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November 6, 2020 – The Court hearing the Town Sports International cases issued an amended final debtor-in-possession ("DIP") order authorizing the Debtors to access a further $2.8mn of DIP financing per beginning the week ending November 13, 2020 and continuing until the the closing of an asset sale (the "Supplemental DIP Funding")[Docket No. 653]. The sale milestones established in the original final DIP order remain unchanged (see below).
On October 16th, the Court hearing the Town Sports International cases issued a final DIP order authorizing the Debtors to access the $12.0mn balance of a $32.0mn DIP financing package being provided by Fitness Recovery Holdings, LLC (the “DIP Lender”), that $12.0mn being a third tranche of financing following an initial $15.0mn made available on October 2nd and a further $5.0mn on October 9th.
The DIP Lender is an entity created by Tacit Capital ("Tacit") in collaboration with an ad hoc group of certain other holders under the Debtors' Prepetition Facility (the "Ad Hoc Lender Group"); who have together made an offer to purchase the Debtors' assets and have agreed to serve as a stalking horse bidder in a section 363 auction sale process. The DIP Lender has agreed to cap the credit portion of its $84.7mn bid at $80.0mn in respect of amounts owed under the Debtors' prepetition credit facility, but does retain the right to also credit bid amounts outstanding under the DIP financing facility (now $32.0mn and counting).
The Debtors' DIP motion [Docket No. 146] stated “The Debtors commenced these chapter 11 cases to implement a value-maximizing going-concern sale of their core operating assets, which will, among other benefits, preserve jobs for employees, tenants for landlords and a go-forward trade partner for vendors. As described in the motion seeking post-petition financing filed contemporaneously herewith, Tacit is providing the Debtors with post-petition debtor-in-possession financing (the ‘DIP Financing’) to fund these chapter 11 cases, including the sale process contemplated by this motion. In connection with the DIP Financing, Tacit is working with an ad hoc group of the Debtors’ prepetition term lenders (the ‘Ad Hoc Lender Group’) to submit the Stalking Horse Bid, which is a going-concern bid for the Debtors’ operations. The Stalking Horse Bid is a credit bid of the amounts outstanding under the Prepetition Facility, which credit bid the Ad Hoc Lender Group has agreed to cap at $80 million. Additionally, the Stalking Horse Bidder retains the right to credit bid amounts outstanding under the DIP Financing facility.
The Debtors' DIP motion [Docket No. 146] notes, “Notwithstanding the unprecedented economic circumstances caused by the COVID-19 pandemic, which drove the Debtors’ business to a halt and caused significant liquidity challenges which ultimately precipitated these chapter 11 cases, the Debtors have secured a viable, going-concern transaction supported by their prepetition lenders. The DIP financing sought herein is an essential component to ensuring that path is a success.
The DIP Facility provides a $32 million commitment to fund both the Debtors’ ongoing operations during these chapter 11 cases and the going-concern sale process described in the bidding procedures, thereby preserving and maximizing the value of the Debtors’ estates. The DIP Facility will also provide a clear, strong message to the Debtors’ customers, vendors, employees and contract counterparties that operations are appropriately funded and, notwithstanding the unprecedented challenges presented by the COVID-19 pandemic, the Debtors have a clear path towards long-term viability. More specifically, the DIP Facility will allow the Debtors to continue meeting the needs of their customers, compensating their employees, paying their vendors and otherwise managing their business in the ordinary course.
The Debtors believe the DIP Facility is fair and reasonable, will maximize value for the Debtors’ stakeholders and is a sound exercise of the Debtors’ business judgment. The Debtors believe the DIP Facility is the best financing available, and the Debtors have been unable to secure any other financing on more favorable terms.
If the DIP Facility is not approved, then there will be immediate and irreparable harm to the Debtors and their estates. Absent funds available from the DIP Facility, the Debtors would be unable to fund the administration of these chapter 11 cases or their operations and would preclude any opportunity for a going-concern transaction.”
