The Hertz Corporation – Creditors’ Committee Objects to “Serious Flaws” in Proposed $1.65bn DIP Financing from Prepetition First Lien Lenders, Argue that Consensual Priming Illegally Damages Unsecured Creditors

Register, or to view the article

October 26, 2020 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors' proposed $1.65bn of debtor-in-possession ("DIP") financing [Docket No. 1603] arguing that "the consensual priming DIP that the Debtors selected has serious flaws from the perspective of unsecured creditors." 

Those flaws "impermissibly prefer" prepetition first and second lien holders and do so in violation of requirements that priming liens are only legal when a debtor has no other options. Here, the Committee argues, not only were other offers of DIP financing on the table, the Debtors "can obtain the same priming lien contractually under their own [prepetition financing] documents and without an order…the allegedly superior terms of the proposed Old First Lien DIP come at a price payable by unsecured creditors. It is not sufficient for the Old First Lien DIP to be ‘best’ – it must also be legal."

The objection reads in part: "The consensual priming DIP that the Debtors selected has serious flaws from the perspective of unsecured creditors. The Committee objects to certain relief sought by the Motion as effectively rolling-up, cross-collateralizing, or otherwise impermissibly preferring the Old First Liens (more than half of which are held by the DIP lenders, the ‘Old First Lien DIP Lenders’) and the Debtors’ prepetition second lien creditors (the ‘Old Second Liens’).

The Old First Lien DIP Lenders (and Old First Liens) require, and the Motion seeks, an order under Section 364(d)(1) granting the Old First Lien DIP a lien priming the Old First Liens and Old Second Liens with respect to collateral they already have. Section 364(d)(1) permits the Court to enter an order granting a priming lien only when the Debtors cannot obtain credit without a priming lien under Section 364(c). The condition to Section 364(d)(1) – that no other financing is available – is not waivable by primed lenders’ consent, and this case shows why: the consent comes at a price payable by other creditors. 

In this case, the Debtors’ own pleadings admit that competing credit was offered by other parties under Section 364(c). 

But even if the Debtors can show at the hearing that such competing credit is not available on the timely basis required by the Debtors, the Debtors cannot show that Section 364(c) credit is not available under the Old First Lien DIP itself because the Old First Lien DIP Lenders can obtain the same priming lien contractually under their own documents and without an order.

The impermissible requirement of an unnecessary Section 364(d)(1) order and the Debtors’ reliance on the Old First Liens for consent to priming comes at the price of impermissible concessions, including:

  • A de facto ‘roll-up’ in the form of a priority claim under Section 507(b) for diminution of value caused by the priming lien that cannot be crammed in a plan of reorganization, even though the Old First Liens have consented to the priming and the language of Sections 361 and 507(b) provides no authority for the grant, today, of such a priority claim;
  • A de facto ‘cross-collateralization’ in the form of granting the Old First Lien DIP, the Old First Liens, and even the Old Second Liens new liens and priority claims on the proceeds of all avoidance actions, including the already-filed $580 million declaratory judgment action against the Old First Liens and Old Second Liens themselves and future potential avoidance actions against the Debtors’ own management;
  • Waiver of the estate’s right to recover unencumbered funds spent to preserve Old First Lien and Old Second Lien collateral under Section 506(c); and
  • Waiver of unsecured creditors’ ability to seek recovery from proceeds of collateral where the ‘equities of the case’ justify such recoveries under Section 552(b). 6.In addition, as discussed below, the Old First Lien DIP contains a covenant effectively requiring the Debtors to pay Old Second Liens 100 cents on the dollar on the effective date of a plan.

In sum: the allegedly superior terms of the proposed Old First Lien DIP come at a price payable by unsecured creditors. It is not sufficient for the Old First Lien DIP to be ‘best’ – it must also be legal. The Court can make it legal by entering an amended order in the form of Exhibit A. The Old First Lien DIP Lenders should not be allowed to compel the grant of impermissible relief, especially where the record shows other financing was offered."

Background

On October 15th, the Debtors filed a motion seeking Court approval to access $1.65bn of new money, debtor-in-possession ("DIP") financing to be supplied by the holders of majority in aggregate outstanding amount of the Debtors' prepetition first-lien debt (the "Commitment Parties") [Docket No. 1523].

A term sheet detailing the financing is attached to the motion at Exhibit B and an executed copy of an October 15th Commitment Letter entered into with the Commitment Parties is attached at Exhibit C.

