UTEX Industries, Inc. – Court Confirms Prepackaged Plan; Debtors Set to Shed $588mn of Funded Debt and Emerge 96% Owned by First Lien Lenders

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October 28, 2020 – The Court hearing the UTEX Industries cases has confirmed the Debtors’ Prepackaged Chapter 11 Plan [Docket No. 172].

On October 8, 2020, UTEX Industries, Inc. and eleven affiliated Debtors (“UTEX” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-34932. At filing, the Debtors, who design and manufacture engineered seals and components, noted estimated assets between $100.0mn and $500.0mn and estimated liabilities between $500.0mn and $1.0bn.

Plan Overview

The Debtors' memorandum of law in support of Plan confirmation [Docket No. 143] provided the following pre-confirmation hearing summary of the Debtors' Prepackaged Plan: "The Prepackaged Plan provides for a comprehensive, value-maximizing restructuring that has been unanimously accepted by each Class of Claims entitled to vote and is also supported by Riverstone Gamma Holdings, LP, (the ‘Consenting Investor’) and the entity that owns 100% of the equity interests in RSH UTEX Holdings LLC, the ‘TopCo’ Debtor here.

The Prepackaged Plan’s benefits are practically self-evident: the Prepackaged Plan will:

(i) pay holders of General Unsecured Claims in full, 

(ii) provide lenders under the First Lien Credit Agreement with their pro rata share of 96% of the New Equity Interests, subject to dilution from the Management Incentive Prepackaged Plan and the New Warrants, 

(iii) provide lenders under the Second Lien Credit Agreement with their pro rata share of (a) 4% of the New Equity Interests, subject to dilution from the Management Incentive Prepackaged Plan, and (b) the New Warrants, and 

(iv) provide the Consenting Investor with a one-time payment in the amount of $7,500,000 and the right to receive additional cash proceeds pursuant to the Eligible Tax Refund Waterfall. 

Additionally, the de-leveraging transactions contemplated by the Prepackaged Plan will reduce the Debtors’ balance sheet liabilities from approximately $763 million in funded debt to approximately $75 million in funded debt, which will greatly enhance the Reorganized Debtors’ long-term growth prospects and competitive position.

The Disclosure Statement adds: "The Debtors’ balance sheet liabilities will be reduced from approximately $763 million in funded debt to approximately $75 million in funded debt, which represents an approximate 90% reduction of debt on the Effective Date relative to the Petition Date. This deleveraging will enhance the Debtors’ long-term growth prospects and competitive position and will provide the Debtors with adequate capital to invest in and grow their business….The material terms of the Prepackaged Plan include the following:

  •  All existing commitments under the First Lien Credit Agreement will be terminated, and each holder of a First Lien Credit Agreement Claim will receive its pro rata share of (i) the new equity interests of Reorganized UTEX Parent (the 'New Equity Interests') representing, in the aggregate, 96% of the New Equity Interests issued pursuant to the Prepackaged Plan on the Effective Date, subject to dilution from New Equity Interests issued pursuant to the Management Incentive Plan and the New Warrants, and (ii) the Exit Term Loan Second Out Loans.
  • All existing commitments under the Second Lien Credit Agreement will be terminated, and each holder of a Second Lien Credit Agreement Claim will receive its pro rata share of (i) the New Equity Interests representing, in the aggregate, 4% of the New Equity Interests issued pursuant to the Prepackaged Plan on the Effective Date, subject to dilution from New Equity Interests issued pursuant to the Management Incentive Plan and the New Warrants, and (ii) the New Warrants.
  • Holders of General Unsecured Claims are unimpaired by the Prepackaged Plan and will receive payment of their claims, in full, in the ordinary course of business.
  •  All Existing Equity Interests shall be cancelled and will be of no further force and effect.
  • On the Effective Date, as an inducement to agreeing to facilitate the Prepackaged Plan, the Consenting Investor will receive (i) the Consenting Investor Payment ($7,500,000) from Debtor UTEX Industries and (ii) the right to receive cash proceeds pursuant to the Eligible Tax Refund Waterfall, as set forth in Section 5.17 of the Prepackaged Plan.

In addition to supporting the Prepackaged Plan, certain Consenting Creditors (in such capacity, the 'DIP Lenders') have committed to provide the Debtors with (i) debtor-in-possession financing pursuant to a term loan facility in an aggregate principal amount of up to $25.0mn (the 'DIP Facility,' and the Debtors’ obligations thereunder, the 'DIP Obligations') and (ii), on the Effective Date, $7.5mn to $17.5mn of new money first lien first out term loans (the 'New Money Exit Term Loan B')."

