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July 7, 2021 – An ad hoc committee of preferred shareholders (the “Ad Hoc Committee”) has objected to the Debtors' proposed bidding procedures [Docket No. 237] arguing that they "are merely a device to attain the fait accompli contemplated by Restructuring Support Agreement’s (‘RSA’) of enabling a small group of four debt holders to wipe out existing equity while, at the same time, siphoning off the residual value of a company that appears likely to have been solvent as of the petition date and is positioned to benefit from a continuing broad economic recovery."
The Ad Hoc Committee urges the Court to (i) slow down the sale process ("nothing more than a self-created emergency dictated by the RSA") and (ii) "promote price discovery and combined bids on the assets individually, as groups (open air, enclosed mall, joint venture, and combinations thereof) as well as in a portfolio without the $2.3 billion cash hurdle." That cash hurdle, ie a minimum of $2.3bn of cash in any competing bid, is particularly irksome given that Plan Sponsor SVPGlobal is "deemed a ‘Qualified Bidder’ even though its ‘Qualified Bid’ pays no more than $325 million in cash and instead is primarily comprised of reinstating and assuming debts."
On June 13th Washington Prime Group Inc. and 88 affiliated Debtors (NYSE: WPG; “WPG” or the “Debtors”) filed for Chapter 11 protection noting estimated assets of $4,028,916,000 (as at March 31, 2021); and estimated liabilities of $3,470,908,000 (as at March 31, 2021 with reference to $3.872bn of funded debt at Petition date). At filing, the Debtors, already struggling with the "seismic shift in the retail landscape" away from brick-and-mortar retail stores to online alternatives, noted that COVID had brought "in-store customer activity to a grinding halt."
Also on June 13th, the Debtors announced that they had entered into a restructuring support agreement (the "RSA") with (i) Strategic Value Partners, LLC ("SVPGlobal" or the “Plan Sponsor”), (ii) the holders of at least 66.7% of the aggregate principal amount of the Unsecured Notes, (iii) the holders of 100% of the aggregate principal amount of the Weberstown Term Loan Facility Claims, and (iv) the holders of at least 71.5% of the aggregate principal amount of the Revolving and Term Loan Facilities claims.
The Debtors do not provide detail as to SVPGlobals' debt holdings or when that debt was acquired, noting that negotiations with SVP Global began in February 2021 after an effort at an out-of-court restructuring failed in December 2020 and the Debtors' decision to defer the payment of interest on unsecured notes. A Court filing notes: "Shortly thereafter, the Debtors began to negotiate the terms of a comprehensive restructuring transaction with a crossover holder of their corporate-level bank debt and unsecured notes, SVPGlobal ('SVP')."
Bidding Procedures Motion
On June 14th, the Debtors filed a motion requesting approval of a bidding procedures order [Docket No. 27], which would (i) establish bidding procedures for a sale of substantially all of Debtors assets (the “Sale”) and (ii) culminate in an August 6th auction.
The bidding procedures motion noted that the Debtors’ Plan would be based on two potential paths to restructuring, an equitization restructuring or an “alternative value-maximizing restructuring,” via a sale if bids are received “that may exceed the value provided by the Equitization Restructuring.”
Ad Hoc Committee Objection
The objection reads: “Approval of the Bidding Procedures in the form proposed at this stage is unnecessary and prejudicial. The Bidding Procedures provide no meaningful protection or enhancement to the Debtors’ businesses or any stakeholder recoveries in these cases. Instead, they are merely a device to attain the fait accompli contemplated by Restructuring Support Agreement’s (‘RSA’) of enabling a small group of four debt holders to wipe out existing equity while, at the same time, siphoning off the residual value of a company that appears likely to have been solvent as of the petition date and is positioned to benefit from a continuing broad economic recovery. As set forth below, the proposed Bidding Procedures provide for an inadequate time period to market the Debtors’ wide ranging portfolio of assets, provide unfair advantages to the putative acquirer SVP Global (‘SVP’ or the ‘Plan Sponsor’), unnecessarily and unfairly constrain the bidding process to a very narrow, and likely unachievable, definition of what is an ‘Acceptable Bid’, and thus will not maximize value. It is imperative that the Debtors do not embark upon a value destructive sale process and capitulate to one bidder at the expense of the estate and public equity holders. Only with additional time for a full and fair bidding process, and a broader definition of Acceptable Bids to permit for alternative value-maximizing proposals, will the bidding process provide maximum value to be attained for the stakeholders and provide a measure of fair market value. The manner in which the current bidding process is structured ensures that the results achieved will not be a true indication of the fair market value of the Debtors’ assets or enterprise.
