Strike, LLC – Final DIP Order Provides Debtors with a Further $18mn of New Money Financing; Rolls Up $81mn of Prepetition Debt Owed Stalking Horse American Industrial Partners, Ltd.

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January 4, 2022 – The Court hearing the Strike, LLC cases issued a final order authorizing the Debtors to (i) access the $18.0mn balance of what is in total $26.0m of new money, debtor-in-possession (“DIP) financing being made available by prepetition lender American Industrial Partners, Ltd. (“AIP,” also the Debtors' stalking horse) and (ii) continue using cash collateral [Docket No. 348]. The final DIP order attaches an amendment No. 1 to the Debtors' December 10, 2021 DIP credit agreement (also attached).

The DIP financing is part of an overall $112.6mn DIP financing package comprised of $26.0mn of new money (in the form of term loans of which $8.0mn was made available by a December 8th interim DIP order [Docket No. 87] and the roll-up of all of what is owed to AIP under the Debtors’ prepetition Senior Loan Facility (i.e., $51.1mn under a prepetition ABL facility and $30.0m under a prepetition bridge facility, plus interest and fees), with the roll-up occurring upon issuance of this final DIP order. As noted below, AIP acquired some of that prepetition debt from original lenders led by Bank of America in recent months.

The order as signed [blackline at Docket No. 347] had a few amendments reflecting ongoing negotiations between AIP, the Debtors and the Debtors' creditors' committee (the "Committee") that prompted the Court to break several times during the January 3rd DIP hearing, but issues seemed resolved relatively amicably, with Judge David R. Jones jokingly lamenting at the end of the call/hearing: "I did we really want to Zakia [White & Case's Jason Zakia, counsel to the Debtors] and Brimmage [Akin Gump's Marty L. Brimmage, counsel to the Committee] really go at it...slightly disappointed but its a new year and we have lots of time…"

Amongst last minute changes, the Committee, which had otherwise already objected to both the Debtors' DIP motion and bidding procedures motion citing AIP's multi-hatted role (ie, stalking horse, DIP lender, prepetition lender) and resulting undue influence in these cases, won several small victories, including (i) removing a budget-related cap on the Committee's professional expenses, (ii) increasing the investigation budget by $75k to $175k and (iii) most importantly, reserving rights as to AIP's intended acquisition of avoidance actions (including against AIP) as part of its purchase of the Debtors' assets. Counsel to the Committee, noting that avoidance actions would likely be the only possible source of proceeds for general unsecured creditors, successfully arguing that the final DIP order should not unduly impinge on what is ultimately a sale-related issue to be considered at a later date.

Background

The DIP financing as agreed evolved considerably from the Debtors’ December 6th Petition date, with the Debtors’ mysterious (and moments into a bankruptcy rather unusual) receipt of $20.0mn in “several large unanticipated payments” impacting the relative bargaining strengths of the Debtors and AIP and “compell[ing] the AIP Parties to renegotiate certain of the terms” of their originally preferred DIP facility.

That renegotiation, which saw (i) the size of the DIP shrink from $29.0mn to $26.0mn (although the DIP budget, below, makes clear that much of the $26.0mn is probably now…as one would imagine with the sudden addition of $20.0mn…not going to be used except perhaps to justify what was to the Debtors' creditors' committee an unseemly roll-up) and (ii) fees "significantly reduced" (although fees and interest on the new money still north of 20%), explains why the Debtors' first day hearing ended up stretching over three days. 

As recently as December 7th, the Debtors were asking the Court for authority to use cash collateral on a non-consensual basis, noting that thanks to the $20.0mn "While it is likely that the Debtors will still require post-petition financing, as long as they are permitted to use cash collateral their need is no longer as immediate. The use of cash collateral will give the Debtors more time to continue to negotiate with AIP, in an effort to secure better terms. The Debtors have asked AIP to consent to the consensual use of cash collateral on an interim basis while DIP negotiations continue.  AIP does not currently consent [they did ultimately consent]."

