Strike, LLC – Creditors Committee Objects to Bidding Procedure Motion, Asks Court to Extend Sale Process and Prohibit Proposed Staking Horse Arrangements with AIP

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December 21, 2021 – The Debtors recently appointed Official Committee of Unsecured Creditors (the “Committee”) filed a limited objection to the Debtors' bidding procedure motion [Docket No. 248], arguing that as proposed the Debtors' bidding procedures "would result in an extraordinarily expedited sale process largely dictated by the milestones imposed on the Debtors by their DIP Facility lender and Stalking Horse Bidder, AIP [American Industrial Partners, Ltd. or "AIP"].

The Committee nominally softens its "limited" objection with its acknowledgement that it is broadly supportive of a going concern sales process in respect of which it is "simply too new to…opine" [appointed December 15th] but nonetheless launches into a fairly comprehensive list of "preliminary concerns with….AIP’s overall approach to these cases" and asks the Court, for starters, to extend the sale process by two and a half weeks.

Beyond that, the Committee wants a number of further restrictions on the ability of multi-hatted AIP (prepetition lender, DIP lender and credit bidding stalking horse) to dominate these cases and to makes changes to existing "bid-chilling" proposals in favor of parameters that would "make this sale process more competitive, fair and unbiased."

These include allowing bids on less than all of the Debtors' assets; limiting AIP's "unqualified right to credit bid" until the Committee has had a chance to fully investigate AIP's prepetition conduct; giving the Committee more time and money to investigate potential avoidance action claims and the appropriateness of allowing AIP to purcahse those claims with its credit bid consideration; lifting a cap on the Committee's professional fees which the Committee argues are just 2% of what the Debtors' professionals are to be paid to advance an agenda shared with AIP; and flat out prohibit any stalking horse agreement with AIP.

Not bad for a Committee "too new to…opine."

NB: AIP is entitled to credit bid amounts outstanding under the DIP (a $26.0mn facility with $8.0mn made available by an interim DIP order) and $81.0mn it is owed in respect od a prepetition ABL facility and a prepetition bridge financing (see further below).

The Committee’s objection reads: “[t]he Debtors seek approval of Bidding Procedures which, if approved, would result in an extraordinarily expedited sale process largely dictated by the milestones imposed on the Debtors by their DIP Facility lender and Stalking Horse Bidder, AIP. It may well be that this process and this proposed buyer represent a value maximizing transaction for the Debtors’ estates, but the Committee is simply too new to the process to opine. The Committee does know, however, that the proposed sale transaction contemplated by the Stalking Horse Agreement would result in a going concern business that would preserve jobs, ensure the assumption of certain liabilities, the assumption and assignment of certain executory contracts and, purportedly, ensure the Debtors’ administrative solvency. These are outcomes to which the Committee ascribes significant value. The Committee, therefore, has determined not to object to the sale process as a whole, and files this Limited Objection instead to begin to remedy the Committee’s preliminary concerns with AIP’s overall approach to these cases, and to request that the Court condition approval of the Bidding Procedures on certain changes being made thereto that are designed to make this sale process more competitive, fair and unbiased.

As expected, AIP has approached these cases, and exerted influence over the Debtors, in a holistic way. Provisions of the proposed Stalking Horse Agreement (as negotiated by AIP), Bidding Procedures (as negotiated by AIP) and DIP Facility (as negotiated by AIP) work together to maximize the chances of an expeditious AIP acquisition of substantially all of the Debtors’ assets (inclusive of any and all claims and causes of action that may exist against AIP) while seeking to marginalize the Committee. Certain provisions are simply aggressive, while others are inappropriate and impermissibly seek to impede the Committee’s ability to acquit its fiduciary duties. For example, the Carve-Out as defined in the interim order approving the DIP Facility (the ‘Interim DIP Order’) includes all allowed fees and expenses of the Debtors’ professionals and other professionals (projected at $19.625 million in the DIP budget), but purports to cap the fees of the Committee’s advisors to the amount contemplated for such advisors in the DIP budget—currently $450,000 in the aggregate (an amount equal to approximately 2% of the projected fees and expenses of the Debtors’ professionals and other professionals). The Committee understands and appreciates the landscape of potential unsecured creditor recoveries here and the need to keep administrative costs as low as possible, but the Committee also believes that it is neither appropriate nor permissible to discriminate in a carve-out between debtor and committee advisors.