…As explained below, the proposed bidding rules do not allow the estate to obtain maximum value as the Bidding Procedures have been sharply crafted to require only one primary formulation of a bid: at least $2.3 billion in cash. However, the Plan Sponsor is deemed a ‘Qualified Bidder’ even though its ‘Qualified Bid’ pays no more than $325 million in cash and instead is primarily comprised of reinstating and assuming debts. As a result, the ‘go shop’ process and proposed bidding rules are inherently unfair, skewed in favor of one bidder, and fundamentally flawed. Further, the proposed aggregate $40 million to equity holders in ‘death trap’ plan consideration is highly coercive, and a significant discount to the recent valuation of the Company’s equity securities as of the Petition Date. On June 14, 2021, the market value of the Debtors’ equity securities was approximately $115 million: preferred equity was approximately $32 million and the market value of the common equity was approximately $83 million. The Debtors allege that this case requires an expedited timeline but that contention is false, and is nothing more than a self-created emergency dictated by the RSA. The narrative of emergency and the need for speed, while often true in chapter 11 cases, is not true in this case and rests on four central fallacies:
First, unlike many cases, this case does not present the often seen ‘melting ice cube’ problem. In fact, the Debtors’ business has become stronger, not weaker, with the pandemic in the rear view mirror and the economy rebounding strongly. Retail stores, many closed or under operating restrictions for extended periods, are now open. Shoppers, once under lockdowns, have returned to malls and shopping centers. Foot traffic is up. Consumer confidence has returned and is on the rise. Here, the DIP Budget reveals that the company has positive operating cash flow and a recently publicly filed June 2021 Creditor Presentation forecasts Funds from Operations of over $110 million for fiscal year 2021…Second, isthe fallacy that the time should be accelerated because SVP and similarly situated noteholders have magnanimously offered to ‘eliminate’ their debts for the benefit of the estate. While this may often be a benefit in ‘underwater’ cases, in this case, the plan seeks to ‘eliminate’ debt yet replace it with a far more valuable asset: substantially all of the equity in the reorganized company. Of course, this is not allowed under basic notions of fairness or the core tenets of the Bankruptcy Code…Third, and relatedly, is the issue of valuation. As set forth in the first day declaration in this case, the Debtors’ CFO admitted that the Debtors have ‘grappled with an appropriate valuation for the Debtors’ enterprise.’… This admission is both commendable and understandable. As the Debtors’ Disclosure Statement acknowledges (see above), stores are re-opening, tenant rents now able to be paid, and a turbo charged ‘reopening’ economy evidence a valuation that is growing not declining. Based on several metrics (book value, public value of the equity securities, and general reopening economic trends) the Debtors appear likely have been solvent as of the Petition Date, beyond the range of $0.00–$40 million in ‘only if you vote yes’ value being offered to equity holders in the coercive ‘death trap’ structure of the proposed chapter 11 plan. As a result, rather than artificially truncate the marketing process and deprive the estate of value, a longer process and more level playing field will help eliminate uncertainty imposed by competing views of valuation that will continue to exist in this case, beyond the bid deadline and auction date. While valuation will be the central issue in this case and a contested valuation will require expert testimony, the following facts cannot be disputed. First, prior to the onset of the COVID-19 pandemic, as of November 29, 2019, the aggregate market value of the Debtors’ equity was approximately $945 million, comprised of approximately $169 million in preferred equity value and approximately $776 million of common equity value. Second, the Debtors’ March 31, 2021 balance sheets filed on SEC Form 10-Q evidence total assets of $4,028,916 and total liabilities and redeemable noncontrolling interests of $3,470,908, and ‘total equity’ of $554,683,000. Third, the Debtors’ equity on the New York Stock Exchange has been recently priced at values far in excess of the ‘plan value’ of the very same equity. Finally, is the fallacy of ‘extensive’ pre-petition negotiations that resulted in the RSA. While extensive negotiations no doubt occurred, notably absent from those discussions were equity holders. Thus, the ‘hard fought’ negotiations were missing the very parties whose interests were being extinguished. Moreover, despite the Debtors’ assertion that there was ‘substantial time and effort’ spent on prepetition marketing, it does not appear that there were, in fact, any such extensive marketing efforts.’”
