PSI Liquidation, Inc. (f/k/a Paper Source, Inc.) – Further to Sale to $91.5mn Elliott Investment Management, and with $1mn Wind Down Amount Depleted, Court Issues Debtor-Requested Dismissal Order

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November 22, 2021 – Further to the Debtors' June 22nd motion [Docket No. 560], the Court hearing the PSI Liquidation, Inc. (f/k/a Paper Source, Inc.) cases issued an order dismissing the Debtors’ Chapter 11 cases [Docket No. 816].

In the June 22nd motion, the Debtors requested a pair of Court orders: (i) an “Implementation Order” that would implement several funding provisions as agreed by parties to the Debtors’ asset purchase agreement (the “APA,” which governs the $91.5mn sale of assets to Papershop HoldCo Inc., an affiliate of Elliott Investment Management L.P. or “Elliott”) and (ii) a “Dismissal Order” [Docket No. 560]. The Court issued the Implementation Order (as revised) on September 8, 2021 [Docket No. 765], with that order approving the $1.0mn "Wind Down Amount" provided for in the APA. That Wind Down Amount was "insufficient to support the administrative costs of a more lengthy and involved conclusion to these cases."

On March 1, 2021, Paper Source, Inc and one affiliated debtor (“Paper Source” or the “Debtors”) filed for Chapter 11 protection citing the impact of COVID-19 and the resulting shutdown of all of their 158 stores in the Spring of 2020. At filing, the Debtors, a Chicago-based "premier lifestyle brand and gift retailer," noted estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn ($103.2mn of funded debt). 

In Petition date filings, the Debtors noted that they had negotiated commitments for $16.0mn of new money debtor-in-possession ("DIP") financing to be provided by Apollo Capital Management's MidCap Financial Trust ("MidCap") with MidCap to also serve as stalking horse in a section 363 auction/sale process for substantially all of the Debtors' assets. MidCap ultimately provided $18.5mn of DIP financing but it was Elliott Investment Management L.P. or “Elliott,” also the owner of Barnes & Noble, that prevailed at auction with a $91.6mn bid (comprised of $40.0mn in cash and $51.6mn in new first lien term loans).

In a May 11th press release, Elliott stated, “The acquisition of Paper Source by Elliott allows the stationery and gift retailer to emerge from Chapter 11 with the support of a well-capitalized owner committed to the development and growth of the business. Following the Chapter 11 process, Paper Source will benefit from significantly less debt on its balance sheet. It will operate from approximately 130 stores across the US, from, as well as its wholesale division, Waste Not Paper by Paper Source."

The Dismissal Order

The Debtors' dismissal motion notes, “…the Debtors, in consultation with the Committee, have explored various options to bring these Chapter 11 Cases to a conclusion, and believe, after making appropriate considerations, that a dismissal of these Chapter 11 Cases, coupled with the other relief requested herein, is the most expeditious and cost-effective mechanism to wind down the Debtors’ affairs. One of the bases for this conclusion is the Debtors’ belief that the $1,000,000 Wind Down Amount is insufficient to support the administrative costs of a more lengthy and involved conclusion to these cases. Specifically, the costs that would be incurred by the estates to establish a bar date, draft and prosecute a disclosure statement and plan of liquidation, solicit votes from creditors, and complete a full general unsecured claims reconciliation process would quickly and fully deplete the $1,000,000 and leave nothing for creditors other than those, such as holders of 503(b)(9) Claims, on whose behalf Excluded Cash has specifically been earmarked. Accordingly, the Debtors believe that the proposed exit strategy will maximize creditor recoveries.

Moreover, a dismissal—as compared to pursuing a chapter 11 plan or conversion to chapter 7—would not negatively impact creditors, because there are insufficient assets of value available for full distributions to priority creditors, let alone non-priority unsecured creditors. Simply put, the Debtors believe they are not in a position to pursue a confirmable chapter 11 plan of liquidation because they will not have sufficient assets available to pay all administrative and priority creditors in full. The Debtors also believe that the incremental cost of converting these cases to chapter 7, including a chapter 7 trustee’s fees, commissions, and related costs, would jeopardize any possibility of making distributions on account of Allowed Priority Claims…"

