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April 22, 2019 − Fuse, LLC and eight affiliated Debtors (“Fuse” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10872. The Company, a cross-platform entertainment media brand for multicultural youth, is represented by James E. O'Neill of Pachulski, Stang, Ziehl & Jones LLC. Further board-authorized engagements include (i) FTI Consulting as financial advisor and (ii) KCC as claims agent.
The Company’s petition notes between 200 and 1,000 creditors; estimated assets between $100mn and $500mn; and estimated liabilities between $100mn and $500mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Showtime Networks Domestic ($600k, acquired programming), (ii) Buena Vista Television ($402k, acquired programming) and (iii) Universal City Studios ($387k, acquired programming).
In a press release announcing the filing, Fuse advised that “The proposed Plan of Reorganization ('the Plan'), which…already has the support of over 80%, in principal amount, of the Company’s noteholders, would allow Fuse to reduce its secured debt by approximately $200 million while also significantly reducing the related interest expense.The Company expects to complete this process and emerge from Chapter 11 protection during the second quarter of 2019.”
Fuse Media CFO and interim CEO Mike Roggero added, “Unlike many other companies in our industry, Fuse has been experiencing growth across platforms, but we have been unable to realize the full benefits of this progress because of the significant amount of debt on our balance sheet. The Chapter 11 process provides a proven framework to efficiently address these challenges in order to position our business for long-term success. It is a logical next step toward ensuring that we are able to provide entertainment content to a traditionally underserved audience for many years to come.”
Overview of Plan
The Disclosure Statement provides the following overview of the Plan and its restructuring goals: "After months of active and arm’s-length negotiations, the Company, in consultation with its advisors, reached agreement on the terms of the Plan with the Supporting Noteholders, representing a substantial majority by principal amount of the Holders of Senior Secured Notes Claims….Because Holders of Senior Secured Notes Claims are the only impaired creditor Class not deemed to reject under the Plan, only such Holders are entitled to vote on the Plan….Through confirmation of the Plan, the Company will restructure and substantially deleverage its balance sheet; reduce its cash interest expense to a level that is aligned with its expected future cash flows; and retain additional flexibility to maximize enterprise value on a going forward basis. With respect to the Debtors’ Litigation Claims, a new Fuse Litigation Trust will be created in order to evaluate and pursue any viable Litigation Claims of the Estates.
The Debtors expect that the Plan will have the support of Holders of approximately 82.5% in principal amount of the Senior Secured Notes. Under the Plan, the Senior Secured Notes will be exchanged for (a) Cash in the Debtors’ accounts, except for Cash needed in the Reorganized Debtors’ operations as mutually agreed upon by the Debtors and the Supporting Noteholders, (b) the New Secured Debt consisting of the $45 million term loan facility, (c) 100% of the New Membership Interests of Reorganized Parent, and (d) 100% of the Litigation Trust Interests in the Fuse Litigation Trust. Allowed Other Secured Debt Claims either will be reinstated or paid in full under the Plan, or will receive the Collateral securing such claims….Because the Debtors have pledged substantially all of their assets that have any material value as Collateral to secure the Senior Secured Notes Claims and no unencumbered assets in the Estates have any material value (taking into account the deficiency claims arising under the Senior Secured Notes and the Administrative Expense Claims that the Holders of the Senior Secured Notes are expected to assert for the diminution in the value of their Collateral during the Chapter 11 Cases), the Holders of Class 4 General Unsecured Claims will receive no distributions under the Plan. Equity Interests in the Debtors will be extinguished. However, such Equity Interests shall be reinstated upon the Effective Date and deemed issued to and held by Reorganized Parent, directly or indirectly as applicable, as such Equity Interests were held prior to the Effective Date (except for the Equity Interests of Fuse, LLC, which shall be held directly by the Reorganized Parent).
Events Leading to the Chapter 11 Filing
The Disclosure Statement outlines the events leading up to the Chapter 11 filing, citing the inter-related, circular impact of (i) declining revenues in a changing media marketplace as subscribers “cut” and “shave” their cords (a revenue decline which made debt refinancing impossible) and (ii) the lack of capital necessary to compete in that evolving marketplace. In a reflection of Fuse's inability to compete effectively, in recent months two major distributors (Comcast and Verizon Fios) have cancelled their distribution of the Fusenetwork and a further key distributor (DirectTV) clearly wants out as well.
