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July 27, 2022 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected (more specifically, filed an "opposition") to proposed debtor-in-possession (“DIP”) financing [Docket No. 152] arguing that the "DIP Loan is likely some of the most expensive money ever submitted to this Court for approval" and would simply accelerate an almost inevtitable adminsitrative insolvency, with DIP fees adding to administrative overheads that will just eat away at any recovery for general unsecured creditors.
This case now belongs in Chapter 7, and not Chapter 11, the Committee continues; before doing the math that shows that the Debtors' asset sale efforts will never result in sale proceeds that leave something on te table for general unsecureds and positing that "Given that no sale scenario is likely to generate proceeds for unsecured claims, this will cause the administrative claims to consume all proceeds that would otherwise be available for unsecured creditors and push general unsecured claims entirely out of the money." Compounding the administrative expense-driving nature of an expensive DIP and an unjustifiable Chapter 11 asset sale process, is the fact that the Debtors are struggling operationally, with the "Debtors’ key operating metrics (including importantly, collections)…unfavorable to budget, which taken along with the professional fee budget overruns and several questions about the UK are anticipated to yield a large uncovered administrative expense claim."
On June 20, 2022, StorCentric, Inc. and six affiliated Debtors (“StorCentric” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtors, a privately held, independent data management and storage solutions company, cited the devastating impact of the COVID 19 pandemic as forcing them to seek bankruptcy shelter and their intention to use Chapter 11 "to effectuate an eventual sale of their businesses."
On July 22nd, the Debtors filed a bidding procedures motion with no then reference to a stalking horse.
The memorandum in opposition [Docket No. 152] states, “The Court should deny the Motion without prejudice because general unsecured creditors would be better off in a chapter 7. While the DIP Lender, various professionals and the Prepetition Secured Creditors all stand to do very nicely if the Court approves the DIP Loan, general unsecured creditors are being offered nothing of substance (and certainly nothing meaningful). The DIP Loan is likely some of the most expensive money ever submitted to this Court for approval. Allowing the Debtors to draw down an additional $2,250,000 at a triple digit annualized interest rate simply pushes the existing Prepetition Secured Creditors’ deficiency claims higher, and those deficiency claims will act to materially dilute (or potentially eliminate) the recovery to other general unsecured creditors from the proceeds of Avoidance Actions or other affirmative claims of the debtors (i.e., the primary unencumbered assets in these estates, although even those assets will be subject to an adequate protection lien).
What’s more, to date the Debtors’ key operating metrics (including importantly, collections) have been unfavorable to budget, which taken along with the professional fee budget overruns and several questions about the UK are anticipated to yield a large uncovered administrative expense claim. And most of the hard work in the case still lies ahead.
The unbudgeted and unpaid chapter 11 administrative expenses (along with unpaid section 503(b)(9) claims) will likely render the estates administratively insolvent in a chapter 11, in turn blocking the hope of any recovery for general unsecured creditors.
Viewed through the lens of a hypothetical chapter 11 plan and the protections it would provide, the Debtors’ DIP financing and sale process fail the ‘best interest of creditors’ test.”
The opposition continues, “Using the most recent information made available to the Committee’s professionals, the Debtors have approximately $42 million in book value of monetizable assets, including approximately $11 million in accounts receivable and inventory, $14 million in fixed assets and $17 million in unamortized book value of intangible assets. The Committee understands that short term assets, including inventory and accounts receivable, could generate between 50% and 85% recoveries in a chapter 7 liquidation and that fixed assets and intangibles could generate between 10% and 25% recoveries in a chapter 7 liquidation. The result is a gross recovery ranging between approximately $9.5 million and $17.5 million, which will be affected by a number of factors, including the experience of the chapter 7 trustee and/or third-party liquidator, the quality and location of the assets and general market forces. In any case, the Committee does not believe that chapter 7 liquidation is likely to pay off the DIP Obligations that have been approved on an interim basis, plus all of the prepetition secured debt. This will not result in a recovery to unsecured creditors from sale proceeds.