The Implementation Order

The Debtors' requesting motion provides: "Pursuant to an agreement (the ‘Committee Settlement’) among the Debtors, MidCap and the Official Committee of Unsecured Creditors (the ‘Committee’),which was announced at a hearing before the Court on April 1, 2021, the APA provides that certain specified funds would be left with the Debtors’ estates following the closing of the sale to Purchaser (respectively, the ‘Closing’ and ‘Sale’), despite that fact that the Debtors’ prepetition first lien secured lenders have not received full payment on account of their claims. Specifically, the definition of “Excluded Cash Expenses” in the APA requires that cash sufficient to satisfy the following expenses be left with the Debtors’ estates: 

i. Budgeted administrative expenses and certain other post-petition expenses that were accrued and unpaid as of the Closing, including (a) $1,000,000 for the payment of amounts due under the key employee incentive plan, (b) amounts due for fees and expense owed to (y) A&G Realty Partners, LLC and(z) SSG Advisors, LLC (“SSG”); 

ii. Up to $2.5 million for payment of accrued, unpaid, undisputed and allowed claims under 11 U.S.C. § 503(b)(9) ('503(b)(9) Claims'); and 

iii. $1,000,000 to fund the Debtors’ wind-down and dismissal or other conclusion of these Chapter 11 Cases, with any remainder ‘earmarked for distributions to unsecured creditors or as otherwise ordered by the Bankruptcy Court. .. .’ (the ‘Wind-Down Amount’). (the cash associated with items (i) through (iii), the ‘Excluded Cash’).

By this Motion, the Debtors seek to implement the APA and Committee Settlement by distributing the Excluded Cash in accordance with the APA and Committee Settlement, and to provide for the orderly dismissal of these cases."

The Sale to Elliott

On May 13th, The Court hearing the Paper Source, Inc cases issued an order approving the $91.5mn sale of substantially all of the Debtors’ “premier paper and gift store” assets to Papershop HoldCo Inc. an affiliate of Elliott [Docket No. 486]. The asset purchase agreement (“APA”) governing the terms of the sale is attached to the order as Exhibit 1.

In a May 11th press release, Elliott stated, “The acquisition of Paper Source by Elliott allows the stationery and gift retailer to emerge from Chapter 11 with the support of a well-capitalized owner committed to the development and growth of the business. Following the Chapter 11 process, Paper Source will benefit from significantly less debt on its balance sheet. It will operate from approximately 130 stores across the US, from, as well as its wholesale division, Waste Not Paper by Paper Source.

Elliott is also the owner of Barnes & Noble, the leading bookseller in the US with bookstores in every state. The businesses are highly complementary, with shared product ranges and a common commitment to excellent customer service. While the businesses will continue to operate independently, considerable opportunities exist for mutually beneficial retail partnerships.

Barnes & Noble has enjoyed a strong performance since its acquisition by Elliott in September 2019, overcoming a number of pandemic-imposed challenges. Elliott now looks forward to the continued progress of both retailers. James Daunt, CEO of Barnes & Noble, will have oversight responsibilities for both companies.”

For the Debtors a modestly improved result; with MidCap's credit bid (previously assessed to be $86.8mn, comprised of $16.0mn DIP debt and $72.8mn prepetition debt) replaced by a $91.6mn bid (comprised of $40.0mn in cash and $51.6mn in new first lien term loans). 

For MidCap, however, not the end of their involvement with the Debtors, as they will be providing the $51.6mn of new first lien loans.  As noted below, the new deal (and its cash element) will leave the Debtors with "approximately $60 million in funded debt, a sizable cash balance, and access to a revolving credit facility to fund additional liquidity. The go-forward company will have shed significant liabilities, including over $70 million."

In a declaration in support of the Elliott sale, the Debtors' investment banker provides [Docket No. 458]. "Prior to the Bid Deadline, Elliott Investment Management L.P. (‘Elliott’) submitted a term sheet for a bid that did not qualify as a 'Qualified Bid' because Elliott proposed to finance a portion of the transaction purchase price with financing from MidCap. To provide Elliott with additional time to qualify its bid, the Debtors, with the consent of MidCap and in consultation with the Official Committee of Unsecured Creditors, agreed to extend the Bid Deadline for Elliott, while it continued to negotiate the terms of its bid and financing with the Debtors and MidCap. No other bids were received by the Bid Deadline. After lengthy negotiations, the parties reached agreement on the terms of the Purchase Agreement and MidCap’s financing of the proposed acquisition.

