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November 2, 2020 – The Court hearing the Town Sports International cases issued an order approving the Debtors’ proposed key employee retention plan (the “KERP”) that covers 135 non-insider employees at a maximum cost of $1.5mn [Docket No. 548].
The KERP motion stresses the important of the eligible participants to the Debtors' ability to complete the proposed sale of their assets to New TSI Holdings, Inc., an entity formed by prepetition lenders Tacit Capital LLC ("Tacit") and an ad hoc group of the further prepetition term lenders (the “Stalking Horse Bidder”), further to which the Stalking horse Bidder agreed to pace the sale process with an up to $84.7mn bid ($80.0mn of which is a credit bid with the balance in cash to cover a $1.0mn recovery pool for general unsecured creditors and wind-down costs).
The KERP motion [Docket No. 256] explains, “Certain of the Debtors’ key employees (each a ‘KERP Participant,’ and collectively the ‘KERP Participants’) may be motivated to leave the Debtors’ employment (or not return to the Debtors’ employment) during the pendency of these chapter 11 cases due to, among other things, the continued challenges involving the Sale Process and uncertainty about the future of their positions with the Debtors. The KERP Participants perform a variety of important business functions for the Debtors that are vital to the Debtors’ ability to preserve and enhance stakeholder value. Many of the KERP Participants have valuable institutional knowledge regarding the Debtors’ business operations that would be difficult and expensive to replace on an expedited basis and could very well harm the Debtors’ operations, derail the Sale Process and delay the Debtors’ wind down. Moreover, the KERP Participants have provided important support to the Debtors’ advisors in meeting the additional demands imposed by chapter 11 and the Debtors’ ongoing sale efforts. The value of the KERP Participants’ support to Huron are particularly acute here, as Huron’s engagement commenced on September 24, 2020. The KERP Participants’ active engagement and anticipated ongoing engagement with Huron has been, and will continue be, critical to meet the Debtors’ various obligations in these chapter 11 cases.
Given the demands placed upon the potential KERP Participants during the chapter 11 cases, the Debtors believe that it is appropriate to make retention payments to them. Unless the Debtors continue to provide compensation designed to motivate key employees to remain with the Debtors throughout the restructuring process, employee attrition could result in costly disruptions to the Debtors’ operations. The Debtors respectfully submit that the KERP will increase the likelihood that the KERP Participants are properly motivated and will remain with the Debtors during the Sale Process, thereby preserving value for the Debtors, their estates, creditors and other parties in interest.
Although certain of the potential KERP Participants have titles incorporating the word ‘director,' ‘officer’ or ‘vice president,’ no KERP Participant is an ‘insider’ of the Debtors. Specifically, the KERP Participants do not include any employee who: (a) is appointed or hired directly by the Debtors’ board of directors; (b) exercises managerial control over, or has responsibility for, the Debtors’ operations as a whole; or (c) directs the Debtors’ overall corporate policy or governance.
Due to the importance of the KERP Participants to the success of the Debtors’ businesses, the Debtors, together with their advisors, worked to develop a KERP designed to offer competitive, fair compensation that would motivate the KERP Participants to remain with the Debtors through the duration of the Debtors’ restructuring.”
Key Terms of the KERP
- Eligible Participants: The KERP awards will be provided to approximately 135 non-insider employees who provide certain essential back office and field management services.
- KERP Awards: KERP awards represent fixed cash amounts ranging from a few thousand dollars to $150,000 (based on salary, role and expertise). The KERP contemplates approximately $1,500,000 in aggregate KERP awards, with an average award of approximately $11,111.
- Payment Dates: Fifty (50) percent of each KERP award will be earned on the closing date (the ‘Sale Closing Date’) of the sale of substantially all of the Debtors’ assets in these chapter 11 cases. The remaining fifty (50) percent of each KERP award will be earned upon the earlier of (i) entry of an order confirming a chapter 11 plan of liquidation in these cases or (ii) termination of a KERP Participant’s employment without cause. Each KERP Participant will be paid at the most practical payroll processing date following termination.
- Termination of Employment: If a participant’s employment is terminated by the Debtors without ‘cause’ or due to death or disability, any then unpaid pro rata portion of the KERP payment (based on the target end date) will be accelerated and paid. If a KERP Participant’s employment is terminated voluntarily or by the Debtors for cause, any KERP payment will be forfeited.
The Sale Process
Given the financial pressures on the Debtors’ operations and diminishing liquidity, the Debtors determined it was necessary to commence 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 [Docket No. 146], Tacit is providing the Debtors with post-petition debtor-in-possession financing (the "DIP Financing") to fund these chapter 11 cases, including a sale process (the "Sale Process") for substantially all of the Debtors’ assets. 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 a stalking horse bid (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.
Given the Debtors’ limited available liquidity and the market and regulatory challenges resulting from the COVID-19 pandemic, it is critical that the Sale Process be consummated on an expeditious timeline to avoid a value destructive liquidation of the Debtors’ business. Completion of the Sale Process on the contemplated timeline will also allow the Debtors to satisfy sale milestones in their DIP Financing facility. The sale timeline was specifically designed to balance the dual goals of (a) running a robust marketing process and (b) minimizing (to the extent possible) continued business deterioration resulting from COVID-19 related regulations and changing customer habits.
Retention of the Debtors most essential employees is a critical component to maximizing the value of the Debtors’ going concern business and ensuring an efficient and expeditious Sale Process. The commencement of these chapter 11 cases and the expeditious timeline of the Sale Process have placed unprecedented burdens on the Debtors’ remaining employees, who are already facing challenges operating the Debtors’ business during the COVID19 pandemic. Now, more than ever, the Debtors’ employees are navigating uncertain times as they balance the tension between maintaining the business as a going-concern while simultaneously managing the chapter 11 cases and Sale Process. Ultimately, the Debtors’ ability to maximize value (and all stakeholder recoveries) will depend entirely on the Debtors’ essential employees.
About the Debtors
According to the Debtors: “Town Sports International Holdings, Inc. (the ‘Company’ or ‘TSI’.), is a diversified holding company with subsidiaries engaged in a number of business and investment activities. The Company’s largest operating subsidiary, TSI, LLC, has been involved in the fitness industry since 1973 and has grown to become one of the largest owners and operators of fitness clubs in the Northeast region of the United States. TSI’s corporate structure provides flexibility to make investments across a broad spectrum of industries in order to create long-term value for shareholders. Town Sports International is led by it’s Chief Executive Officer and Chairman of the Board, Patrick Walsh.”
As of December 31, 2019, the Debtors owned and operated 186 fitness clubs and collectively served approximately 605,000 members.
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