. or “Sortis”), which had extended a $261.5k bridge loan to the Debtors on December 10th. Sortis, which had been contacted by the Debtors' investment banker in connection with a possible out-of-court sale transaction, had declined during that prepetition marketing process to pursue an acquisition in an out-of-court context.
Sortis recently formed "The Sortis Rescue Fund…to capitalize on the dislocation and market stress caused by the COVID-19 pandemic and subsequent economic fallout. The current recession is proving to be deep and intense enough to create situational distressed opportunities, particularly in hospitality, retail, office, and select operating businesses. The SRF does not make broad market acquisitions but rather rescues and acquires specifically targeted distressed assets in situations with strong value enhancement."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Galligan Declaration”), Stacy J. Galligan, the Debtors’ Director of Operations and Finance, detailed the events leading to PBS’s Chapter 11 filing. The Galligan Declaration provides: “ On or about May 31, 2018, Brandco and CrowdOut Capital LLC ('Crowd Out') entered into a loan agreement (as subsequently amended, the 'Crowd Out Promissory Note') by and through which Crowd Out loaned $20,000,000 to Brandco, The obligations due under the Crowd Out Promissory Note were guaranteed by certain of the Operating Companies and secured by the PBS, Inc.’s interest in Brandco’s shares or membership interests pursuant to a certain Security Agreement Pledge dated May 31, 2018 (the 'Crowd Out Pledge Agreement').
On September 26, 2019, after one of the Company’s locations was closed, Crowd Out declared a default under the Crowd Out Promissory Note due to the Company’s EBITDA ratio. On January 2, 2020, the Company, Cracker Barrel and Crowd Out entered into a forbearance agreement (the 'Forbearance Agreement') by and through which Crowd Out agreed to forbear from exercising available rights and remedies under the Promissory Note and deposit control agreement until March 15, 2020. Among other things, the forbearance agreement also required that (i) on or prior to January 2, 2020, Cracker Barrel would deposit with Crowd Out $2,000,000 for the benefit of Brandco; (ii) on or prior to January 17, 2020, Cracker Barrel would deposit with Crowd Out an additional $1,500,000; and (iii) prior to March 15, 2020, Cracker Barrel’s board of directors would effectuate a guaranty of the loan obligations or repay the loan to Crowd Out. In accordance with its obligations under the Forbearance Agreement, Cracker Barrel timely remitted a total of $3.5 million to Crowd Out due under the Forbearance Agreement.
In a now too-familiar tale, the Debtors’ businesses were immediately and significantly adversely affected by COVID-19. On March 14, 2020, the country was realizing the extent which COVID-19 would affect the hospitality, restaurant and travel industries, those businesses were all focused on preserving their businesses. In that context, Cracker Barrel notified the Debtors and Crowd Out that it had not and would not execute a guaranty as required under the Foreclosure Agreement…On March 16, 2020, Crowd Out issued a Notice of Forbearance Termination Event, Notice of Acceleration and Reservation of Rights to the Debtors and Cracker Barrel, and on March 20, 2020, Crowd Out issued a notice of intent to sell the collateral. In its March 20, 2020 notice, Crowd Out stated that, unless it received payment in full by 5:00 p.m. CDT on March 24, 2020 for the entire unpaid principal balance of the indebtedness including all interest and other sums due by Brandco under the Crowd Out Promissory Note and related agreements, Crowd Out would the process to sell the membership interests of Brandco held by PBS, Inc., including by immediately providing notice of the sale to the public and those parties entitled to receive notice pursuant to the Uniform Commercial Code of New York and by contacting potential buyers.
On August 17, 2020, Crowd Out, putatively acting its capacity as a secured creditor with authority pursuant to the Pledge Agreement, executed a purported Joint Written Consent of the Member and Managers of Brandco (the 'August 17 Written Consent'). By the August 17 Written Consent, Crowd Out purported to appoint John W. Haywood as Chief Executive Officer of Brandco, effective August 14, 2020. Further, by the August 17 Written Consent, Crowd Out purported to authorize the retention of PJ Solomon Securities, LLC ('PJ Solomon') on an exclusive basis as the Company’s investment banker and/or placement agent. The Debtors understand that Solomon conducted a thorough search for interested purchasers. Sortis Holdings, Inc. ('Sortis'), an affiliate of Prepetition Lender and the DIP Lender (as defined below), was one of the parties contacted by PJ Solomon as part of the marketing process. Unfortunately, PJ Solomon could not find a path forward for the sale the assets of the Debtors and certain non-debtors to Sortis, or any other party through its marketing process.