On May 10, 2021, following the designation of Elliott’s bid as a “Qualified Bid”, the Debtors, after consulting with the Official Committee of Unsecured Creditors, designated the Purchase Agreement as the Successful Bid and the Stalking Horse APA as the Backup Bid…

The Sale consideration to be provided by Elliott includes:

A Purchase Price in excess of $91.5 million, which consists of (i) a $40 million in cash (which would be used to repay the DIP Facility and only a portion of the Prepetition First Lien Obligations), (ii) approximately $51.6 million in the form of new first lien term loans from MidCap to the Purchaser; and (iii) the assumption of certain liabilities, payment of cure amounts, and funding of various other costs, all as set forth in the Purchase Agreement; and

Preservation of the settlement terms reached with the Official Committee of Unsecured Creditors, which includes ensuring that the estates retain (i) funding to satisfy accrued and unpaid administrative expenses that are accrued and unpaid as of the Sale closing date, (ii) up to $2.5 million to satisfy section 503(b)(9) claims, and $1.0 million for the wind down of the Debtors’ estates….

Upon the Closing, the Purchaser will have approximately $60 million in funded debt, a sizable cash balance, and access to a revolving credit facility to fund additional liquidity. The go-forward company will have shed significant liabilities, including over $70 million in secured debt obligations and significant go-forward rent obligations…”

Petition Date Perspective

In 2013, private equity group Investcorp International ("Investcorp," 80% common stock holding as at Petition date) purchased the Debtors from Brentwood Associates for an undisclosed price.

In March 2020, the Debtors acquired 30 stores from then competitor Papyrus as part of the latter's own bankruptcy. With that acquisition and as of the Petition date, the Debtors had approximately 158 stores.

Goals of the Chapter 11 Filings

The Kruczynski Declaration (defined below) provides: "The Debtors have commenced these Chapter 11 Cases to implement a comprehensive restructuring that will allow the Debtors to achieve certain objectives that are critical to their survival: (a) conduct a marketing process whereby the Debtors will seek to sell all or substantially all of their assets to MidCap Funding Investment XI LLC, an affiliate of MidCap Financial Trust— which is both the DIP Agent and Prepetition First Lien Agent—or another buyer; (b) evaluate and rationalize the Debtors’ real estate portfolio, including renegotiating lease terms to align the Debtors’ rent expenditures with prevailing market rates; and (c) continue operations without interruption, including minimizing any potential adverse effects to the Debtors’ businesses, customers, employees, trade partners and other key stakeholders."

Marketing Efforts and MidCap Stalking Horse Role

the Kruczynski Decalartion provides": "…the Debtors will conduct a postpetiton marketing process lasting approximately 50 days which will provide sufficient time for the Debtors and its advisors to obtain substantial lease concessions. This process will supplement the thorough and extensive pre-petition marketing process that the Debtors launched in December 2020 whereby by the Debtors contacted nearly 140 potential acquirers.

….the Debtors have entered into a “stalking horse” agreement (the “Stalking Horse Agreement”) with MidCap Funding Investments XI LLC (the 'Stalking Horse Purchaser'). The Stalking Horse Purchaser is an acquisition entity designated by (a) MidCap Financial Trust ('MidCap') in its capacity as administrative agent and collateral agent for the DIP Lenders (in such capacities, the “DIP Agent”) and (b) MidCap in its capacity as administrative agent and collateral agent for the Prepetition First Lien Lenders (in such capacities, the “Prepetition First Lien Agent”). Under the terms of the 'stalking horse' asset purchase agreement (the “Stalking Horse Agreement'), MidCap has agreed to credit bid an amount equal to (a) the full amount of obligations under the DIP Facility (the 'DIP Obligations') in the expected aggregate principal amount of $16.0 million and (b) up to the full amount of the obligations under the prepetition First Lien Facility (the 'Prepetition First Lien Obligations') in the aggregate principal amount of approximately $72.8 million as of the Petition Date (together, the 'Credit Bid')."

