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March 29, 2023 – Further to the terms of a Restucturing Support Agreement (the "RSA"), which requires the Debtors to continue to market their assets in the hopes of securing cash consideration in excess of the Debtors' $349.1mn of prepetition and DIP debt (although see below as to encouragement of "lower preliminary bids"), the Debtors filed a motion seeking approval of (i) proposed bidding procedures order and (ii) a proposed timetable culminating in a June 5th auction [Docket No. 17].
In the event that there are no qualified buyers hitting this threshold, the debtors will stay with their "baseline Equitization Restructuring" that would see affiliates of Oaktree Capital Management, L.P. "equitize some or all of the Allowed First Lien Term Loan Claims and Allowed DIP Claims….in exchange for 100% of the equity of the reorganized Debtors." As noted below, the Debtors and their investment bankers Lazard have already "invested substantial time and effort" in a marketing process begun at the beginning of the year and efforts, having clearly not borne fruit on an out-of-court basis, now continue at some level with "discussions…ongoing with several prospective purchasers."
The Debtors' Disclosure Statement adds as to the proposed auction/sale efforts: "Oaktree has agreed that it will not participate in the auction process. The floor for bids is therefore approximately $349.1 million, which is the anticipated amount of Oaktree’s Allowed DIP and First Lien Term Loan Claims. Nonetheless, Oaktree has indicated that it may consent to a recovery different than what is currently contemplated under the Plan, and the Debtors therefore encourage all interested parties to engage in the process, even if they may have a lower preliminary bid. There is no break-up fee or expense reimbursement contemplated to be paid to Oaktree in its role."
On March 29, 2023, SiO2 Medical Products, Inc. and two affiliated Debtors (“SiO2” or the “Debtors”) filed for Chapter 11 protection (on a "pre-arranged" basis) noting estimated assets between $100.0mn and
$500.0mn; and estimated liabilities between $500.0mn and $1.0bn. At filing, the Debtors, who "create and manufacture engineered primary packaging container components for the Pharmaceutical and Biotechnology industry, " noted that they had "yet to meet the anticipated commercialization timeline for its products" adding that "after raising and investing over $800 million in facilities, equipment, and research and development over the last 10 years…[the resulting] legacy capital structure, which includes 12 debt facilities, convertible debt, and nine types of preferred stock, each with various consent and other rights, has made raising capital extremely challenging, especially in the current market environment."
A significant portion of that financing was used "over the last few years on production of vials for the COVID-19 vaccine as part of Operation Warp Speed. The Company now has capacity to deliver on targets contemplated by earlier government grants, but those production levels are no longer needed. The Company will likely need to retool its equipment for future client demand."
On March 29th, the Debtors requested Court authority to enter into a $120.0mn (“DIP”) financing facility to be provided by certain affiliates, managed funds, or accounts of Oaktree Capital Management, L.P. (collectively the “DIP Lenders”) and comprised of: (i) $60.0mn in new money term loans ($12.32mn on an interim basis) and (ii) a roll-up of approximately $60.0mn of the Debtors' First Lien Term Loan Facility on a dollar-for-dollar basis debt (the “Roll-Up Amount”).
Also on March 29th, the Debtors filed a Plan of Reorganization and a related Disclosure Statement [Docket Nos. 18 and 19, respectively].
On March 30th, the Debtors filed a seeking approval of a proposed timetable which culminates in a June 15th Plan confirmation hearing.
Bidding Procedures and Marketing Process
The motion [Docket No. 17] reads: “The Debtors commenced these chapter 11 cases with a single objective: reorganizing the Debtors’ business as quickly as possible in a manner that maximizes value for all of the Debtors’ stakeholders. To that end, as described more fully in the First Day Declaration, the Debtors entered into the Restructuring Support Agreement and negotiated the Plan, contemplating that the Initial Plan Sponsors—affiliates of Oaktree Capital Management, L.P.— would equitize some or all of the Allowed First Lien Term Loan Claims and Allowed DIP Claims of the DIP Lenders (in each case, in their discretion) in exchange for 100% of the equity of the reorganized Debtors (the ‘New Common Stock’, and such transaction, the ‘Equitization Restructuring’) through the Plan.
The Equitization Restructuring serves as a baseline restructuring proposal. The Plan contemplates, however, that the Debtors will continue their prepetition marketing and bidding process….These Bidding Procedures authorize the Debtors to consummate an alternative sale Transaction in the event that the Debtors receive an offer that, in their reasonable business judgment, and subject to and consistent with the terms of the Restructuring Support Agreement, represents a higher or otherwise better bid compared to the value provided by the Equitization Restructuring.’
