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May 13, 2021 – The Debtors have filed a pair of notices which include proposed amendments to their Disclosure Statement Supplement filed on May 12th [Docket No. 4670]; notably in respect of (i) projected recoveries for the Debtors' general unsecured creditors and (ii) revised disclosure as to the Debtors' valuation of bids submitted in the auction concluded on May 12th.
The notices (a "Notice of Filing of Proposed Revisions of Auction Approval Order" and "Notice of Filing of Proposed Revisions of Plan and Disclosure Statement Supplement" filed at Docket Nos. 4716 and 4706, respectively) each note that the proposed changes would only be made if "the Court approves the Debtors’ selection of the Plan Sponsors and grants the relief requested in the Auction Approval Motion…" The Debtors will be seeking the Auction Approval Order at a hearing scheduled for this morning (10:30am, May 14th)
On May 12th, further to the conclusion of a 36-hour auction, the Debtors designated a private equity group comprised of Certares Opportunities LLC (“Certares”), Knighthead Capital Management, LLC (“Knighthead”) and Apollo Capital Management, LP (“Apollo”) as the successful bidder and now Plan sponsors (the "Plan Sponsors") and filed revised Plan documents including a Third Amended Plan and the Disclosure Statement Supplement.
Recovery for General Unsecured Creditors
Recovery for general unsecured creditors in Class 7 (which includes claims in respect of the Debtors' 7.000% Unsecured Promissory Notes) has now been simplified with general unsecured creditors set to receive, if their claims are not reinstated, 100% cash recoveries. Gone is the proposed 82% cap and any references to the proposed $550.0mn cash pool or proceeds from "Specified Causes of Action." The Disclosure Statement Supplement would now provide: "General Unsecured Claims will no longer be paid from the General Unsecured Recovery Cash Pool Account nor limited in any respect by the General Unsecured Recovery Cash Pool Amount as described in the Disclosure Statement."
On May 12th, a pair of substantially identical declarations were filed by investment banker Moelis and Hertz Director Vincent J. Intrieri in support of the Debtors' motion to approve the Plan Sponsors (Docket Nos. 4675 and 4672, respectively) . Those declarations provided some background on how the auction unfolded and the methodology for choosing a winning bid. In particular, the declarations provide support for the Debtors' choice of the Certares/Knighthead/Apollo Group as the winning bidder and their chosen Plan Sponsor with a bid that they valued at $8.01 per share largely based on a superior warrant package (30 years, $6.5bn strike price and 18% of equity vs 10 years/$8.0bn/14% offered by the losing CWD Group ((ie, Centerbridge Partners L.P., Warburg Pincus LLC, Dundon Capital Partners LLC and an ad hoc group of holders of more than 85% of the Debtors’ Unsecured Funded Debt, together, the “CWD Group”). See comparison of bids supplied by Moelis below.
Also noted by Moelis as part of the $8.01 share price valuation was $500.0mn of synergistic value provided by Amex GBT that was also referenced in the Disclosure Statement Supplement. That assertion as to synergistic that reference has been now been deleted with the value previously ascribed to synergies ($8.01 – $7.36, or 65 cents per share) now instead reflecting "the highest value at which any of the Equity Commitment Parties are investing," [NB, the Equity Commitment Parties are receiving both common and preferred stock and "certain of the Equity Commitment Parties shall receive premiums in an aggregate amount of $163,500,000.00 of Reorganized Hertz Parent Common Interests"]. As we highlight below, the changes also remove a fairly unfortunate bit of drafting which had the "New Warrants," not the shares, valued at $8.01, now revised down to $5.47.
As we reported yesterday , "If a last minute objection were to emerge (the agenda for the May 14th hearing for the moment notes none), it would likely relate to arguments that the auction was prematurely closed and that the Plan Sponsors' winning "last and final" bid was largely the result of the attenuated shareholder recovery provided by a last minute extension of a warrant package from 10 to 30 years (to which Moelis attributes the lion's share of the winning margin, see below) and a rather fuzzy inclusion of "synergistic value from Amex GBT and other portfolio companies of the Plan Sponsors." Amex GBT is American Express Global Business Travel, a joint venture between American Express and a group of investors led by Certares."
The amended Disclosure Statement Supplement would provide: "Using a Black-Scholes valuation, the Plan Equity Value of $4.721 billion, and a volatility range of 50-65%, the value of the New Warrants is estimated at $730 million to $797 million. Using a midpoint volatility of 57.5%, the value of the New Warrants is estimated at $769 million, which equates to $4.92 per share. Using an equity value of $5.221 billion, which reflects the highest value at which any of the Equity Commitment Parties are investing, the value of the New Warrants is estimated at $814 million to $885 million. Using a midpoint volatility of 57.5%, the value of the New Warrants under this approach is estimated at $855 million, which equates to $5.47 per share."
The Debtors' blackline as to proposed changes to the Disclosure Statement Statement highlights the amendments as to synergistic value and corrected per "New warrant" values:
The Moelis declaration states: "Over a continuous, approximately 32-hour period on May 10 and 11, 2021, the Debtors held an auction to select the sponsor for their plan of reorganization….The auction involved a total of three rounds of competitive bidding, with each of the prospective plan sponsor groups submitting two overbids, and then a third bid constituting its best and final offer.
The key determining factor for the Debtors’ selection of the plan sponsor was the recovery to the Debtors’ existing equity holders. In this regard, each proposal provided for recoveries to the Debtors’ existing equity holders through a combination of (i) warrants, (ii) cash distributions and (iii) a common equity distribution (in the case of the Plan Sponsors’ proposal) or a preferred equity distribution (in the case of the CWD proposal). Accordingly, we evaluated these proposals using the following methodology: (i) the value of the cash portion of each proposal was self-evident; (ii) the value of the common equity portion was determined based on the plan equity value reflected in each proposal; (iii) the value of the warrants was determined using a Black- Scholes analysis; and (iv) the value of the preferred equity was determined based on assumed market yields.
The Debtors received best and final proposals, including fully executed transaction documents, from both prospective sponsor groups at approximately 2:50pm on May 11, 2021. For purposes of its analysis, Moelis considered each of the best and final proposals to be feasible and capable of confirmation. However, using the methodology outlined above, the Moelis team determined that the total value of the recovery to equity holders under the Plan Sponsors’ proposal was approximately $1.15 billion, as compared to approximately $841 million under the CWD proposal. This equated to an estimated recovery per share of $7.36 under the Plan Sponsors’ proposal, assuming a plan equity value of $4.721 billion, as compared to $5.39 under the CWD proposal. Using the Plan Sponsors’ proposed plan equity value of $5.221 billion, which includes the Plan Sponsors’ estimated potential synergistic value from Amex GBT and other portfolio companies of the Plan Sponsors, recovery per share is $8.01. Part of the improvement in the Plan Sponsors’ proposal was an extension of their warrant package to a 30 year term from a 10 year term. When we evaluated the Plan Sponsors’ proposal assuming a 10 year term, effectively eliminating the benefit of that specific improvement, the estimated recovery per share is $5.74.
Because the CWD Group increased the dividend rate on the preferred equity distribution from 5.75% to 7.25%, for purposes of evaluation the CWD Group’s final proposal, we treated the preferred equity at par on a market yield basis. Thus, in my view, the final proposal submitted by the Plan Sponsors was the highest proposal under the circumstances at the auction."
Comparison of Best and Final Offers from Prospective Plan Sponsors (see the Moelis declaration [Docket No. 4675] for bid-by-bid detail)
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