The objection continues, “…The $2.3 billion (plus) minimum cash bid effectively forces an enterprise purchase when that may not be the best way to maximize value. The Bidding Procedures should be structured in ways that allow adequate time to promote price discovery and combined bids on the assets individually, as groups (open air, enclosed mall, joint venture, and combinations thereof) as well as in a portfolio without the $2.3 billion cash hurdle. Similarly, other value maximizing alternatives may include alternative debt financing or refinancing structures as well other creative options which are not contemplated by the Bidding Procedures. Simply said, the current procedures and timeline would effectively shut the door on all of these options.”
The Disclosure Statement [Docket No. 162] reads: “After extensive hard-fought, arm’s-length negotiations, the Debtors and Consenting Stakeholders entered into a restructuring support agreement on June 11, 2021, (as may be further amended, supplemented, or modified from time to time, the ‘Restructuring Support Agreement’), attached hereto as Exhibit C, prior to filing voluntary petitions under chapter 11 of title 11 of the United States Code (the ‘Bankruptcy Code’) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the ‘Bankruptcy Court’). The Consenting Stakeholders are Holders of at least 74.5% of the aggregate principal amount of the 2018 Credit Facility Claims, Holders of at least 62% of the aggregate principal amount of the 2015 Credit Facility Claims, Holders of 100% of the aggregate principal amount of the Weberstown Term Loan Facility Claims, and Holders of at least 66.67% of the aggregate principal amount of the Unsecured Notes Claims.
The Restructuring Support Agreement provides for two paths toward a consensual resolution of these chapter 11 cases, each of which is encompassed in the Plan. The first path is the Equitization Restructuring, which is a comprehensive restructuring pursuant to which the equity of Reorganized WPG will be issued to existing shareholders, Unsecured Noteholders (on account of their Claims), and Unsecured Noteholders, and Backstop Parties that participate in an Equity Rights Offering. The Equitization Restructuring is anchored by the Plan Sponsor’s [the "Plan Sponsor" is Strategic Value Partners, LLC and its affiliated funds (or "SVP"), in their capacity as holders of 2015 Credit Facility Claims, 2018 Credit Facility Claims, Weberstown Facility Claims, and Unsecured Notes Claims] commitment to equitize its Unsecured Notes Claims and backstop a $325 million rights offering, and the agreement of both the Plan Sponsor and Ad Hoc Lender Group to accept takeback paper in satisfaction of the bulk of the credit facilities claims.
In addition, a key component of the Restructuring Support Agreement and Plan is a ‘toggle’ feature, allowing the Debtors to seek an alternative value-maximizing transaction that would repay, in full in Cash, all of the Company’s corporate-level debt. Specifically, the Debtors will use the 60 days following the Petition Date to solicit proposals for such an alternative transaction, continuing the comprehensive marketing process that began prepetition. If such a proposal is received, and it provides a distribution to the Debtors’ Existing Equity Interests in excess of what is provided for under the Equitization Restructuring, the Debtors are able to toggle to, and then effectuate, the Toggle Restructuring. Notably, to ensure a robust marketing process on the timeline proposed in the Bidding Procedures Motion, the Debtors, with the assistance of their proposed investment backer, Guggenheim Securities, LLC (‘Guggenheim Securities’), and their other advisors, have conducted outreach to a broad group of relevant strategic and financial parties and have been in discussions with several potentially interested parties for nearly one month.”
The Disclosure Statement adds: “
The Equitization Restructuring
The Equitization Restructuring contemplates (1) a full equitization of the Unsecured Notes in exchange for the majority of the equity in Reorganized WPG, (2) an Equity Rights Offering available to Holders of the Unsecured Notes to pay down the DIP Facility and fund emergence costs, (3) a partial paydown of the 2018 Credit Facility Claims, 2015 Credit Facility Claims, and Weberstown Term Loan Facility Claims, with the remainder of these Claims satisfied through takeback secured debt on terms acceptable to the Consenting Stakeholders, (4) unimpaired treatment for Holders of General Unsecured Claims, and (5) a recovery in the form of Cash or New Common Equity for Holders of Existing Preferred Equity Interests and Existing Common Equity Interests.