The Debtors have already started the marketing process to create as competitive an auction as possible. As further described in the First Day Declaration, in the months leading up to the Petition Date, the Debtors with the assistance of their investment banker, Lazard Frères & Co. LLC (‘Lazard’) pursued all incremental financing options to address their acute liquidity issues and extend their runway. Having received no actionable proposals, in early 2023, the Debtors expanded their efforts and initiated a marketing process (the ‘Marketing Process’) to find potential strategic or financial purchasers of the Debtors’ businesses as a going concern. The Debtors, with the assistance of Lazard, have invested substantial time and effort in the Marketing Process: as of the date hereof, the Debtors have approached several prospective purchasers ranging from sponsors with a related portfolio company and/or that specialize in complex situations. Many of these prospective purchasers have been sent confidentiality agreements and, though some ultimately declined to proceed, discussions are ongoing with several prospective purchasers.
The Debtors intend to continue market testing the Equitization Restructuring to maximize value for all stakeholders. To the extent that the Marketing Process results in viable competing bids, the Debtors will hold an auction (the ‘Auction’) pursuant to the Bidding Procedures to maximize the value of their estates. Should the Debtors ultimately select a bid as the winning bid (any such bid, the ‘Winning Bid, and any such bidder, the ‘Winning Bidder’), the Winning Bidder will become the Plan Sponsor. Any value in the Winning Bid above the value provided through the Equitization Restructuring (the ‘Additional Value’) will be distributed as set forth in the Plan. In the event that such a bid does not materialize, the Debtors will consummate the Equitization Restructuring subject to the terms of the RSA. Completing the Marketing Process on a postpetition basis will ensure the Debtors’ ability to fulfill their fiduciary duties, as it will serve as a market check on the value of the proposed recoveries to holders of Claims and Interests under the Equitization Restructuring.”
Proposed Key Dates
- Indication of Interest Deadline: April 29, 2023
- Bid Deadline: May 29, 2023
- Deadline to notify all Qualified Bidders of the highest or otherwise best Qualified Bid: June 2, 2023
- Auction (if required): June 5, 2023
- Deadline for objections: June 6, 2023
- Confirmation Hearing: June 15, 2023
- Effective Date: June 27, 2023
Under the RSA and the Debtors' Pre-arranged Plan of Reorganization:
- Certain affiliates, managed funds, or accounts of Oaktree Capital Management, L.P. (such funds, the “DIP Lenders”) will commit to fund the DIP Facility in the aggregate amount of $120 million on the terms set forth in the DIP Documents. The DIP Facility provides for $60 million in new money loans and a $60 million roll-up of Prepetition Term Loans held by the DIP Lenders.
- The Plan provides for the Initial Plan Sponsors to receive 100% of the New Common Stock issued as of the Plan Effective Date through an equitization of some or all of the Allowed DIP Claims and Allowed First Lien Term Loan Claims (with any portion of the Allowed DIP Claims and Allowed First Lien Term Loan Claims not so equitized rolled into the Exit Term Loan Facility) (the “Equitization Restructuring”).
- In the event of a Toggle Trigger, the Initial Plan Sponsors may elect, in consultation with the Debtors, to implement the Restructuring Transactions through a credit bid of some or all of the Allowed DIP Claims and Allowed First Lien Term Loan Claims to purchase all, substantially all, or one or more subsets of the assets of the Debtors through a sale pursuant to section 363 of the Bankruptcy Code on terms and conditions satisfactory to the Initial Plan Sponsors (the “Credit Bid Sale Restructuring”). In the event the Initial Plan Sponsors pursue a Credit Bid Sale Restructuring, the Initial Plan Sponsors and the Debtors shall determine an amount of cash to remain in the proposed Debtors’ estates, (or for the Initial Plan Sponsors to fund to the Debtors’ estates), at or prior to closing of the Credit Bid Sale Restructuring which will include (1) all Allowed Professional Fees (as defined in the DIP Order) incurred or payable prior to the closing of the Credit Bid Sale Restructuring, (2) a wind down budget consisting of (a) estimated professional fees to be incurred after the closing of the Credit Bid Sale Restructuring and (b) other agreed reasonable and ordinary expenses necessary to effectuate a wind down, and (3) all accrued and unpaid wages (and related employee claims), taxes, and other similar agreed reasonable and ordinary course of business costs and expenses incurred by the Debtors prior to the closing of Credit Bid Sale Restructuring in the chapter 11 cases that are not otherwise assumed as part of the Credit Bid Sale Restructuring.
- The Restructuring Support Agreement and the Plan will constitute a stalking horse bid in the Equitization Restructuring and the Restructuring Support Agreement will constitute a stalking horse bid in the Credit Bid Sale Restructuring described below, in each case subject to the terms therein, for purposes of the bidding procedures (the “Bidding Procedures”) substantially in the form attached to the Restructuring Support Agreement as Exhibit F and will be subject to higher or better bids pursuant to the Bidding Procedures.
- The DIP Lenders will receive, in consideration for their DIP claims, (i) where an Initial Plan Sponsor is the Plan Sponsor, on account of Allowed DIP Loans (which will include fees and interest) New Common Stock in accordance with the Stalking Horse Bid; or (ii) where any other party is the Plan Sponsor, payment in full, in Cash, on the Effective Date or such other terms agreed by the Required DIP Lenders.