In a declaration in support of the DIP financing filed by the Debtors’ investment bankers, those advisors provide: “…the Debtors and Houlihan initiated a marketing process to identify possible DIP financing sources to fund their restructuring efforts. Specifically, the Debtors engaged in discussions with Kennedy Lewis Investment Management, LLC (‘KLIM’), a holder of approximately 45 percent of the Prepetition Facility, as well an ad hoc group of certain other holders under the Prepetition Facility (the ‘Ad Hoc Lender Group’) regarding a potential DIP Facility. The KLIM proposal, however, was contingent upon securing the support of at least 50.1 percent of the Prepetition Lenders to avoid a priming fight, support that the KLIM proposal did not have. Without the majority of the Prepetition Lenders’ support for the KLIM proposal, the Debtors’ only actionable financing proposal was the Tacit proposal.
On August 20, 2020, Tacit Capital (‘Tacit’), in collaboration with the Ad Hoc Lender Group, provided the Debtors with a purchase offer proposal that included a $5 million DIP facility. After the Debtors relayed that the proposed DIP sizing would not be sufficient to satisfy their liquidity needs, Tacit responded with an increase of the DIP size to $15 million. On September 11, 2020, after further negotiation between the Debtors and Tacit, Tacit submitted a proposal for a $17.5 million DIP financing package, which included the terms of a credit bid for substantially all of the Debtors’ assets (the ‘Tacit Proposal’). In the lead up to and following Petition Date, the Debtors engaged with both KLIM and the Ad Hoc Lender Group and Tacit to understand their proposals and improve their respective terms. The Debtors also sought to create consensus between the parties for a joint proposal that both sides would support. Despite these efforts, neither party was interested in working with the other on a joint proposal.
Accordingly, without the majority of the Prepetition Lenders’ support for the KLIM Proposal, the Debtors’ only actionable financing proposal was the Tacit Proposal. Following the Petition Date, the Debtors negotiated with Tacit and the Ad Hoc Lender Group to improve the economic terms of the Tacit Proposal and reach an agreed case budget, resulting in a material increase in the DIP Facility to $32 million.
Key Terms of the DIP Financing:
- Borrower: Town Sports International, LLC.
- Guarantors: Those Guarantors under the Prepetition Loan Agreement that are also Debtors in these chapter 11 cases.
- DIP Lender: Fitness Recovery Holdings, LLC (“Term DIP Lender”).
- Commitment: The DIP Facility shall consist of a priming, super-priority, senior secured, debtor-in possession term loan in an aggregate amount not to exceed $32.0mn. The Interim DIP Facility may be drawn up to $15.0mn upon entry of the Interim DIP Order. The remaining Term DIP Loan Commitment may be drawn in two additional installments, with up to $5.0mn of principal of the Term DIP Loan (the “Supplemental DIP Loan”) available upon entry of the Second Interim DIP Order; and up to $12.0mn of principal of the Term DIP Loan (the “Final DIP Loan” and, together with the Initial DIP Loan and the Supplemental DIP Loan, the “Term DIP Loan”) available upon entry of the Final DIP Order, in each case subject to conditions precedent set forth herein and subject to the Budget. Any principal amount repaid shall permanently reduce the Term DIP Loan Commitment. the Amended final DIP order add the "Supplemental DIP Funding," $2.8mn per week from the week ending November 13th through the closing of an asset sale.
- Interest Rates: The DIP Facility shall bear interest at 10.0% per annum, to be paid monthly in cash. The default rate shall be the Interest Rate plus an additional 2.0%.
- Fees: The DIP Facility also includes the following fees:
- Closing Fee: The Borrower shall pay a closing fee equal to 1.0% of the DIP Commitment, payable in full upon entry of the Interim DIP Order.
- Commitment Fee: The Borrower shall pay a commitment fee equal to 1.50% of the daily unused amount of the DIP Commitment for each day during the period from entry of the Interim DIP Order until termination of the DIP Commitment.
- Exit Premium: The Borrower shall pay an exit premium of 2.0% of the DIP Commitment; provided, however, that in the event the Sale contemplated under the DIP Term Sheet closes, such exit premium will be waived in its entirety by the DIP Lender. The Exit Premium has been fully earned.