As part of the Equitization Restructuring, the Debtors will conduct an Equity Rights Offering to raise up to $325 million in cash. Eligible Holders of Unsecured Notes Claims are entitled to purchase their Pro Rata share of 50% of the Equity Rights at 32.5% discount to Set-Up Equity Value of $800 million. Proceeds from the Equity Rights Offering will be utilized to satisfy the DIP Facility Claims in Cash in full, fund emergence costs, and fund the cash payments to Holders of Allowed Existing Equity Interests. If the maximum amount of $325 million is raised, the New Common Equity issued pursuant to the Equity Rights Offering will represent 60.2% of the New Common Equity on the Effective Date, subject to dilution by the Management Incentive Plan. The Plan Sponsor and its related funds have agreed to backstop 100% of the Equity Rights Offering.
The Equitization Restructuring is intended to shed approximately $950 million in secured and unsecured funded debt and provides a meaningful recovery for equity holders. The Plan treatment for each Class of Claims and Interests in an Equitization Restructuring is as follows:
- Revolving and Term Loan Facility Claims. Each Holder of Revolving and Term Loan Facilities Claims shall receive in an Equitization Restructuring its Pro Rata share of (i) $1,187 million, plus the Elective Exit Loan Amount attributable to the Revolving and Term Loan Facilities Claims, if any, in principal amount of loans under the New Term Loan Exit Facility, and (ii) the Revolving and Term Loan Facilities Cash Pool (i.e., $150 million plus Cash in the amount of certain additional accrued and unpaid amounts specified in the Plan);
- Weberstown Term Loan Facility Claims. Each Holder of Weberstown Term Loan Facility Claims shall receive in the Equitization Restructuring its Pro Rata share of (i) $25 million, plus the Elective Exit Loan Amount attributable to the Weberstown Term Loan Facility Claims, if any, in principal amount of loans under the New Term Loan Exit Facility and (ii) the Weberstown Cash Pool (i.e., $40 million plus Cash in the amount of certain additional accrued and unpaid amounts specified in the Plan);
- Unsecured Notes Claims. Each Holder of Unsecured Notes Claims shall receive if the Equitization Restructuring occurs its Pro Rata share of (i) 100% of the New Common Equity, less any New Common Equity distributed to Holders of Existing Equity Interests pursuant to the Equity Options and subject to dilution on account of the Management Incentive Plan, Backstop Equity Premium, and the Equity Rights Offering and (ii) the Unsecured Noteholder Rights (i.e., the right to purchase their Pro Rata share of 50% of the New Common Equity offered in the Equity Rights Offering, as specified in the Plan);
- Property-Level Mortgage Guarantee Claims: Each Holder of Property-Level Mortgage Guarantee Claims shall receive, at the option of the applicable Debtor(s) (i) Reinstatement, or (ii) such other treatment reasonably acceptable to the Plan Sponsor rendering such PropertyLevel Mortgage Guarantee Claim Unimpaired in accordance with section 1124 of the Bankruptcy Code;
- General Unsecured Claims. Each Holder of General Unsecured Claims shall receive, at the option of the applicable Debtor, (i) payment in full in Cash, (ii) Reinstatement, or (iii) such other treatment reasonably acceptable to the Plan Sponsor rendering such General Unsecured Claim Unimpaired in accordance with section 1124 of the Bankruptcy Code;
- Existing Preferred Equity Interests. Each Holder of Existing Preferred Equity Interests shall receive (i) if Class 10 votes in favor of the Plan, such Holder’s Pro Rata share of the (A) Preferred Equity Cash Pool (i.e., $40 million or $20 million if Class 11 votes to accept the Plan) or (B) if such Holder is an Eligible Election Participant, and such Holder elects the Preferred Equity Option, such Holder’s Pro Rata share of the Preferred Equity Equity Pool in lieu of the distribution pursuant to the Preferred Equity Cash Pool11; or (ii) if Class 10 votes to reject the Plan, each Holder of Existing Preferred Equity Interests shall not receive any distribution on account of such Interests, which will be canceled, released, and extinguished as of the Effective Date, and will be of no further force or effect; and
- Existing Common Equity Interests. Each Holder of Existing Common Equity Interests shall receive in an Equitization Restructuring (i) if Holders of Existing Preferred Equity Interests and Existing Common Equity Interests in their respective Classes both vote in favor of the Plan, such Holder’s Pro Rata share of the (A) Common Equity Cash Pool (i.e., $20 million) or (B) if such Holder is an Eligible Election Participant, and such Holder elects the Common Equity Option, such Holder’s Pro Rata share of the Common Equity Equity Pool in lieu of the distribution pursuant to the Common Equity Cash Pool12; or (ii) if Holders of Existing Preferred Equity Interests and Existing Common Equity Interests in their respective Classes, vote to reject the Plan, Holders of Existing Common Equity Interests shall not receive any distribution on account of such Interests, which will be canceled, released, and extinguished as of the Effective Date, and will be of no further force or effect.
