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September 28, 2022 – Further to a July 22nd bidding procedures order [Docket No. 141] and absent any further qualified bids in advance of a September 27th bid deadline, the Debtors notified the Court that reluctant stalking horse (and debtor-in-possession, or "DIP," lender) Serene Investment Management, LLC ("Serene" or the “Stalking Horse Bidder”), has been designated as the successful bidder [Docket No. 276]. A proposed form of sale order is attached at Docket No. 279 and the Debtors plan to file the Serene Asset Purchase Agreement (the “APA”) prior to their scheduled September 29th sale hearing. UPDATE: APA filed at Docket No. 282.
That is the clean version of what may (or may not) be the last chapter of what has been a very messy sale process.
The latest gritty chapters of the back story, however, are laid out in a pair of declarations filed by the Debtors' investment banker Force 10 Partners, LLC ("Force 10") and Serene, with Force 10 ultimately advising its client to name Serene as the successful bidder notwithstanding that the "Enceladus’ bid is clearly more beneficial to the estate than Serene’s credit bid." Such was Force 10's (lack of) confidence in Enceladus' ability to come up with acquisition financing and growing fatigue/annoyance as "the Debtors have waited, listened to numerous details of how the ‘burgers are made'," while they otherwise chewed through a very limited budget.
Anticipating a possible challenge at the September 29th sale hearing (there is no time to file objections, they will have to be made in Court), DIP lender Serene points out that it "was never its intention to own its collateral" and had bent over backwards in its efforts to accommodate the Enceladus bid, before insisting, however, that its right to credit bid its $5.0mn of DIP debt be respected.
Serene continues as to any gripes that prepetition lenders or a never-say-die Enceladus might have as to its credit-bidding acquisition of the Debtor's assets, "To the extent the Prepetition Secured Creditors wish to protect against a scenario in which a third party purchases these assets from Serene down the road at a price higher than what Serene paid via a credit bid, both the DIP Order and the Bidding Procedures Order provide the solution: they are free to pay off the DIP Loan in full, invest their own capital and enjoy the upside and downside risks of being the owner."
By way of reminder:
On September 20th, the Debtors, set to run out of cash in just over a week, filed an emergency motion to reopen an auction process after their "successful bidder" failed to secure funding for their acquisition of the Debtors' assets [Docket No. 252]. That motion was granted on the 21st with thebid deadline, auction and sale hearing set for 27th and September 29th, respectively. At that point, a less exasperated Force 10 commented: "The Debtors received three bids for the Assets. However, the bid received from Enceladus Development Venture III, LLC ('Enceladus'[*]) was so far superior to the other bids that the auction authorized under the Bidding Procedures for August 30, 2022 was cancelled. Overland Tandberg ('Overland') had significant closing conditions and remaining deal terms to be negotiated, and agreed to be the back-up bidder if we could resolve the open issues. In order to accommodate timing issues associated with financing for Enceladus and the sale of the Debtors’ assets in the United Kingdom, the hearing to approve the sale of the Assets has been continued four (4) times moving from September 2, 2022 to September 21, 2022.
On Friday, September 16, 2022, Enceladus effectively withdrew its bid because its financing fell through.
It is my understanding that Serene Investment Management, LLC (the 'DIP Lender') proposes that the Debtors’ reopen the Auction with the DIP Lender serving as the stalking horse bidder.
…I believe that reopening the Auction process will allow additional time for Overland, and possibly Enceladus, to determine to resubmit bids for the Assets. Further, as of this writing, we contacted three additional parties to encourage them to re-engage."
Fast forward a week and Enceladus, which had not placed a deposit much less come up with financing, continued to be part of the sale picture much to the ultimate chagrin of Force 10 and Serene.
From Force 10 (Docket No. 280 which attaches a pair of letters from Enceladus): "…It is my understanding that Newlight Capital LLC, the servicer of the prepetition first lien bonds, played an active role in bringing Enceladus to the table.