On December 10, 2020, Crowd Out issued a Notice of Public Disposition Of Collateral Under Uniform Commercial Code by and through which it stated it intended to offer for sale the following collateral at public sale to be held on December 28, 2020…:
- All of the limited liability company interests in Brandco and the Operating Entities; and
- All of the personal property of the Operating Entities, including but not limited to the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located: (i) Accounts, (ii) Inventory; (iii) Fixtures; (iv) Equipment; (v) General Intangibles; (vi) Chattel Paper; (vii) Instruments; (viii) Documents; (ix) Letter of Credit Rights; (x) Deposit Accounts; and (xi) Proceeds.
The Debtors’ currently owe approximately $20 million to Crowd Out. Such amounts continue to accrue interest at the default rate due under the applicable loan documents.”
In a Form 8-K filed on March 25, 2020, Cracker Barrel Old Country Store, Inc. announced that PBS Holdco, which owns and operates food, beverage and entertainment establishments under the name Punch Bowl Social, suspended all operations at each of its 19 locations and laid off substantially all restaurant and corporate employees due to COVID-19 pandemic. In July 2019, the Company purchased approximately 58.6% of the economic ownership interest in PBS Holdco. At January 31, 2020, Cracker Barrel valued its equity investment in PBS Holdco at approximately $79.5 million. Additionally, in connection with its equity investment, the Company agreed to assume certain unsecured indebtedness of PBS Holdco at closing and to fund additional capital to PBS Holdco thereafter in return for additional unsecured indebtedness. As of March 24, 2020, the Company held unsecured indebtedness of PBS Holdco with a total principal value of $50.4 million.
On March 20, 2020, the primary lender under PBS’ secured credit facility provided notice to PBS Holdco and to the Company declaring a default under its secured credit facility and stating the lender’s intention to foreclose on its collateral interest in the equity of PBS and substantially all of PBS’ assets unless Cracker Barrel would repay or unconditionally guarantee PBS indebtedness. In keeping with its strategy to concentrate its resources on its core business during the pandemic and in light of the substantial uncertainties surrounding the Punch Bowl Social business coming out of the pandemic, Cracker Barrel underscored that it has decided not to invest further resources to prevent the foreclosure or otherwise provide additional capital to PBS Holdco.
In a July 23, 2019 press release announcing entry into a strategic relationship with Cracker Barrel Old Country Store, Cracker Barrel and Bunch Bowl Social said Cracker Barrel would take a non-controlling position in the concept, explaining, "Under the terms of the agreement, Cracker Barrel will invest up to approximately $140 million to acquire its initial non-controlling stake and to provide growth capital for future development, although a portion of this amount is anticipated to be offset by third-party financing…The agreement includes provisions for the Company to potentially acquire a controlling or full ownership position in Punch Bowl Social in the future."
The Galligan Declaration further stated, "As recently as the week of December 8, 2020, the Company was operating just three venues at limited capacity. Unfortunately, because of restrictions limiting the number of patrons at each venue, as well as the public’s uneasiness of going out to eat or drink in public during a pandemic, each of those venues was losing money on a daily basis."
About the Debtors
According to the Debtors: "Punch Bowl Social is the first experiential food and beverage brand to bring a made-from-scratch menu and craft beverages together with social gaming in one design-forward environment. Punch Bowl Social was named as one of Fast Company's 2019 Top 50 Most Innovative Companies in the World, a Nation's Restaurant News Hot Concept in 2018, among more than a dozen other national and regional awards. Punch Bowl Social serves weekend brunch, lunch, dinner and late-night snacks alongside a variety of creative punches, local microbrews and craft non-alcoholic beverages."
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