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March 2, 2021 – The Court hearing the Hertz Corporation cases issued an order approving the sale of Debtor Donlen Corporation and its Debtor subsidiaries (collectively, “Donlen Corp.” or the “Donlen Assets”) to stalking horse bidder Freedom Acquirer LLC (the “Stalking Horse Bidder,” an affiliate of Apollo Insurance Solutions Group LLC (formerly Athene Asset Management LLC) and a wholly-owned subsidiary of Apollo Global Management, Inc., or “Apollo”) [Docket No. 2915]. The executed stock and asset purchase agreement (the “SAPA”) governing the terms of the $875.0mn to $900.0mn cash sale is attached to the order as Annex 1.
On February 23, 2021, and absent the receipt of any other qualified bid other than that of the Stalking Horse Bidder, the Debtors canceled an auction scheduled for February 24, 2021 and designated the Stalking Horse Bidder as the successful bidder [Docket No. 2839].
On November 24th, the Debtors received Court authority to enter into a new $4.0bn ABS facility (the “Interim Facility,” the proceeds of which will fund the purchase of up to 229,000 new and used vehicles and which comes with its own interesting fee structure) with another Apollo entity, which is discussed further below. As of February 28, 2021, the Debtors had borrowed $380.0mn under this facility.
Key Terms of the SAPA:
- Seller: Hertz Global Holdings, Inc.
- Buyer: Freedom Acquirer LLC, an affiliate of Apollo Insurance Solutions Group LLC
- Purchase Price:
- $850.0mn plus (a) (i) the difference between the closing Working Capital and the Target Working Capital of $70.3mn (which may be a negative number), plus (ii) the difference between the closing Fleet Equity and the Target Fleet Equity of $165.0mn (which may be a negative number), minus (iii) the Assumed Indebtedness Amount, minus (b) the ABS Refinancing Adjustment Amount (equal to $25.0mn);
- payment of 20% of all Cure Payments payable by the Buyer, subject to a $2.0mn cap;
- assumption of the Assumed Liabilities; and
- the payment of the amount payable under the Intercompany Loan Agreement between The Hertz Corporation and the Seller.
The Debtors' March 2, 2021 Disclosure Statement notes that: "the Stalking Horse Bidder agreed to pay anticipated cash consideration of between $875 million and $900 million in connection with the Donlen Sale."
The exact language of the Donlen SAPA is as follows: The aggregate consideration for the sale and transfer of the Purchased Assets from the Selling Entities to the Buyer shall be as follows:
- an amount in cash equal to $850,000,000 plus the Closing Adjustment (which may be expressed as a negative number) less the ABS Adjustment Amount (the “Cash Purchase Price”);
- the payment of all Cure Payments payable by the Buyer pursuant to Section 2.5(e);
- the assumption of the Assumed Liabilities by execution of the Assignment and Assumption Agreement (such amounts in clauses (i) – (iii) and as may be adjusted pursuant to Section 3.5, collectively, the “Purchase Price”); and
- the payment of the Intercompany Loan Payment Amount to Hertz or one of its designated Affiliates on behalf of the Selling Entities.
“Closing Adjustment” means: the amount (which may be positive or negative) equal to (x) the Working Capital minus the Target Working Capital (which amount may be negative or positive), plus (y) the amount equal to the amount by which the Fleet Equity exceeds the Target Fleet Equity (which amount may be negative or positive), minus (z) the Assumed Indebtedness
“Fleet Equity” means the fleet equity of the Acquired Subsidiaries calculated in accordance with the calculations set forth on Section 1.1(b) of the Disclosure Schedule.
“Target Fleet Equity” means an amount equal to $165,000,000.
“Target Working Capital” means an amount equal to $70,266,000.
“Working Capital” means, in respect of the Business, (x) the current assets included in the Purchased Assets (including, without duplication, all current assets of the Acquired Subsidiaries, but excluding Cash, intercompany receivables, capital lease receivables, prepaid deferred debt, and deferred Tax assets), in each case, to the extent not included in Fleet Equity minus (y) without duplication, (a) the current liabilities included in the Assumed Liabilities, (b) current liabilities of the Acquired Subsidiaries and (c) Liabilities under Assumed Plans to the extent not paid prior to 11:59 P.M. Eastern Time on the Business Day immediately prior to the Closing Date (whether or not included in an intercompany account), in each case under this item (y) excluding intercompany payables (other than to the extent included in item (y)(c)), Assumed Indebtedness, Liabilities subject to compromise, accrued income taxes, deferred Tax Liabilities, and outstanding bank drafts), in the case of each of items (x) and (y), to the extent not included in Fleet Equity, as adjusted and determined in accordance with (i) the calculations, methodologies, policies, procedures set forth on Section 1.1(i) of the Disclosure Schedule, (ii) to the extent not inconsistent with (i), and only to the extent consistent with GAAP, the accounting policies, principles, procedures, rules, practices, methodologies, categorizations, and definitions as applied in the Seller Financial Statements for the fiscal year ended December 31, 2019, and (iii) to the extent not addressed in (i) or (ii), GAAP.
