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November 21, 2019 – The Debtors Ad Hoc Committee of Holders of Preferred Equity (the “Ad Hoc Committee”) filed a motion seeking to terminate the Debtors' exclusive Plan filing and solicitation periods with the intention to subsequently file "a fully funded and confirmable alternative" Plan (the "AHC Plan") [Docket No. 216]. The Ad Hoc Committee takes a good bash at the Debtors' existing Plan, arguing that it stands to line the pockets of Fortress Investment Group LLC ("Fortress") at the expense of preferred shareholders: "if the Sale and Plan go forward, the Debtor will return almost $150 million to Fortress within 16 months…This windfall…at the expense of the preferred shareholders." On the other hand (and Plan), the Ad Hoc Committee states that it can demonstrate that "the Debtors’ enterprise value is between $190 million and $240 million"; considerably in excess of the $129.0mn it calculates is being offered by Fortress and leaving preferred equity very much "in the money". In bolstering its case, the Ad Hoc Committee points to the 10-Q filed by the Debtors' parent on November 7, 2019 (for quarter ending June 30th), that 10-Q representing that shareholders’ equity was in excess of $65.0mn at fair value.
The motion states, “There is no reason for this Court to approve the Debtors’ plan that wipes out preferred shareholders when preferred shareholders are in fact 'in the money,' and the AHC Plan will permit the preferred shareholders to realize the value to which they are entitled.
The Debtors’ exclusivity period…must be terminated to preserve the rights of disenfranchised equity holders. There is no reason for this Court to allow the Debtors to proceed on their plan of reorganization (the ‘Plan’) [Docket No. 139], without there being an alternative competing plan providing different and better treatment for creditors and equity stakeholders to consider. Doing so would in essence compel estate stakeholders to either accept an unsatisfactory plan or have no recovery at all, clearly an unfair result. Instead, the Ad Hoc Committee has proposed a fully funded and confirmable alternative structure for paying claims in full and providing equity holders with far better treatment than that proposed by the Debtors and CF RFP Holdings LLC, an entity owned by funds managed by affiliates of Fortress Investment Group LLC (‘Fortress’) to be consummated under a plan of reorganization (the ‘AHC Plan’).
The Ad Hoc Committee and its representatives have had dozens of meetings and calls over the past month, primarily with private investment funds and multiple, multi-billion dollar institutions, about financing the AHC Plan…the Ad Hoc Committee, in coordination with Never Summer Holdings LLC, negotiated a Commitment Letter with Magnetar Capital LLC and its affiliate Magnetar Financial LLC (‘MFL’) on behalf of one or more funds or accounts managed by MFL (collectively, ‘Magnetar’) and Moab Partners, L.P. (‘Moab,’ collectively, with Magnetar, the ‘New Investors’) to provide $50 million in AHC Plan funding (Magnetar and MOAB manage $13 billion and $750 million, respectively). The AHC Plan will provide payment to all creditors in accordance with their contractual rights and facilitate the Debtors’ emergence from Chapter 11 with at least $65 million in shareholders’ equity. A Term Sheet reflecting the treatment of classes of claims and interests under the AHC Plan and other significant AHC Plan terms was filed with the Sale Objection.
The Ad Hoc Committee submits, and will demonstrate at the hearing on this matter, that the Debtors’ enterprise value is between $190 million and $240 million. The headline number under the Equity and Asset Purchase Agreement with Fortress, which will provide the source of funding for the Debtors’ Plan, purports to be $174.4 million, but that includes a significant amount of the Debtors’ own cash. The actual cash consideration being provided by Fortress is only about $129 million (the ‘Sale’).
As of the Petition Date, the Debtors’ principal assets consisted of $300 million of commercial real estate loans (none of which was in default) held by two non-Debtor affiliates, RAIT FL7 (‘FL7’) and RAIT FL8 (‘FL8’). This valuable portfolio of approximately 20 commercial real estate loans is held by the Debtors in the form of commercial mortgage backed securities (‘CMBS’), i.e., pools of commercial mortgages which pay interest and principal to investors in accordance with an agreed waterfall. Each of the loans is currently deemed ‘performing’ by the collateral manager, which is RAIT Parent itself. Since the bankruptcy filing on August 30, 2019, $67 million of these loans has been repaid, leaving a balance of $233 million. These loans are short-term and first lien, with approximately 99% of maturities before March 2021. While some loans provide for borrower extensions, they also have often been repaid prior to their stated maturity dates. The Ad Hoc Committee notes, and asks that the Court take judicial notice, that the commercial mortgage market is healthy, interest rates are low, and borrowers are experiencing strong competition among lenders for their business.