Moreover, the restrictions on the Committee’s ability to investigate and, if applicable, pursue claims and causes of action against AIP (and other third parties) currently included in the Interim DIP Order are designed to extinguish such potential claims and causes of action upon the occurrence of the Sale Hearing, currently scheduled to take place less than one month from the hearing on the proposed Bidding Procedures (and indeed such causes of action, including all avoidance actions, constitute Purchased Assets under the current Stalking Horse Agreement). This is of particular concern to the Committee in light of the fact that, based on information provided to date, (x) avoidance actions may constitute the most valuable unencumbered assets of these estates and (y) AIP, in its capacity as a lender under the Prepetition Junior Loan Agreement, received a partial pay down of its Junior Loan Claims (Claims that are now purportedly ‘out of the money’) from the proceeds of a $65 million preferred equity infusion made within the one year period prior to filing. The Committee understands that the issues raised by the motion to approve the DIP Facility are issues for another (rapidly approaching) day, but believes it is important to advise the Court and all parties in interest at this early stage that it will be focusing a substantial portion of its efforts in the coming days and weeks on the immediate investigation and estimation of all potential claims and causes of action that may inure to the benefit of unsecured creditors and which AIP proposes to acquire for what appears to be no consideration. As a corollary, the Committee intends to challenge any provision in any proposed form of order that purports to restrict its ability to conduct an appropriately tailored investigation into AIP and other third parties and thereby acquit its fiduciary duties. The Committee also intends to move as quickly as possible to complete its investigation, and to that end has already provided the Debtors with both formal and informal discovery requests.

Turning this narrow, focused lens to the proposed Bidding Procedures, Bidding Procedures Order and form of Stalking Horse Agreement (as applicable to the Bidding Procedures), the Committee has identified a handful of discreet issues that it believes should be remedied now in order to provide the most level playing field possible for all potential bidders under the circumstances and to protect the interests of the Debtors’ estates and their unsecured creditors, particularly given the otherwise compressed nature of the sale process. 

…The foregoing terms of the proposed Bidding Procedures, Bidding Procedures Order and Stalking Horse Agreement, if left unchanged, could inappropriately chill bidding and prevent (x) the Debtors from having a fair opportunity to maximize the value of their assets and (y) impede the Committee’s ability to acquit its fiduciary duties. In that regard, the requested modifications have been carefully and narrowly tailored to ensure that the sale process is more fair and unbiased, particularly in relation to AIP’s involvement, and the estates’ rights are protected, while at the same time recognizing the need for these cases to progress quickly.”

Background

On December 6th, the Debtors filed a bidding procedures motion [Docket No. 60] which proposed an auction/sale timetable culminating in an auction on January 18, 2022 and a sale hearing on January 19th. It also attached the proposed stalking horse asset purchase agreement entered into with Strike Acquisition LLC (the "Stalking Horse Bidder").

The Stalking Horse Bidder is an acquisition entity created by prepetition (and now DIP) lender AIP which will pace bidding with a credit bid (comprised of prepetition and DIP borrowings) estimated by the Debtors to be $115.0mn (AIP holding approximately two thirds of the $215.0mn owed by the Debtors under their junior term loan agreement). The APA has the Debtors filing their DIP motion as at the Petition date which did not appear to have happened. 

As noted below, the Debtors marketing efforts appear to have borne considerable fruit, with 22 of 180 contacted parties having either signed an NDA, and begun diligence, or on the verge of doing so. In a further indication that the Debtors and AIP are genuinely looking to generate 3rd-party interest, the Stalking Horse Bidder has nor requested a break-up fee.

The Debtors' motion notes, “Beginning in summer 2021, the Debtors foresaw that they would experience a liquidity shortfall in the third quarter of this year and sought rescue financing in order to avoid a free-fall into bankruptcy. Although the Debtors reached out to various funding sources, American Industrial Partners, Ltd. (‘AIP’) and certain of its affiliates (together with AIP, the ‘AIP Parties’), were the only parties that expressed a willingness to provide additional liquidity to the Debtors.

The Debtors engaged in good-faith negotiations with the AIP Parties to obtain the funding needed to preserve their businesses as a going-concern on the best possible terms and agree on the terms of a comprehensive restructuring. These negotiations were extended several times through the entry into forbearance agreements and amendments to the Debtors’ term loan facility and asset-backed loan facility.

On November 22, 2021, the Debtors and the AIP Parties entered into a restructuring support agreement (the ‘RSA’) with the common goal of maximizing the value of the Debtors’ assets and winding down their estates in a responsible and efficient manner. The RSA contemplates that the Debtors will engage in a pre- and post-petition marketing process for a sale of substantially all of their assets. The AIP Parties agreed to provide the stalking horse bid for that competitive process, which contemplates a purchase price comprised of (1) a credit bid of obligations under the Prepetition Senior Loan Facility and DIP Facility which the Debtors estimate to be approximately $115 million, (2) the assumption of certain liabilities, and (3) cash, which amount is anticipated to be sufficient to effectuate an orderly wind-down of the Debtors’ estates pursuant to a chapter 11 plan of liquidation (the ‘Liquidating Plan’). The AIP Parties further agreed to provide debtor-in-possession financing to fund the administration of the Chapter 11 Cases, including the Sale Transaction and wind-down process.

In order to continue to market their assets during these Chapter 11 Cases and conduct an auction (if necessary) to maximize the value of the estates, the Debtors seek authorization to enter into the Stalking Horse Agreement, implement the competitive sales process under the Bidding Procedures, and execute and consummate a Sale Transaction. The Bidding Procedures will allow the Debtors to market-test the Stalking Horse Bid and confirm whether any value exists for the Debtors’ unsecured creditors….Even if no higher and otherwise better offers are identified through this process, the Purchaser has agreed to purchase substantially all of the Debtors’ assets, which will preserve the Debtors’ businesses as a going concern, save thousands of jobs and vendor and customer relationships, and provide resources to allow the estates to wind-down in an orderly fashion pursuant to a Liquidating Plan. Granting the relief sought in this Motion is in the best interest of the Debtors’ estates.”