- Bidder Protections/Termination Payments: The Debtors have agreed to pay the Stalking Horse Bidder the Buyer Expense Payment Amount in an amount not to exceed $15.0mn, the Termination Fee in the amount of $23.75 [was $24.75mn in sale motion] (less the amount by which the Buyer Expense Payment Amount paid or due to be paid contemporaneously with the Termination Fee exceeds $7.5mn), the Option Fee in the amount of $15.0mn (less the amount by which any Buyer Expense Payment Amount paid or due to be paid contemporaneously with the Option Fee, exceeds $10.0mn) and the Catch-Up Fee (together with the Buyer Expense Payment Amount, the Termination Fee and the Option Fee, the “Termination Payments”)… The Termination Payments are capped at $31.25mn [was $32.25mn], the reasonableness of which the Debtors justify as follows: “Given the size and complexity of the transaction and the amount of work required by the Stalking Horse Bidder, the Termination Payments, which at the maximum payable amount will total approximately 3.6% – 3.7% of the $875,000,000 to $900,000,000 anticipated cash purchase price, are necessary, fair, reasonable and appropriate.”
The Debtors' sale motion [Docket No. 1953] notes, “Since the commencement of these Chapter 11 Cases, the Debtors have implemented a series of transactions aimed at stabilizing their businesses, improving their overall liquidity, improving the efficiency of their operations and ensuring that the company will be able to maintain a competitive fleet throughout the chapter 11 process. In short, the Debtors’ efforts have been focused on developing, bringing forward, and implementing measures that will maximize value and provide flexibility for the development of a chapter 11 plan. The proposed sale of Donlen Corp. is the next step in this process. Shortly after the commencement of the Chapter 11 Cases, the Debtors undertook an analysis of how to maximize the value of Donlen Corp., which functions as a largely stand-alone business within the Hertz enterprise. It was determined that it may be possible to sell Donlen Corp. at a price that reflected a higher value than would be realized from continuing to own the business. To test this thesis, the Debtors quietly initiated a thoughtful process in September to get indications of value for Donlen Corp. If an attractive price was obtained, the Debtors would then go to Court for permission to launch a second marketing phase to see if the broader market would provide a higher price. The proposal set forth in the Motion reflects the culmination of this effort.
The Motion seeks to approve the second phase of that competitive sale process for Donlen Corp. that is designed to maximize the value of the Debtors’ estates and facilitate their successful emergence from chapter 11. The proposed stalking horse buyer has agreed to pay between $875 and 900 million in cash for the Donlen Assets. This is an attractive price that compares favorably to comparable transactions. Importantly, it reflects a multiple of EBITDA that is substantially higher than how the market currently values the Debtors. The stalking horse bid only sets a floor. While the Debtors secured the stalking horse bid through a competitive process that involved fourteen potential purchasers, the proposed Bid Procedures provide for a further opportunity to market the Donlen Assets through a competitive auction process that will allow the Debtors to identify any higher and better offers that might exist. The Debtors intend to use the cash proceeds from the sale of the Donlen Assets to significantly pay down their prepetition secured debt, thus deleveraging their balance sheet and providing additional flexibility for the upcoming plan process in these Chapter 11 Cases. Because the stalking horse bid locks in a purchase price that represents full value for the Donlen Assets and allows the Debtors to test the market and see if they can secure an even better deal, the proposed transaction clearly serves the best interests of the Debtors’ estates and their stakeholders.”
The Debtors’ Marketing and Sale Efforts
The motion adds: “Since its acquisition by THC in 2011, Donlen Corp. has largely operated as a standalone business and has not been substantially integrated into the Debtors’ rental car business. Unlike the Debtors’ rental car business, Donlen Corp.’s fleet leasing business was not dramatically affected by the COVID-19 pandemic. Indeed, Donlen Corp’s business has historically generated consistent revenue and EBITDA through varying economic environments. Based on unsolicited preliminary indications of interest, the Debtors learned that potential third party purchasers place a high value on Donlen Corp.’s consistent returns and attractive business lines. Accordingly, after the commencement of these Chapter 11 Cases, the Debtors began considering the potential of a value-maximizing sale of substantially all of Donlen Corp.’s assets. On or about September 3, 2020, the Debtors, with the assistance of their investment banker, Moelis & Company LLC (‘Moelis’), launched a marketing process for the sale of the Donlen Assets. As part of that marketing process, Moelis, with input from the Debtors, compiled a list of 23 potential purchasers.