In an October 6th press release announcing entry into a restructuring support agreement, the Debtors advised that UTEX: “has entered into a restructuring support agreement (the 'Agreement') with the vast majority of its lenders on the terms of a comprehensive prepackaged restructuring. The balance sheet transaction will reduce UTEX's funded debt by approximately $700 million and will provide UTEX with up to $42.5 million in new financing. UTEX expects to complete this process and consummate its prepackaged restructuring in a matter of weeks."

The Debtors' Chief Executive Officer, Mike Balas, commented further: "After an extensive analysis of strategic and financial options for the Company, and after months of negotiations, we are very pleased to have reached an agreement for a consensual restructuring with our secured lenders and other stakeholders. We believe that the restructuring contemplated by the Agreement will provide us with the capital structure and liquidity to compete and grow in today's business environment."

The release continued: "UTEX's prepackaged plan is supported by over 81.6% and 90.4% of UTEX first and second lien lenders, respectively.  UTEX's lenders have also agreed to provide UTEX with debtor-in-possession financing and the consensual use of cash collateral to enable UTEX to operate its business in the ordinary course. UTEX's prepackaged plan provides that all general unsecured creditors, including UTEX's vendors and business partners, will remain unimpaired and will be paid in full in the ordinary course of business."

The following is summary of classes, claims, voting rights and expected recoveries (Defined terms are as in the Disclosure Statement):

  • Class 1 (“Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $2.0mn and expected recovery is 100%.
  • Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $500k and expected recovery is 100%.
  • Class 3 (“First Lien Credit Agreement Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $563.0mn and expected recovery is 27%. Each Holder shall receive its Pro Rata share of (i) 96% of the New Equity Interests issued pursuant to the Prepackaged Plan on the Effective Date, subject to dilution by the New Equity Interests issued pursuant to the Management Incentive Plan and the New Warrants, and (ii) the Exit Term Loan Second Out Loans. 
  • Class 4 (“Second Lien Credit Agreement Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $200.0mn and expected recovery is 3%. Each holder of an Allowed Second Lien Credit Agreement Claim will receive, on the Effective Date, its Pro Rata share of (i) 4% of the New Equity Interests issued pursuant to the Prepackaged Plan on the Effective Date, subject to dilution by the New Equity Interests issued pursuant to the Management Incentive Plan and the New Warrants and (ii) the New Warrants.
  • Class 5 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $11.0mn and expected recovery is 100%. The legal, equitable and contractual rights of the holders of General Unsecured Claims are unaltered by the Prepackaged Plan. Except to the extent that a holder of an Allowed General Unsecured Claim agrees to different treatment, the Debtors shall continue to pay or dispute each General Unsecured Claim in the ordinary course of business as if the Chapter 11 Cases had never been commenced. .
  • Class 6 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $35.0mn and expected recovery is N/A.
  • Class 7 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
  • Class 8 (“Existing Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of interests is N/A and expected recovery is N/A. Holders of Existing Interests in Class 8 shall receive no distribution.

Voting Results

On October 20, 2020, the Debtors' claims agent notified the Court of Plan voting results [Docket No. 139], which were as follows:

  • Class 3 (“First Lien Credit Agreement Claims”): 124 claim holders, representing $543,070,638.84 (100%) in amount and 100% in number, voted in favor of the Plan.
  • Class 4 (“Second Lien Credit Agreement Claims”): 59 claim holders, representing $190,941,435.06) (100%) in amount and 100% in number, voted in favor of the Plan.

Events Leading to the Chapter 11 Filing

In the Disclosure Statement, the Debtors detailed the events leading to their Chapter 11 filing. The Disclosure Statement provides: "Although the Debtors’ business is operationally sound, the Debtors have substantial long-term funded debt that they must restructure. Through these chapter 11 cases, the Debtors will have the opportunity to address their substantial indebtedness while raising additional capital to fund their operations and emerge as a stronger enterprise. 

