CTI Foods – Court Approves Disclosure Statement and Confirms Joint Prepackaged Chapter 11 Plan, Debtors Set to Emerge $405mn Lighter in Coming Weeks

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April 18, 2019 – The Court hearing the CTI Foods cases confirmed the Debtors' Joint Prepackaged Chapter 11 Plan and Disclosure Statement [Docket No. 177].

On March 11, 2019, CTI Foods, LLC and its affiliated debtors, filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10497. In its Petition, CTI Foods, which produces custom food solutions to the foodservice industry, noted between 5,000 and 10,000 creditors; estimated assets between $500mn and $1bn; and estimated liabilities between $500mn and $1bn. 

In a press release announcing the Plan confirmation, the Debtors stated, “The Company expects to complete its restructuring and successfully emerge from Chapter 11 in the coming weeks. Upon emergence, the Company will reduce its debt by more than $400 million, providing significant financial flexibility to support continued investments on behalf of its customers."

Plan Overview

The Debtors' Memorandum of Law in support of the Plan's confirmation provided the following Plan summary: "Confirming the Plan, among other things, reduces the Debtors’ balance sheet liabilities from approximately $580 million to $175 million in funded debt, provides the Debtors with access to a new working capital facility to continue funding the Debtors’ business operations, and enables the Debtors to continue as a leading provider of value-added protein, soups, beans, and other food solutions to the most recognized chain restaurants in North America. 

Key components of the Plan include the following: 

  • each holder of an Allowed First Lien Term Loan Claim, will receive, on the Effective Date, or as soon as reasonably practicable thereafter, its Pro Rata Share of (i) 97% of shares of the New Common Shares, subject to dilution from the New Common Shares issued pursuant to each of the Management Incentive Plan and the Backstop Commitment Fee; and (ii) the Exit Last Out Term Loans; 
  • each holder of an Allowed Second Lien Term Loan Claim will receive, on the Effective Date, or as soon as reasonably practicable thereafter, a pro rata share of 3% of the New Common Shares,4 subject to dilution from New Common Shares issued pursuant to each of the Management Incentive Plan and the Backstop Commitment Fee; 
  • each holder of a claim arising under the existing Revolving Credit Agreement, dated as of June 28, 2013 (as amended, restated, amended and restated, supplemented, or otherwise modified from time to time, the “ABL Credit Agreement”), to the extent not Paid in Full prior to the Effective Date, will be Paid in Full5; 
  • the Debtors’ general unsecured creditors will receive payment of their claims in full in the ordinary course of business; and 
  • existing equity interests in Chef Holdings, Inc. (“Chef Holdings”) will be cancelled on the Effective Date. 

Plan Voting

On April 8, 2019, the Debtors' claims agent notified the Court of the results of Plan voting [Docket No. 155]. The two classes eligible to vote on the Plan each voted unanimously to accept the Plan which will see Class 3 and Class 4 get 97% (50.5% expected recovery) and 3% (2.8% expected recovery), respectively, of the emerged company's new common stock .

The voting results were as follows:

  • Class 3 (“First Lien Term Loan Claims”): 99 claim holders, representing $328.6mn (or 100%) in amount and 100% in number, voted to accept the Plan.
  • Class 4 (“Second Lien Term Loan Claims”): 46 claim holders, representing $124.1mn (or 100%) in amount and 100% in number voted to accept the Plan.

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):