Prepetition Indebtedness

The Debtors' current capital structure is largely the result of certain refinancing transactions that took place in May 2019. Debtor Pine Holdings, Inc.’s only asset is the 100% equity interest it holds in Debtor Paper Source, Inc. As of the Petition date, the Debtors’ capital structure consists of outstanding funded-debt obligations in the aggregate principal amount of approximately $103,188,208.08. The following table summarizes the Debtors’ outstanding funded-debt obligations as of the Petition Date (collectively, the “Prepetition Credit Facilities”):

Stalking horse MidCap is the agent in respect of the first lien indebtedness noted in the first three rows of the chart above.


The Debtors are party to 163 leases, comprised of 158 active retail locations, 3 non-active retail locations, the Company’s headquarters, and distribution center. These leases create fixed costs for the Debtors of approximately $36 million per year. Due to the loss of revenue from store closures in 2020 as a result of the COVID-19 pandemic, the Debtors sought rent waivers and deferrals for the majority of the leases. While the Company was able to successfully negotiate a number of rent deferrals and rent abatements with its landlords, each of those arrangements expired in December 2020. As a result of these deferrals and other unpaid rent obligations, the Debtors have outstanding rent obligations of approximately $15.8 million as of the Petition Date.

As to the Debtors' lease negotiations, the Kruczynski Declaration continues: "Responses within the landlord community varied. Many landlords made no concessions. Some landlords agreed to the Company’s request, while others negotiated bespoke rent relief arrangements. These negotiated rent concessions helped the Company navigate an increasingly tight liquidity profile for the remainder of 2020. However, each of these agreements expired prior to January 2021. Since then, the onslaught of landlords threatening to terminate lease agreements has increased to the point where the Company was left no other option but file these Chapter 11 Cases."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Kruczynski Declaration”),Robert Kruczynski, the Debtors’ chief financial officer, detailed the events leading to the Debtors' Chapter 11 filing. In addition to detailing the "onslaught" of threatened lease terminations, the Kruczynsk Declaration provides: “Before the COVID-19 pandemic began—which required Paper Source to close 100% of its retail operations for over one month in the Spring of 2020—the Debtors’ business had been strong. On March 2, 2020, the Debtors acquired 27 leases out of the chapter 11 proceedings of Papyrus, historically one of the Company’s biggest competitors in the high-quality paper product space. The logic of the acquisition was simple: Paper Source acquired the best leases out of Papyrus’ portfolio and was uniquely positioned to leverage its existing supply chain, vendor network and distribution capabilities to add bottom line growth to the Company’s balance sheet. The sale represented a 22% expansion of the Debtors’ retail footprint at a time when many retailers were continuing to close their stores. Investcorp helped the Company finance the acquisition by purchasing $8,000,000 of Series A Convertible Preferred stock—a significant vote of confidence in the long term equity value of the Company. Unfortunately, the Company never realized the benefits of the Papyrus acquisition. Less than three weeks later, on March 16, 2020, the Company decided to shut down all of its retail locations in the face of the unprecedented global COVID-19 pandemic. At the time of this decision, approximately 83% of the Debtors’ sales were generated through in-store sales.”

Principal Prepetition Shareholders

Funds affiliated with, or managed by, Investcorp constitute the majority owners of the Company through its equity holdings of debtor Pine Holdings, Inc. Debtor Pine Holdings, Inc. has three classes of equity—Series A Common, Series D Common, and Series A Convertible Preferred. MidCap Financial Trust and certain affiliated funds own both nonvoting preferred equity and nonvoting common equity in Pine Holdings, Inc. as a result of a capital infusion transaction that took place on October 16, 2020. A summary of the approximate ownership interests in Pine Holdings, Inc. is provided below:

About the Prepetition Debtors

According to the Debtors: “Founded in 1983, Paper Source is a premier paper and gift store offering a curated selection of fine and artisanal papers, invitations, gifts, gift wrap, greeting cards and an exclusive collection of envelopes and cards. With the goal to "Do Something Creative Every Day," Paper Source is committed to offering inspiration and innovation to their customers as they celebrate all of life's moments, both big and small.  In support of this mission, Paper Source offers a creative aesthetic with a unique color palette and proprietary designs that are hand-illustrated by an in-house Art and Design team. As of early 2020 [ie before Papyrus purchase added 30 stores], Paper Source operates 135 stores nationwide, plus an ecommerce store and wholesale division."

Prepetition Organizational Structure

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