Over the last 18 months, the Debtors have taken several steps to try to address its capital structure. In early 2019, the Debtors explored alternatives to partner and/or merge with other companies in its industry. The Debtors also explored and made arrangements for an initial public offering (“IPO”) of the Debtors’ equity interests as a means to raise additional liquidity. Additionally, the Debtors undertook a process to solicit interest from potential purchasers in parallel with a potential IPO (the “Prepetition Marketing Process”) beginning in the fourth quarter of 2019. The Debtors ultimately did not receive any actionable bids in an amount that would exceed the amount of the Debtors' obligations under the First Lien Credit Agreement in connection with the Prepetition Marketing Process or otherwise. During this time, the Debtors’ operations were dramatically impacted by the continued challenges facing the global energy sector, together with the ongoing COVID-19 pandemic. In early 2020, with an impending May 22, 2020 maturity date for the Debtors’ RCF Loans, market conditions necessitated that the Debtors’ reduce their fiscal year 2020 revenue projections by over 50%. In light of the reduced projections, uncertainty in the Debtors’ end markets caused by the COVID-19 pandemic and the May 22, 2020 maturity for the RCF Loans, it became clear that the Debtors were in need of a comprehensive balance sheet restructuring.

In the midst of the tumultuous market and with a continued need to deleverage its balance sheet, the Debtors shifted their strategic goal to a comprehensive restructuring transaction. Through cost reduction initiatives, business optimization and general efficiencies, the Debtors significantly reduced its cash operating cost structure while simultaneously reviewing the best path forward to implement a full restructuring. With their advisors’ assistance, the Debtors began to engage with major stakeholders to develop alternatives in light of, among other thing, their maturity profile. In April 2020, the 12 Debtors entered into non-disclosure arrangements with advisors to (i) an ad hoc committee of first lien lenders (the “Ad Hoc Committee”), (ii) the largest holder of Second Lien Loans and (iii) the First Lien Administrative Agent. The Debtors also established a data room to facilitate providing diligence to the groups and advisors who executed non-disclosure agreements, held a number of diligence calls with management and participated in a number of meetings to discuss potential restructuring transactions. Further, the Debtors appointed two independent directors to the Board of Directors of UTEX Holding (the “Board”): Mr. Steven G. Panagos and Ms. Jill Frizzley…The Board then formed the a special committee, composed solely of Mr. Panagos and Ms. Frizzley (the “Special Committee”). The Special Committee was delegated the authority to review, evaluate and approve all matters as they relate to negotiations around the restructuring process. Over the past several months, the Special Committee participated on weekly calls with the Debtors’ advisors, reviewed and approved drafts of the Restructuring Support Agreement, the Prepackaged Plan, this Disclosure Statement and related documents and made all final decisions in furtherance of the restructuring transaction, among other things. In addition, working with the assistance of Weil, the Special Committee conducted an investigation into any claims the Debtors or their estates may have against the Consenting Investor or its affiliates. After months of arms-length negotiations overseen by the Special Committee, these efforts culminated in the transactions contemplated by the Prepackaged Plan and the Debtors' entry into the Restructuring Support Agreement with the Consenting Support Parties." 

Prepetition Indebtedness

As of the Petition date, the Debtors have outstanding funded debt obligations in the aggregate amount of approximately $763.0mn, which amount consists of (i) approximately $563.0mn of Prepetition First Lien Loans and (ii) approximately $200.0mn of Prepetition Second Lien Loans.

The Prepetition First Lien Loans are comprised of (a) approximately $513.0mn in term loans and (b) approximately $50.0mn in revolving loans. Obligations under the First Lien Credit Agreement are secured by a first priority lien on substantially all of the Debtors’ assets.

Key Documents

The Disclosure Statement attached the following Exhibits:

  • Exhibit A: Prepackaged Plan (Files Separately at [Docket No. 20])
  • Exhibit B: Financial Projections 
  • Exhibit C: Liquidation Analysis 
  • Exhibit D: Valuation Analysis

On October 8th, the Debtors filed a Plan Supplement [Docket No. 32] to their Prepackaged Plan and attached the following documents:

  • Exhibit A: New Board Disclosure
  • Exhibit B: Schedule of Retained Causes of Action
  • Exhibit C: Description of Transaction Steps
  • Exhibit D: LLC Agreement for Reorganized UTEX Parent
  • Exhibit E: Exit Term Loan Credit Agreement
  • Exhibit F: New Warrant Agreement

Liquidation Analysis (see Exhibit C of Disclosure Statement [Docket No. 21] for notes)

About the Debtors

According to the Debtors: “UTEX is a market-leading manufacturing business headquartered in Houston, Texas. UTEX operates manufacturing, distribution and technical sales facilities in the United States and abroad and has approximately 500 employees. UTEX's innovative, custom-engineered, Best-in-Class solutions support a diverse customer base in the oil & gas, industrial, mining and water end markets."

Corporate Structure

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