  • Class 1 (“Other Priority Claims”) was unimpaired, deemed to accept and not entitled to vote on the Plan. The projected recovery is 100%.
  • Class 2 (“Other Secured Claims”) was unimpaired, deemed to accept and not entitled to vote on the Plan. The projected recovery is 100%.
  • Class 3 (“First Lien Term Loan Claims”) was impaired and entitled to vote on the Plan. Estimated Percentage Recovery: 50.5% (if Class 4 votes to accept the Prepackaged Plan). 51.6% (if Class 4 does not vote to accept the Prepackaged Plan). Each holder of an Allowed First Lien Term Loan Claim shall receive, in full and final satisfaction of such Claim, such holder’s Pro Rata share of (i) 97% of the New Common Shares issued on the Effective Date, plus an additional 3% of the New Common Shares issued on the Effective Date in the event that Class 4 does not vote to accept the Prepackaged Plan, each subject to dilution from the New Common Shares issued pursuant to each of the Management Incentive Plan and the Backstop Commitment Fee and (ii) the Exit Last Out Term Loan.
  • Class 4 (“Second Lien Term Loan Claims”) was impaired and entitled to vote on the Plan. Estimated Percentage Recovery: 2.8% (if Class 4 votes to accept the Prepackaged Plan). 0% (if Class 4 does not vote to accept the Prepackaged Plan). Each Allowed Second Lien Term Loan Claim shall receive, on the Effective Date, or as soon as reasonably practicable thereafter, in full and final satisfaction of such Claim, such holder’s Pro Rata share of 3% of the New Common Shares issued on the Effective Date, subject to dilution from the New Common Shares issued pursuant to each of the Management Incentive Plan and the Backstop Commitment Fee. In the event that Class 4 does not vote to accept the Prepackaged Plan, each holder of an Allowed Second Lien Term Loan Claim shall not receive or retain any distribution on account of such Claim.
  • Class 5 (“ABL Claims”) was unimpaired, deemed to accept and not entitled to vote on the Plan. The projected recovery is 100%.
  • Class 6 (“General Unsecured Claims”) was unimpaired, deemed to accept and not entitled to vote on the Plan. The projected recovery is 100%.
  • Class 7 (“Intercompany Claims”) was unimpaired, deemed to accept and not entitled to vote on the Plan. The projected recovery is 100%.
  • Class 8 (“Existing Holdings Interests”) was impaired, deemed to reject and not entitled to vote on the Plan. The projected recovery is 0%.
  • Class 9 (“Existing Profit Interests”) was impaired, deemed to reject and not entitled to vote on the Plan. The projected recovery is 0%.
  • Class 10 (“Intercompany Interests”) was unimpaired, deemed to accept and not entitled to vote on the Plan. The projected recovery is 100%.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Percy Declaration”), Kent Percy, the Company's Chief Restructuring Officer detailed the events leading to CTI Foods' Chapter 11 filing. The Percy Declaration noted, "While the Debtors’ business as a whole remains operationally sound, a number of market factors and other unexpected events have led to a decline in profitability and a liquidity shortfall for the Company.  Specifically…the Debtors have experienced increased competition, market softness with certain key customers, high upfront costs in connection with improving food safety and quality, a capital expenditure dispute,and large interest payments due under the First Lien Term Loan Agreement and Second Lien Term Loan Agreement.  Consequently, the Debtors have negotiated the Prepackaged Plan with their key creditor constituencies to de-lever their balance sheet and increase operational liquidity." 

The Percy Declaration provided the following further detail, "CTI’s recent profitability decline is attributable in part to an increase in the number of protein processors in competitive segments of the food manufacturing and food service industries, which led to losses in customer shares and a decrease in new business for the Company.  Simultaneously…the Company’s costs have increased over time.  The combination of increased competition and increased costs resulted in lower volumes and narrower profit margins.  The losses were particularly acute for taco meat production—historically one of CTI’s top three products by sales volume—with an approximately 43.1% decline in volume sold between 2016 and 2018.  While the issue was most severe for its taco meat production, the Company’s overall volume sold declined by approximately 13.6% over the same two-year period.

The Company has also been exposed to a number of unexpected operational costs. For example, CTI acquired Liguria in 2016 expecting to capitalize immediately on Liguria’s presence in a niche market of the protein processing industry, and to incorporate Liguria’s products into the menu of options available to CTI’s other customers.  Shortly after the acquisition, however, the Company discovered a number of issues at the Humboldt Facility that delayed CTI’s ability to take advantage of the Liguria acquisition and incorporate the Liguria business into the rest of the Company effectively.

Other segments of CTI’s business experienced a number of recent financial and operational setbacks as well.  For example, after expansion of its Owingsville Facility, the Company has been in the process of transitioning the production of certain meat products to the expanded Owingsville Facility.  The Company has come across a number of difficulties in effecting that expansion and transition, largely due to the more complex operational processes and products.  Additionally, several of the Company’s customer contracts provide that the Company bear the cost of freight.  Consequently, after a substantial uptick in freight costs, CTI incurred expenses that were significantly greater than anticipated.

The Company’s profitability also suffered from food quality incidents in 2017 and 2018.  Although the Company quickly identified and remedied the issues, those occurrences led to a loss of customer sales and to the incurrence of significant costs in remedying the situation and ensuring the integrity of products manufactured on a go-forward basis.  These costs, albeit temporary, have collectively had a material impact on the Company’s recent profitability levels.

CTI has also experienced diminished liquidity due to a capital recovery dispute with one of its customers.  Specifically, in connection with one of CTI’s product lines at the Owingsville Facility, the Company invested in certain specialized packaging equipment at the customer’s request.  CTI initially paid for the upfront costs of the equipment with the agreement that it would recover such costs through reimbursement payments during the life of the contract; however, the customer subsequently unilaterally stopped making the reimbursement payments.  As of the Petition Date, approximately $4.4 million in capital recovery expenses remain outstanding from the customer for the packaging equipment and CTI continues to evaluate potential resolutions.

Lastly, the immediate catalyst leading to the commencement of these chapter 11 cases is the approximately $9.25millioninterest payment on the First Lien Term Loan and Second Lien Term Loan that became due and owing on January 8, 2019.”

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