The DIP Facility would provide the Debtors with up to $1.65bn of liquidity, of which up to $1.0bn can be used for new interim fleet financing, giving the Debtors the future ability to replenish their vehicle fleet.  The DIP Facility contains economic terms that are the most favorable to the Debtors compared to other proposals received by the Debtors, including: (i) minimum draws of $250 million, (ii) interest of LIBOR plus 7.25% which is reduced to LIBOR plus 6.75% upon a significant repayment of prepetition first lien debt, and (iii) other fees as described in the DIP Term Sheet (as defined below).  The DIP Facility matures on December 31, 2021 and has limited covenants and events of default, including one milestone requiring the filing of a plan by August 1, 2021.  The DIP Facility will be secured by first priority liens on substantially all of the Debtors’ assets (subject to certain exclusions) and has the support of the requisite majority of the Debtors’ first lien prepetition debt to allow for consensual priming of existing liens.  The DIP Facility does not contain a roll-up or cross-collateralization of prepetition debt or otherwise dictate how prepetition claims will be addressed in a plan.  The closing of the DIP Facility is subject to, among other conditions, the execution of definitive documentation and approval by the Bankruptcy Court. 

In a press release heralding the development, the Debtors noted: "The financing is to be provided by certain of the Company's pre-petition first-lien lenders and is expected to be structured as a delayed draw term loan debtor facility. Up to $1 billion can be used to provide equity for vehicle acquisition in the U.S. and Canada. Up to $800 million can be used for working capital and general corporate purposes. The financing is subject to finalization of definitive documentation, Court approval and other customary conditions, and a hearing is scheduled for October 29, 2020."

The Debtors have filed cleansing materials with the SEC "which contain discussion materials related to the impact of the COVID-19 pandemic and general economic conditions on the Company’s financial condition and results of operations, including certain scenarios considered by the Company."

The Debtors' DIP financing motion provides: "The Debtors have been operating as debtors-in-possession for approximately five months using cash on hand, during which time they have made meaningful strides toward right-sizing their balance sheets, including by shrinking their national footprint, rejecting unprofitable contracts, and reducing expenditures. The Debtors have also worked with certain of their prepetition lenders to free up access to cash during these Chapter 11 Cases, negotiated a settlement in respect of their vehicle lease payments, and obtained authority to enter into a new fleet financing facility for Debtor Donlen Corporation. 

Notwithstanding such progress, the Debtors require additional liquidity to continue to operate their businesses in the ordinary course, preserve and maximize the value of their estates for the benefit of their stakeholders, and bridge to the formulation and consummation of a plan of reorganization. Having access to additional liquidity is critical for the Debtors – not only is the operation of the Debtors’ business cash-intensive, but the Debtors also must purchase hundreds of thousands of new cars in order to maintain their fleet and stay competitive.

On marketing and terms, the Debtors add: “The Debtors had sufficient cash and time to facilitate a competitive process and engage in extensive negotiations with prospective DIP lenders. The Debtors received eight proposals…In each case, the Debtors insisted that the DIP have a maturity through 2021, no roll-up of prepetition debt, no requirement to pursue any particular restructuring deal, and give the Debtors the necessary flexibility to operate their businesses, manage these Chapter 11 Cases, and pursue a plan of reorganization. 

After several rounds of negotiations, the Debtors determined that the proposed facility described in this Motion (the ‘DIP Facility’) was the most viable and provides financing on the most attractive terms. The DIP Facility provides the Debtors with up to $1.65 billion of liquidity, of which up to $1.0 billion can be used for equity toward new interim fleet financing, giving the Debtors the future ability to replenish their fleet of cars. The DIP Facility also allows the Debtors the use of up to $800 million of the $1.65 billion DIP Facility for working capital and general corporate purposes, which – in addition to cash on hand – is projected to provide the Debtors with the necessary liquidity to continue operations through 2021. 

The DIP Facility contains economic terms that are the most favorable to the Debtors compared to other proposals received by the Debtors, including: (i) minimum draws of $250 million each without any additional initial minimum draw requirement, (ii) interest of LIBOR plus 7.25% which is reduced to LIBOR plus 6.75% upon a significant repayment of prepetition first lien debt of at least [REDACTED] and (iii) other fees as described herein. The DIP Facility matures on December 31, 2021 and has limited covenants and events of default, including one milestone requiring the filing of a Chapter 11 Plan by August 1, 2021.