If the Sale to Fortress were to be approved on its current terms, Fortress would receive an immediate windfall in the form of the Debtors’ balance sheet cash, exceeding $40 million, and the short-term pay-down of approximately $110 million from the 20 or so commercial mortgages held in FL7 and FL8. Thus, Fortress will receive the full benefit of the Debtors’ remaining assets after FL7 and FL8 are liquidated. Stated another way, Fortress is investing $129 million and if the Sale and Plan go forward, the Debtor will return almost $150 million to Fortress within 16 months from the Debtors’ own cash and self-liquidating FL7 and FL8 securities. This windfall, of course, comes at the expense of the preferred shareholders who, without termination of exclusivity, will be forced either to accept such an unsatisfactory plan or to reject it and have no ready alternative to which to turn, and perhaps face the prospect of a conversion to a liquidation. With such a valuable and liquid asset pool, it cannot be gainsaid that a plan of reorganization such as that being assembled by the Ad Hoc Committee that allows such value to be fully realized over the next 16 months is a mechanism to maximize value far superior to the sale to Fortress.
There is no reason for this Court to approve the Debtors’ plan that wipes out preferred shareholders when preferred shareholders are in fact ‘in the money,’ and the AHC Plan will permit the preferred shareholders to realize the value to which they are entitled.”
The Court scheduled a hearing to consider the motion for December 5, 2019, with objections due by December 2, 2019.
Proposed Sale to Fortress
On September 9, 2019 the Debtors filed a bidding procedures and sale motion requesting each of a bidding procedures order and a sale order [Docket No. 53]. On October 2, 2019, the Court hearing the RAIT Funding cases issued an order approving (i) proposed bidding procedures in respect of the sale of substantially all of the Debtors’ assets and (ii) the Debtors’ selection of CF RFP Holdings LLC, a Fortess affiliate, as the stalking horse bidder (the “Stalking Horse”) [Docket No. 126]. On November 19, 2019, the Ad Hoc Committee filed an objection [Docket No. 203] to the proposed sale order, the arguments therein substantially identical to the arguments raised in the motion to terminate exclusivity.
On August 30, 2019, the Debtors entered into an Equity and Asset Purchase Agreement (the "APA") with CF RFP Holdings LLC, a Delaware limited liability company owned by funds managed by affiliates of Fortress Investment Group LLC (“Fortress”), further to which, the Stalking Horse agreed to buy substantially all of the Debtors’ assets for a purchase price that the Debtors' value at $174.4mn ($129.25mn in cash) as adjusted pursuant to several cash adjustments, and the assumption of certain liabilities. Further to terms in the APA, the Stalking Horse has been given bidder protections including a $5.3mn (ie 3%) breakup fee and an expense reimbursement of up to $1.7mn (this includes $760k in pre-petition expenses that have already been reimbursed).
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Reyle Declaration”) [Docket No. 7], John J. Reyle, the Debtors' Chief Executive Officer, President, and General Counsel detailed (barely) the events leading to RAIT's Chapter 11 filing. The Reyle Declaration is noticeably short on company-specific detail as to the Debtors' slide into bankruptcy, but the need to seek Chapter 11 shelter boils down to the loss of $1.5bn from 2008-2018 (not the Debtors' fault mind you) and the resulting need to tap the capital markets to the tune of approximately $800.0mn to fund loss-making businesses. The ability to access $800.0mn of capital over the same time frame as losing $1.5bn might appear curious to some (including purchasers of almost $500.0mn of the Debtors' equity); which may explain in part the conspicuous lack of detail in the Declaration.
Reyle states: "As a result of the 2008-2009 financial crisis, ongoing market conditions, and other factors, RAIT incurred approximately $1.468 billion in losses between 2008 and 2018 through mortgage write-offs, asset write-downs, and losses on the sale of assets. To fund its business during that period, RAIT issued convertible notes, senior notes, preferred stock, and common stock as follows:
- 2010: $18.7 million junior subordinated note at fair value;
- 2011: $115 million in 7.0% convertible senior notes and $100 million in senior secured notes;
- 2012: $100 million Series D preferred stock;
- 2013: $125 million in 4.0% convertible senior notes;
- 2014: $60 million in 7.625% Senior Notes and $72 million in 7.125% Senior Notes.
- 2012-2016: $54 million in net proceeds from Series A, Series B, and Series C preferred stock issued through RAIT Financial Trust’s preferred ATMprograms.
- 2012-2017: $321 million in net proceeds from common stock issued in public offerings, through RAIT Financial Trust’s Capital on Demand program, and through RAIT Financial Trust’s Dividend Reinvestment and Share Purchase Plan program.
During 2016 and 2017, RAIT sold or divested $737.2 million of its property portfolio and reduced related indebtedness by approximately $652.0 million, as part of a plan to transition to a monoline commercial lending business model."
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