- The First Lien Term Loan Lenders will receive either: (i) where an Initial Plan Sponsor is the Plan Sponsor, their pro rata share of New Common Stock and/or their pro rata share of the Exit Term Loan Facility, or such other treatment as agreed by such holders, (ii) where any party other than the Initial Plan Sponsors is the Plan Sponsor, payment in full, in cash on the Plan Effective Date or such other treatment as agreed to by such holders.
- The Second Lien Term Loan Lenders will receive their pro rata share of Additional Value (if any).
- General unsecured claims will receive their pro rata share of Additional Value (if any) after payment of Second Lien Term Loan Claims in full.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Steffen Declaration”), Yves Steffen, the Debtors’ chief executive officer, detailed the events leading to SiO2’s Chapter 11 filing. The Steffen Declaration provides: “SiO2 is a material life sciences company that — after raising and investing over $800 million in facilities, equipment, and research and development over the last 10 years — is at the precipice of mass-commercialization of its breakthrough materials science technology that is poised to revolutionize the pharmaceutical industry….
Despite the Company’s breakthrough advances in technology, which are likely to lead to increased patient safety, it has yet to meet the anticipated commercialization timeline for its products. While management believes that many significant players are interested in investing new capital into the Company, the Company’s legacy capital structure, which includes 12 debt facilities, convertible debt, and nine types of preferred stock, each with various consent and other rights, has made raising capital extremely challenging, especially in the current market environment. The Company’s relatively limited current revenue — approximately $50 million in 2022 — cannot support its current operational overhead and debt load, which required $13 million in interest payments over the same period. The Company has spent much of the last year trying to raise capital despite these capital structure issues, but neither third-parties nor existing equity holders — those with the most to lose under the circumstances — have come to the table with new capital.
Notably, the Company focused its efforts over the last few years on production of vials for the COVID-19 vaccine as part of Operation Warp Speed. The Company now has capacity to deliver on targets contemplated by earlier government grants, but those production levels are no longer needed. The Company will likely need to retool its equipment for future client demand. Now, with only approximately $4.1 million in cash on hand, including restricted amounts, the Company has filed these chapter 11 cases to address its capital structure and reorganize its operations, allowing a new owner to bring the products to market.
Significantly, the Debtors filed these chapter 11 cases with a clear path to emergence. The Debtors and certain affiliates and funds of Oaktree Capital Management, L.P. (the 'Initial Plan Sponsors' or 'Oaktree'), which holds all of the Company’s first lien debt, have developed a comprehensive restructuring on an accelerated timeline (the 'Restructuring') memorialized in the restructuring support agreement attached hereto as Exhibit A (the 'Restructuring Support Agreement'). The Restructuring contemplates saving the SiO2 business — including nearly 250 jobs—through these chapter 11 cases.
The Restructuring has three main components: First, Oaktree has agreed to provide a $120 million ($60 million new-money) superpriority debtor-in-possession financing facility (the 'DIP Facility,' and the claims created by the DIP Facility, the 'Allowed DIP Claims'), to fund these chapter 11 cases. Second, Oaktree committed to serve as the Initial Plan Sponsor and equitize its Allowed DIP Claims and Allowed First Lien Term Loan Claims into 100% ownership of Reorganized SiO2 through a chapter 11 plan, subject to the Company meeting certain milestones. Third, Oaktree agreed to subject its recovery under the Plan to an auction process pursuant to court-approved bidding procedures, whereby any party may submit a bid to acquire 100% of the New Common Stock of Reorganized SiO2 through the Plan.
Oaktree has agreed that it will not participate in the auction process. The floor for bids is therefore approximately $349.1 million, which is the anticipated amount of Oaktree’s Allowed DIP and First Lien Term Loan Claims. Nonetheless, Oaktree has indicated that it may consent to a recovery different than what is currently contemplated under the Plan, and the Debtors therefore encourage all interested parties to engage in the process, even if they may have a lower preliminary bid. There is no break-up fee or expense reimbursement contemplated to be paid to Oaktree in its role. The Company’s proposed investment banker in these chapter 11 cases, Lazard Frères & Co. LLC ('Lazard'), has already started a robust marketing process for the sale of the Company.”
As of the Petition Date, the Debtors have an aggregate principal amount of approximately $430 million in funded debt obligations, consisting of (a) First Lien Term loans, (b) Second Lien Term Loans, (c) certain secured financing secured by certain specified assets, (d) Promissory Notes (as defined herein), and (e) Convertible Indebtedness. 27. SiO2 is a borrower under twelve debt facilities, each as more fully described below:
About the Debtors
According to the Debtors: “SiO2 Materials Science is a company with deep roots in chemistry and engineering. The company creates and manufactures engineered primary packaging container components for the Pharmaceutical and Biotechnology industry. These containers typically take the form of syringes, vials and cartridges.
Our patented technology applies a unique glass-like barrier onto any plastic surface. Our products are engineered to combine the durability and dimensional precision of plastic with the physical and barrier properties of glass.
In the Pharma Industry, SiO2 advanced technology solves more than 30 problems which have plagued the industry for more than 100 years – including some of the most challenging related to drug stability, drug efficacy and safety."
Corporate Structure Chart
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