Key Terms of the DIP Facility

  • Borrower: The Hertz Corporation
  • DIP Lenders: Initially, the Commitment Parties under, and listed on Annex I to, the Commitment Letter, among such Commitment Parties and the DIP Borrower
  • Guarantors: (i) Hertz Global Holdings, Inc.,(ii) Holdings; (iii) each of the Borrower’s direct and indirect Domestic Subsidiaries that are Debtors; and (iv) each of the Borrower’s direct and indirect Canadian 
  • DIP Facility: A senior secured superpriority  priming delayed draw term loan facility, in an aggregate principal amount of $1.65 billion. The initial funding under the DIP Facility shall occur on the first date after the DIP Order is entered on which the “Conditions Precedent to the Initial Extension of Credit Under the DIP Facility” below have been satisfied or waived, which initial funding shall be in the amount of at least $250,000,000. The DIP Facility will be available in multiple draws at times to be determined by the Debtors in their sole discretion, on 16 days’ prior written notice to the DIP Agent (or, in the case of the initial funding of at least $250,000,000, on notice given by no later than 11:59 p.mSubsidiaries that are Debtors. (New York City time) on or before October 19, 2020; provided, that the LIBOR Rate shall not be available until three Business Days after the Initial Funding Date unless the Borrower has delivered to the DIP Agent and the DIP Lenders a customary funding indemnity letter in form and substance reasonably satisfactory to the DIP Agent and the DIP Lenders). Each draw shall be in an amount of at least $250,000,000. DIP Loans repaid cannot be reborrowed.
  • Interest Rates: All obligations of the DIP Borrower under the DIP Loan Documents shall accrue interest at the rate of L + 7.25% per annum and shall be payable in cash on a monthly basis on all obligations under the DIP Loan Documents, provided, that if the aggregate purchase price for a sale [REDACTED] and the Prepetition First Lien Secured Parties shall have been paid, in accordance with the procedures set forth above in this Term Sheet [REDACTED] then the foregoing interest rate shall be L + 6.75%; provided, further, that solely in the event that a challenge to the allocation of the distribution of [REDACTED] being paid in cash to the Prepetition First Lien Obligations in accordance with the procedures set forth above in this Term Sheet, then the Loan Parties may use [REDACTED] for the interest rate reduction described in the DIP Term Sheet.
  • Default Interest: During the continuance of an Event of Default, any overdue amounts under the DIP Loan Documents will bear interest at an additional 2% per annum, payable by the Borrower in cash, monthly, on the last Business Day of the month, in arrears.
  • Fees: The DIP Borrower shall pay to the DIP Agent fees as agreed pursuant to any previously agreed fee letter, including a backstop commitment fee of 1.50% payable pursuant to the Commitment Letter. The Debtors have agreed to an original issue discount of 1.50%. The DIP Borrower shall pay to the DIP Agent unused commitment fees for the account of each DIP Lender, computed at a rate of 3.75% per annum, which will accrue as a percentage of the daily average undrawn portion of the DIP Facility (whether or not then available), payable monthly in arrears and on the Maturity Date.

The DIP Borrower shall pay the reasonable, documented and invoiced expenses of advisors to the DIP Agent and DIP Lenders as set forth in the DIP Term Sheet and Commitment Letter, including the Deferred Fee (as defined in the Houlihan Engagement Letter).

Prepetition Indebtedness

The following chart provides a summary of the Debtors' significant third-party financial debt obligations as of the Petition Date:

Facility

 Principal Amount

Non-Vehicle Debt

Senior Notes

$2,700 million

Senior Term Loan

$656 million

Senior RCF

$615 million

Senior Second Priority Secured Notes

$350 million

Promissory Notes

$27 million

Vehicle Debt

HVF II U.S. ABS Program

$10,893 million

Donlen U.S. ABS Program

$1,592 million

U.S. Vehicle RCF

$93 million

European Vehicle Notes (estimated in USD)

$794 million

European ABS Program (estimated in USD)

$650 million

Hertz Canadian Securitization (estimated in USD)

$251 million

Donlen Canada Securitization (estimated in USD)

$27 million

Australian Securitization (estimated in USD)

$149 million

New Zealand RCF (estimated in USD)

$46 million

U.K. Financing Facility (estimated in USD)

$229 million

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."

Read more Bankruptcy News