The Toggle Restructuring
Pursuant to the Restructuring Support Agreement, Plan, and Bidding Procedures (as defined in the Bidding Procedures Motion), the Debtors are continuing their prepetition marketing process to determine whether a higher offer or combination of offers for either the Debtors’ assets or a valuemaximizing plan sponsor recapitalization proposal is available. Because the Debtors’ process is ongoing, the form and structure of the transaction underlying the Toggle Restructuring is currently unknown. The only condition to electing the Toggle Restructuring, however, is known—an Acceptable Alternative Restructuring Proposal must be received. An Acceptable Alternative Restructuring Proposal must provide for payment in full in Cash of the DIP Facility and all senior debt (including pre- and postpetition default base rate interest) claims, Administrative Claims (including professional fees of Debtor advisors and advisors to the Plan Sponsor and the Ad Hoc Lender Group), the DIP Facility, General Unsecured Claims, and the Backstop Base Premium, plus a recovery for the Debtors’ Existing Equity Interests in excess of what is provided for under the Equitization Restructuring. This is the case regardless of whether Holders of Claims or Interests vote to reject the Plan, as such Holders will be entitled to the Toggle Restructuring Distributable Proceeds in the order of priority under the Bankruptcy Code. Therefore, stakeholders only stand to see their recoveries improve or maintain if a Toggle Restructuring is implemented.
On the Petition Date, the Debtors filed the Bidding Procedures Motion to approve the Bidding Procedures to use as part of the postpetition marketing process to obtain an Acceptable Alternative Restructuring Proposal. The Debtors were actively engaged in discussions and diligence efforts with certain strategic and financial third parties prior to the Petition Date. That process will continue postpetition pursuant to the bidding process, as the Debtors, with the assistance of their advisors, are engaging with parties to determine whether a value-maximizing Toggle Restructuring option exists. The Bidding Procedures formalize the marketing timeline, requiring formal bids on or before August 4, 2021, at 4:00 p.m., prevailing Central Time. If necessary, the Debtors will hold an auction on August 6, 2021, at 9:00 a.m., prevailing Central Time.
If the Debtors secure a committed and binding offer before August 12, 2021, i.e., the Confirmation Order Milestone (as defined in the Restructuring Support Agreement), and deliver a Toggle Election Notice to the Plan Sponsor, the Debtors will have until August 26, 2021, to confirm the Plan implementing such Acceptable Alternative Restructuring Proposal through the Toggle Restructuring and then, no later than fifteen (15) days after entry of a Confirmation Order, the Effective Date of the Plan must occur. The Plan Sponsor will be entitled to a $27.5 million Backstop Base Premium (subject to the Bankruptcy Court’s approval) if the Toggle Restructuring is effectuated unless the Plan Sponsor is in breach of the Restructuring Support Agreement. The Debtors believe that this dual-track path towards a holistic restructuring allows the Debtors to maximize value for the estates.”
About the Debtors
According to the Debtors: "Washington Prime Group Inc. is a retail REIT and a recognized leader in the ownership, management, acquisition and development of retail properties. The Company combines a national real estate portfolio with its expertise across the entire shopping center sector to increase cash flow through rigorous management of assets and provide new opportunities to retailers looking for growth throughout the U.S."
The Yale Declaration adds: “WPG is a recognized market leader in the ownership, development, and management of retail real estate across the United States, including enclosed and open air retail properties. WPG’s property portfolio consists of material interests in 102 shopping centers in the United States totaling approximately 52 million square feet of gross leasable area. Retail space at WPG’s shopping centers are leased to a variety of tenants across the retail spectrum, including anchor stores, big-box tenants, national inline tenants, sit-down restaurants, movie theaters, and regional and local retailers.
According to SVP Global: "SVPGlobal is a global investment firm focused on distressed debt, special situations and private equity opportunities with more than $15 billion in assets under management. The firm, established by Victor Khosla in 2001, has 127 employees, including 49 investment professionals, across its main offices in Greenwich (CT), London and Tokyo."
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