The Committee also estimates that there will likely be no proceeds from the chapter 11 asset sale process proposed by the Debtors. Using a comparable company multiple approach and a recent transaction multiple approach, the Committee does not believe that a sale proceeds estimate that exceeds the full amount of the DIP Obligations on a proposed final basis plus the prepetition secured debt is justifiable. The Debtors’ prepetition secured debt obligations exceed $30 million and the full amount of DIP Obligations as proposed would be approximately $6.5 million. When factoring in the proposed success fee (5%) that would be payable to the Debtors’ financial advisor, a chapter 11 sale would need to generate in excess of $39 million before any proceeds are available to provide any recovery to general unsecured creditors.
Notwithstanding the foregoing, the Committee understands that some assets are currently for unsecured creditor recoveries, including proceeds from Avoidance Actions and D&O Claims. The Debtors have reported in excess of $5 million in payments during the 90 days leading up to the bankruptcy filing and carry a $1 million D&O insurance policy as of the Petition Date. After excluding certain preferential transfers that are unlikely to be avoidable (certain payroll-related items, e.g.), unsecured creditors could still possibly recover in excess of $1 million from these assets.
The Debtors disclosed in their schedules of assets and liabilities unsecured claims of approximately $46 million after intercompany items are cancelled out. Assuming that Avoidance Actions and D&O Claims generate proceeds of $1 million, creditors could recover approximately 2.2% on $46 million in claims. The risk of allowing the Debtors to continue running a chapter 11 sale process that is not likely to repay the DIP Loans and prepetition secured claims in full is the increased administrative expense claims will completely subsume the proceeds of the currently unencumbered assets, leaving general unsecured creditors with absolutely nothing. There can be no doubt that if the case continues, administrative costs will continue to accrue. Already the Debtors have exceeded their budget on certain operational items to date, and the Committee understands the same is true of certain of the professionals that have been budgeted for. The longer the case persists, the higher the amount of administrative priority unsecured claims will be.
Given that no sale scenario is likely to generate proceeds for unsecured claims, this will cause the administrative claims to consume all proceeds that would otherwise be available for unsecured creditors and push general unsecured claims entirely out of the money. And that is before taking into consideration the adequate protection lien in unencumbered assets that is being granted to the prepetition secured creditors. That type of zero-recovery scenario will not unfold in a chapter 7, where the general unsecured creditors will receive something.”
Bidding Procedures Motion
On July 22, 2022 – The Court hearing the StorCentric cases issued an order: (i) approving bidding procedure in a respect of the sale of substantially all of the Debtors’ assets, (ii) authorizing the Debtors to select of one or more stalking horses (none selected yet) and to offer bidder protections to any selected stalking horse (capped at 3% and subject to Court approval), and (iii) approving a proposed auction/sale timetable culminating in an auction on August 23, 2022 and a sale hearing on August 26, 2022 [Docket No. 141].
About the Debtors
According to the Debtors: “StorCentric is a privately held, independent data management and storage solutions company. StorCentric’s operations are focused on providing comprehensive data security, mobility, governance and storage solutions for our customers. In the past four fiscal quarters, over 95% of StorCentric’s revenue was generated from the sale of data management and storage solutions and related support and maintenance agreements. StorCentric’s data management solutions enable our customers to manage and store their data in a secure environment protected from hackers and ransomware attacks. StorCentric enhances these capabilities further with subscription services, such as offline access management. StorCentric also optimizes its global customer support organization to address the needs of our customers, providing full-time support and staffing in multiple locations around the world.
In 2018, StorCrentric was incorporated in the State of Delaware in preparation for the merger and subsequent integration of two long-established data storage vendors, Nexsan and Drobo. Since its incorporation, StorCentric has acquired five companies – Nexsan and Drobo in August 2018, Retrospect and Vexata in June 2019, and Violin in October 2020."
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