The Disclosure Statement provides the following detail: “Two intervening and inter-related factors have contributed to the Company’s commencement of the current bankruptcy proceeding. First, there have been rapid changes in the media marketplace adversely affecting the pay-tv television industry, which in turn adversely affected the Company’s revenues and precluded the Company from refinancing its current debt (i.e., the Senior Secured Notes). And second, capital constraints (including debt service levels and lack of available investment capital) impeded the Company’s ability to grow investment in original content development/production and marketing at competitive levels. With regard to the first factor, the overall pay-TV industry is in a period of substantial transformation as the result of the introduction into the marketplace in recent years of high quality and relatively inexpensive and consumer friendly content alternatives (e.g., Netflix, Hulu and others).
The ongoing marketplace changes have resulted in, and will continue to cause, a material decline in pay-tv subscribers and related affiliate fee revenue as a result of a declining number of new subscribers, ‘cord-cutting’ (the cancellation of an existing pay-tv subscription), and ‘cord-shaving’ (the downgrading of a pay-tv subscription from a higher priced package to a lower priced package). Each quarter the Company receives less revenue from its traditional pay-tv distribution partners as the result of the decline in subscribers receiving the Company’s networks.
And new sources of revenue for the Company, although developing and in progress, have not grown sufficiently to offset revenue declines in the legacy business. As a result of these trends, the refinancing of the Company’s debt was not viable. Evidencing the pressures within the pay-tv business, effective December 31, 2018, Comcast and Verizon Fios, which together represented a significant and material portion of the Company’s 2018 contracted revenue and 2018 subscriber base, ceased distributing the Fusenetwork.
Separately, in mid-February 2019, DirecTV (a major distributor of the Fuse network and a source of material revenue) claimed that the Company had breached its affiliation agreement with DirecTV by failing to offer DirecTV an early right to terminate the affiliation agreement prior to its stated expiration date. DirecTV’s notice of breach provided the Company with 30 days to cure the alleged default and indicated that DirecTV might terminate the affiliation agreement if the Company did not timely cure the claimed breach. The Company disputes that DirecTV has a legitimate basis to claim that the Company has violated the terms of its agreement with DirecTV or to terminate its distribution obligations with respect to the Fuse network. The Company filed a complaint for declaratory relief against DirecTV in California state court and sought injunctive relief to prevent DirecTV from exercising any asserted termination rights
As a result of fast-moving transformational shifts in the pay-tv industry caused by changes in programming alternatives and consumer behavior, the Company has been forced to restructure its operations and implement staff reductions. The Company began to consider restructuring options during 2018 and commenced discussions with its largest noteholders. After months of negotiations, the parties reached agreement on a debt-for-equity swap that would be implemented through a prepackaged chapter 11 plan (the ‘Plan’). No creditor constituency, aside from the holders of the Senior Secured Notes, is entitled to vote on the Plan."
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan):
- Class 1 (“Other Priority Claims”) is unimpaired and not entitled to vote on the Plan. The estimated aggregate claims amount is $0 and expected recovery is 100%.
- Class 2 (“Other Secured Claims”) is unimpaired and not entitled to vote on the Plan. The estimated aggregate claims amount is $0 and expected recovery is 100%.
- Class 3 (“Senior Secured Notes Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate claims amount is $242.0mn (plus interest) and expected recovery is “substantially greater than liquidation value, but substantially less than outstanding claims.”
- Class 4 (“General Unsecured Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated aggregate claims amount is $10.0-$25.0mn and expected recovery is 0%.
- Class 5 (“Equity Interests in Debtors”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated aggregate claims amount is N/A and expected recovery is 0%.
Fuse is a cross-platform entertainment media brand for multicultural youth. The company’s platforms include the Fuse and FM (Fuse Music) linear and video-on-demand (VOD) channels; Fuse.TV online and social media properties; OTT apps; and live events.
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