- Milestones: The Debtors shall comply with the following Milestones:
- Deadline to file Petition Date: September 15, 2020;
- Deadline to file bidding procedures motion: October 5, 2020;
- The Bid Procedures Objection Deadline shall be no later than three days before the hearing on the Bidding Procedures;
- Deadline for bidding procedures order: 40 days after the Petition Date;
- Deadline for submitting bids: 42 days after the Petition Date;
- Deadline for holding auction: 44 days after the Petition Date; and
- Deadline for sale hearing: 5 days after the the auction date (or if an auction is not necessary, within 5 days after the Bid Deadline).
- Term: The maturity date with respect to the DIP Facility (the “Maturity Date”) shall be the earliest of:
- the date that is one hundred and twenty (120) days from the Petition Date (the “Scheduled Maturity Date”);
- the date that is sixty (60) days from the Petition Date, but only in the event the Final DIP Order approving the DIP Facility and the DIP Facility Documents has not been entered by such date. This was extended in the Amended Supplemental DIP Term Sheet from forty (40) days from the Petition Date;
- the date of final indefeasible payment and satisfaction in full in cash of all DIP Obligations and the termination of the DIP Commitment;
- the effective date of any confirmed plan in these chapter 11 cases;
- the consummation of a sale or other disposition of all or substantially all of the assets of the Borrower, which includes the Sale (as defined in the Bidding Procedures Order) contemplated by the DIP Term Sheet
- immediately upon receipt of written notice to the Borrower from the DIP Lender of the occurrence of any violation by the Borrower of the DIP Orders or any Event of Default (as defined in the DIP Facility Documents) or breach of any covenant under the DIP Facility Documents, which breach is not cured within the time periods set forth in the DIP Facility Documents;
- the dismissal of these chapter 11 cases or the conversion of any of the chapter 11 cases into a case(s) under chapter 7 of the Bankruptcy Code;
- the appointment of a trustee or an examiner with enlarged powers (beyond those set forth in sections 1106(a)(3) and (4) of the Bankruptcy Code) relating to the operation of the business of the Borrower, without the prior written consent of the DIP Lender (which consent may be withheld in its respective sole discretion), or the Borrower applies for, consents to, acquiesces in or fails to object to, any such appointment without the prior written consent of the DIP Lender (which consent may be withheld in its respective sole discretion);
- the Interim DIP Order, Second Interim DIP Order or Final DIP Order is stayed, reversed, vacated, amended or otherwise modified in any respect without the prior written consent of the DIP Lender (which consent may be withheld in its respective sole discretion);
- the Court or any other court of competent jurisdiction enters an order or judgment in or related to these chapter 11 cases modifying, limiting, subordinating or avoiding the priority of the DIP Obligations or the perfection, priority or validity of the DIP Superpriority Claims, the DIP Liens or the Prepetition Liens or imposing, surcharging or asserting against the DIP Lender or any of the assets and property securing the DIP Obligations (collectively, the “DIP Collateral”), the Prepetition Lenders or any Prepetition Collateral, any costs or expenses, whether under section 506(c) of the Bankruptcy Code or otherwise;
- any breach of the adequate protection provisions set forth in the DIP Orders and with respect to non-monetary breaches that is not cured within three (3) business days after the Borrower’s receipt of written notice of such breach or entry by the Court or any other court of competent jurisdiction of an order or judgment modifying, limiting or avoiding any aspect of such provisions;
- termination of the Stalking Horse Purchase Agreement (as defined in the Bidding Procedures Order); provided that such Stalking Horse Purchase Agreement has not been terminated as a result of the breach of the purchaser’s obligations thereunder or as a result of the exercise of any applicable “fiduciary out” to accept a superior proposal by the sellers thereunder; and
- such earlier date on which the DIP Facility shall become due and payable in accordance with the terms of the DIP Orders and/or the DIP Facility Documents.
The Debtors’ Prepetition Capital Structure
As of the Petition date, the Debtors’ have approximately $167.2mn in total funded debt obligations. The table below summarizes the Debtors’ prepetition capital structure:
Principal Amount (in USD millions)
Prepetition Term Loan
November 15, 2020
Prepetition Revolving Loan Facility
August 14, 2020
Total Debt Obligations
Approved Budget (see Exhibit B of original Final Order)
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