Prepetition Marketing Process

The motion continues: "On November 12, 2021, the Debtors launched a marketing process for the sale of the Assets. The Debtors’ investment banker Opportune Partners, LLC ('Opportune Partners') with input from the Debtors, compiled a list of potential financial and strategic purchasers, and then reached out to entities identified as potential purchasers.

Opportune Partners also distributed…a 'teaser'…to potential purchasers in connection with the marketing process. Thereafter, the Debtors provided interested parties that had executed non-disclosure agreements with a confidential information memorandum (the 'CIM') that included a summary of the Debtors’ operations, a description of its services and products, and historical and projected financial information. The CIM also included illustrative descriptions of the Assets. Those interested parties were also granted access to a virtual data room, which provided such interested parties with access to hundreds of documents, including the information a potential purchaser would need to make a proposal.

As of the date of this Motion, Opportune Partners has contacted 180 entities identified as potential purchasers of the Assets and distributed marketing materials to 155 of those potential purchasers. Currently, 22 potential buyers have non-disclosure agreements in process and 10 have signed a non-disclosure agreement and have been granted access to diligence materials."

Key terms of the Stalking Horse APA:

  • Seller: Strike HoldCo LLC, a Delaware limited liability company (“Strike HoldCo”), (ii) Strike, LLC, a Texas limited liability company (“Strike LLC”), (iii) Strike Global Holdings, LLC, a Texas limited liability company (“Strike Global”), (iv) Capstone Infrastructure Services, LLC, a Texas limited liability company (“Capstone”), (v) Delta Directional Drilling, LLC, a Texas limited liability company (“Delta”), and (vi) Crossfire, LLC, a Colorado limited liability company (“Crossfire” and together with Strike HoldCo, Strike LLC, Strike Global, Delta and Crossfire, each, a “Seller” and, collectively, the “Sellers”)
  • Purchaser: Strike Acquisition LLC, a Delaware limited liability company formed by AIP
  • Purchase Price: The aggregate consideration (the “Purchase Price”) to be provided in connection with the Purchaser’s purchase of the Purchased Assets shall consist of:
  1. Credit bid of (i) all DIP Obligations outstanding as of immediately prior to the Closing, and (ii) all ABL Obligations outstanding as of immediately prior to the Closing;
  2. Assumption of the Assumed Liabilities (collectively, the “Debt Assumption”) (including the payment of all Determined Cure Costs with respect to any Assigned Contract); and
  3. Excluded Cash
  • Bid Protections: Up to $1.5mn expense reimbursement

Proposed Sale Timeline:

  • Hearing to consider entry of the Bidding Procedures Order: December 22, 2021
  • Deadline for Objections to the Sale Transaction other than Assignment Objections: January 10, 2022
  • Bid Deadline: January 14, 2022
  • Auction: January 18, 2022
  • Sale Hearing: January 19, 2022

Prepetition Indebtedness

The Debtors’ prepetition capital structure consists of (i) a revolving asset-backed loan facility (the “Prepetition ABL Facility”), which was subsequently amended to provide incremental delayed draw term loans provided by the AIP Parties (the “Prepetition Bridge Facility,” and together with the Prepetition ABL Facility, the “Prepetition Senior Loan Facility”) governed by the Prepetition Senior Loan Agreement (as defined below), (ii) a term loan facility (the “Prepetition Junior Loan Facility”) governed by the Prepetition Junior Loan Agreement (as defined below), and (iii) certain capital lease obligations. In addition, the Company has one cash-collateralized undrawn letter of credit in an aggregate face amount of $2,000,000 (the “Prepetition LC”).

As of the Petition Date, the aggregate amount of revolving loans outstanding under the Prepetition ABL Facility was approximately $51.0mn and the aggregate principal amount of Bridge Loans outstanding under the Prepetition Bridge Facility was approximately $30.0mn. As of the Petition Date, the aggregate principal amount of term loans outstanding under the Prepetition Term Loan Agreement was approximately $215.0mn.

About American Industrial Partners

According to AIP: "AIP is an operationally-oriented middle-market private equity firm that makes control investments in industrial businesses serving domestic and global markets. The Firm has deep roots in the industrial economy and has been active in private equity investing since 1989. AIP invests in all forms of corporate divestitures, management buyouts, recapitalizations, and going-private transactions of established businesses with revenues of $300 million to $1 billion+."

About the Debtors

According to the Debtors: “Strike is a full-service pipeline facilities, and energy infrastructure solutions provider. Headquartered in The Woodlands, Texas, Strike partners closely with clients all across North America, safely and successfully delivering a full range of integrated engineering, construction, maintenance, integrity and specialty services that span the entire oil and gas life cycle. For more information, visit www.strikeusa.com."

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