On September 27, 2022, I was informed Enceladus, its financial advisor, and Newlight worked through the weekend to secure a path to financing the Enceladus bid. When I learned of this, I reminded them that…[bidding procedures] required bidders to submit a $1 million deposit by 5:00 p.m. (prevailing Pacific Time) on September 27, 2022. The Debtors did not receive a new bid or deposit from Enceladus by the Bid Deadline, but the Debtors were informed that Enceladus was continuing to work on submitting a bid and deposit. The Debtors and Enceladus continued discussions, and I made it clear to Newlight that the Debtors needed at least $333,000 per week to ensure a going concern.
During the early morning of September 28, 2022, I was informed that Enceladus was agreeable to providing $335,000 per week, and the Debtors received a letter from Enceladus, which is attached hereto as Exhibit A. Additionally, in the afternoon on September 28, 2022, Enceladus provided the letter attached hereto as Exhibit B. Although Enceladus’ bid is clearly more beneficial to the estate than Serene’s credit bid, it is not without significant risks. First, there is no assurance that the ultimate financing is going to be successful. Although I have confidence in Newlight’s role in helping to structure the financing, it ultimately depends on Enceladus performing. On one hand, I question why Enceladus would go through the efforts of purchasing Storcentric, and generally conclude that they are determined and would not waste their time, or ours, if they did not ultimately think they could close. On the other hand, the Debtors have waited, listened to numerous details of how the ‘burgers are made,’ and made certain arguably value mitigating decisions around extending the timeline through changes to the budget.
The Debtors can no longer extend the timeline any further without cash.
I do not know why Enceladus was unable to come up with a timely deposit. My understanding is that throughout the Enceladus financing process, Newlight approached the pre-petition secured parties, on numerous occasions, to ask for interim financing for the deposit or for funding the Debtors, to no avail. Newlight’s focus on the pre-petition secured parties is logical given they are main economic beneficiaries of the Enceladus transaction.
With no bidders, the September 28, 2022 auction was cancelled, and Serene’s Stalking Horse Bid prevailed."
The Serene declaration (Docket No. 281) elucidates as to their reluctant stalking horse role and provides insight as to where the Debtor's should ultimately rest: "Serene was not a prepetition lender or creditor of the Debtors and specifically bargained for the right to purchase its collateral through a credit bid if the Debtors’ prepetition secured creditors refused to purchase those assets with their own credit bid and repay the DIP Loan in full and in cash, as the DIP Order and the Bidding Procedures Order provide. Having induced Serene to lend $5 million in the bankruptcy case by agreeing that Serene may credit bid and prime their liens, the Prepetition Secured Creditors (who have not funded a penny of this case and will use proceeds of Serene’s loan to pay their legal fees) should be held to their end of the bargain and be deemed to have consented to a sale free and clear of their liens. The consent of a junior creditor to the credit bid of a senior creditor could not possibly mean that the senior creditor could only purchase its collateral in bankruptcy subject to that junior creditor’s liens.
To the extent the Prepetition Secured Creditors wish to protect against a scenario in which a third party purchases these assets from Serene down the road at a price higher than what Serene paid via a credit bid, both the DIP Order and the Bidding Procedures Order provide the solution: they are free to pay off the DIP Loan in full, invest their own capital and enjoy the upside and downside risks of being the owner.
…. Serene agreed to provide DIP Financing for the main purpose of funding these cases for a brief period to enable the Debtors to sell their assets. It was not Serene’s intention to own its collateral. In fact, based upon representations concerning the sale process and the unwillingness of one of the bidders to submit a deposit even though it needed additional time to close, Serene agreed that such bid need not be accompanied by a deposit. Serene also agreed to the extended sale deadlines without calling a default and advanced the final $600,000 of the DIP Loan so that the sale could close with one of the remaining bidders.
Unfortunately, no other bidder with the ability to close before the Debtors run out of cash has emerged. As a result, Serene has negotiated and agreed to the terms of an Asset Purchase Agreement to purchase substantially all of the Debtors’ assets via a credit bid, free and clear of all liens, including those of the Prepetition Secured Creditors."
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