Almost certainly, we have not heard the last of that $20.0mn and how it will impact the trajectory (and distributions) of these cases; not to mention draw scrutiny as to the run-up to the Debtors' filings and the terms of AIP's several roles (prepetition lender, including as to recently acquired debt; DIP lender and stalking horse) in these cases. So will we see accusations of a loan-to-own strategy and cases designed to line the pockets of AIP? The Debtors and AIP will point to the bare-knuckled renegotiation of the DIP and the lack of a break-up fee for AIP in its role as stalking horse as indicating otherwise. Potential objectors will likely cast shade on that defense, noting AIP's still hefty interest and fees; the possibility that AIP's acquisition of debt (what did they pay for it?) in the run-up to the Debtors' filings is indicative of an own-to-loan strategy; and the potential lack of significance of no break-up fee given an already lofty bid floor established by AIP's ability to credit bid that $112.6mn of prepetition and DIP debt.

The Debtors’ requesting motion [Docket No. 79] states, “Beginning in late 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, including various lenders under the Debtors’ prepetition term loan facility, American Industrial Partners, Ltd. (‘AIP’) and certain of its affiliates (together with AIP, the ‘AIP Parties’), the Debtors’ largest existing lenders, were the only parties that were willing to even sign a confidentiality agreement to discuss the possibility of providing additional liquidity to the Debtors.

The Debtors and their advisors engaged in good-faith negotiations with the AIP Parties to obtain the funding needed to preserve the Debtors as a going-concern on the best possible terms and agree on the terms of a comprehensive restructuring. The AIP Parties subsequently acquired all of the loans under the Debtors’ asset-backed loan facility. The negotiations were extended several times through the entry into forbearance agreements and amendments to the Debtors’ term loan facility and asset-backed loan facility. Thereafter, on October 18, 2021, the Debtors and the AIP Parties entered into a series of agreements, including an additional forbearance agreement and amendment to its term loan facility, and an amendment to its asset backed loan facility whereby the Debtors obtained commitments from the AIP Parties to make up to $40 million of additional loans needed to fund operations while the parties negotiated a comprehensive restructuring.

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 through the sale of substantially all 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, collect bids, and conduct an auction during the Chapter 11 Cases in order to obtain the highest and best price for their assets. The AIP Parties agreed to provide senior secured superpriority priming debtor-in-possession financing in an amount to fund the competitive sale process and the Chapter 11 Cases, including the orderly wind-down of the Debtors’ estates pursuant to a chapter 11 plan of liquidation (the ‘Liquidating Plan’). An affiliate of the AIP Parties also agreed to provide the stalking horse bid for the competitive process, which contemplates a credit bid of the asset-backed loans and postpetition loans, assumption of certain liabilities and cash in an amount to effectuate the wind-down under the Liquidating Plan, as set forth in the stalking horse purchase agreement entered into between the parties thereto.

The DIP Facility is the best financing available to the Debtors, and the terms have improved significantly over the last two days, when the Debtors’ receipt of several large unanticipated payments reduced the immediate borrowing need and compelled the AIP Parties to renegotiate certain of the terms. The AIP Parties agreed to significantly reduce fees and eliminate several terms permitted only under extraordinary circumstances. The unanticipated cash receipt did not completely solve the Debtors’ financing needs—they will still need postpetition financing during the interim period—but did reduce the needed amount of expensive financing and give the Debtors the opportunity to improve the terms of that financing significantly. The Debtors took full advantage of the opportunity and are satisfied that the DIP Facility is not only the best financing available to them, but also fair, reasonable, and critical to the success of the chapter 11 cases.”

Key Terms of the DIP Facility:

  • Borrower: Strike, LLC, Delta Directional Drilling, LLC and Strike Global Holdings, LLC
  • Guarantors: Strike Holdco, LLC and each of its subsidiaries (the “Subsidiary Guarantors”)
  • DIP Lenders: As of any time of determination, each Person that has a Commitment and/or holds any Loan at such time (including any Person that has become a Lender pursuant to an Assignment and Acceptance) (the foregoing Persons, collectively, the “Lenders”). As of the Closing Date, the Lenders shall be the Persons whose name are set forth on Schedule 1.1 of the DIP Loan Agreement under the heading “Lenders.”
  • DIP Agent: Lightship Capital II LLC (an AIP affiliate)
  • Amount and Facility: A senior secured superpriority debtor-in-possession term loan facility comprised of:
  1. a new money multiple-draw term loan facility in an aggregate principal amount of up to $26 million (the “DIP Term Facility,” and the term loans made or advanced thereunder, the “DIP Term Loans”), comprised of $22 million in tranche A DIP Loans (the “Tranche A DIP Loans”), and $4 million in tranche B DIP Loans, pursuant to which (1) an aggregate principal amount of up to $8 million of Tranche A DIP Loans (the “Interim Borrowings”), may be borrowed in one or more borrowings, during the period from and after the Closing Date (as defined in the DIP Loan Agreement) through the date of entry of the Final Order, and (2) the remaining aggregate principal amount available under the DIP Facility (and together with the Interim Borrowings, the “Borrowings”) may be borrowed, in one or more borrowings, following entry of the Final Order; and
  2. subject to entry of the Final Order, a roll-up facility (the “DIP Roll-Up Facility,” and the loans deemed to be made or advanced thereunder, the “DIP Roll-Up Loans;” the DIP Term Loans and, subject to the entry of a Final Order, the DIP Roll-Up Loans, collectively, the “DIP Loans;” and the DIP Term Facility and, subject to the entry of a Final Order, the DIP Roll-Up Facility, collectively, the “DIP Facility”), pursuant to which all amounts outstanding under the Senior Loan Facility as of the entry of the Final Order shall automatically be deemed “rolled up” into the DIP Facility, on a cashless dollar for dollar basis, and shall automatically be deemed DIP Loans.
  • Funding Use of Proceeds: All proceeds of the DIP Loans and all Cash Collateral shall be used and/or applied solely for the purposes permitted in the Approved Budget, including, without limitation:
  1. to pay the costs of administration of the Chapter 11 Cases;
  2. for general corporate and working capital purposes;
  3. to pay adequate protection payments to the extent set forth in the Interim Order; and
  4. to pay professional fees and expenses and fund the Carve Out in accordance with the Interim Order
  • Interest Rate: (i) For Base Rate Loans, the Base Rate in effect plus 10%, payable in-kind and (ii) For LIBOR Loans, LIBOR for the applicable Interest Period plus 10%, payable in-kind
  • Default Interest: Interest Rate applicable plus 2% to accrue automatically upon any Event of Default, payable in cash
  • Fees:
    • New Money Loan Commitment Payment: 7.50% of the New Money Loan Cap ($26.0mn), which amount shall be deemed earned in full and payable in-kind upon the Closing Date.
    • Termination Payment: Dollar amount equal to (a) in the case of any Termination Payment Triggering Event described in clause (a) of the definition thereof, 3.00% of the aggregate principal amount of the New Money Loans being prepaid, repaid, paid or redeemed (as applicable) at such time, and (b) in the case of any other Termination Payment Triggering Event, 3.00% of the aggregate principal amount of then-outstanding New Money Loans. For the avoidance of doubt, there shall be no Termination Payment due and payable in respect of the Roll-Up Loans.
  • New Money: $26.0mn
  • Roll-Up: With a final DIP order, all outstandings under the Debtors' prepetition Senior Loan Facility
  • Milestones:
    • The sale procedure shall be entered; on or before the date that is twenty-one (21) calendar days following the Petition Date
    • The Final DIP Order shall be entered; on or before the date that is thirty-five (35) calendar days following the Petition Date
    • The deadline for the submission of final qualified bids in connection with the Sale Process shall have occurred; on or before the date that is forty (40) calendar days following the Petition
    • The Sale Auction (if required in accordance with the Sale Procedures) shall have occurred; on or before the date that is forty-two (42) calendar days following the Petition Date
    • The Sale Approval Order shall have been entered by the Bankruptcy Court; on or before the date that is forty-five (45) calendar days following the Petition Date
    • The Sale Transaction shall have been consummated, on or before the date that is sixty (60) calendar days following the Petition Date

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 $51,000,000 and the aggregate principal amount of Bridge Loans outstanding under the Prepetition Bridge Facility was approximately $30,000,000. As of the Petition Date, the aggregate principal amount of term loans outstanding under the Prepetition Term Loan Agreement was approximately $215,000,000.

Interim DIP Budget

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."

The Debtors are a portfolio company of private equity house OEP Capital Advisors which saw a 2019 effort to sell their stake to Sentinel Energy Services Inc. aborted in November 2019 when market conditions led to Sentinel withdrawing from that transaction (see our filing date coverage for more).

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