Fourteen parties entered into confidentiality agreements with the Debtors and conducted due diligence with respect to the Donlen Assets…Ultimately, the Debtors received, through Moelis, seven indications of interest, six written and one verbal, for the purchase of the Donlen Assets. The Debtors, in consultation with their advisors, identified the three parties that they determined had submitted the most attractive proposals from a valuation perspective and attempted to obtain the best terms available from each potential purchaser. The Debtors continued, however, to provide all other parties that had signed confidentiality agreements with access to the data room so that they could continue their diligence efforts.”
Apollo ABS Facility
On November 24th, the Debtors received Court authority to enter into a new $4.0bn ABS facility (the “Interim Facility”) with Apollo Capital Management, L.P. (“Apollo”); with funds made available under the facility to be used to fund the purchase of vehicles during the Debtors’ stay in Chapter 11 [Docket No. 1698]. The Debtors’ current fleet plan anticipates the purchase of up to 229,000 new and used vehicles, including from OEMs, with these purchases necessitating up to $4.0bn of further borrowing during 2021. The Debtors’ earlier-approved $1.65bn debtor-in-possession (“DIP”) facility included $1.0bn earmarked for vehicle purchases and the Debtors also have a new $400.0mn fleet financing facility for Debtor Donlen Corporation. Numerous Apollo entities are signatories to the DIP facility commitment letter and Apollo’s interest in (and connections with) the Debtors predates the Chapter 11 filings, with Apollo raising eyebrows in May 2020 when it began buying credit default swaps in respect of Hertz debt.
The motion attaches an October 31st Commitment Letter amongst the Debtors and Apollo (the “Parties”), which in turn attaches an Interim Facility term sheet. Also attached are an Engagement Letter which notes a redacted “Structure Fee” and a Fee Letter which notes a redacted “Commitment Fee.” Amongst fees that are disclosed (see further below) is a 0.5% upfront fee (i.e., $20.0mn).
The Interim Facility will replace prepetition ABS facilities that were terminated as a result of the Debtors’ Chapter 11 filings; those filings constituting “amortization events” in respect of those prepetition ABS facilities and effectively shutting a critical source of vehicle financing from the Petition date. The earlier ABS facilities continue to provide some utility (if not utility vehicles), with “pre-existing structures that the Debtors have created in connection with past ABS facilities [serving]… to reduce transaction and other costs” in respect of the administration of the replacement facility.
The Debtors go to lengths to stress that this facility is not a standard debtor-in-possession (“DIP”) facility in that the borrower (Hertz Vehicle Interim Financing, LLC or “HVIF” which will own the vehicles) is a bankruptcy remote, special purpose non-Debtor and that none of the Debtors’ assets will be used to support money borrowed under the Interim Facility. The Interim Facility will sit silo-ed from the Debtors’ estates and the Debtors “only request that the Court authorize THC and certain other Debtor affiliates to enter into and perform under certain ancillary transaction documents required in connection with the Interim Facility, including a ‘Master Lease Agreement,’ and the other “Debtor Facility Documents” ….Pursuant to such transaction documents, THC and certain other Debtors will lease the vehicles acquired by HVIF and provide, on customary terms, certain servicing and collateral services to HVIF.”
About the Debtors
According to the Debtors: “The Hertz Corporation, a subsidiary of Hertz Global Holdings, Inc., operates the Hertz, Dollar and Thrifty vehicle rental brands throughout North America, Europe, the Caribbean, Latin America, Africa, the Middle East, Asia, Australia and New Zealand. The Hertz Corporation is one of the largest worldwide vehicle rental companies, and the Hertz brand is one of the most recognized globally. Product and service initiatives such as Hertz Gold Plus Rewards, Ultimate Choice, Carfirmations, Mobile Wi-Fi and unique vehicles offered through its specialty collections set Hertz apart from the competition. Additionally, The Hertz Corporation owns the vehicle leasing and fleet management leader Donlen Corporation, operates the Firefly vehicle rental brand and Hertz 24/7 car sharing business in international markets and sells vehicles through Hertz Car Sales.”
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