Fusion Connect, Inc. – Over-acquisitive, Under-performing Cloud Services Provider Files Chapter 11, First Lien Lenders Play De Facto Stalking Horse in $300.0mn Deleveraging

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June 3, 2019 − Fusion Connect, Inc. and 18 affiliated Debtors ("Fusion" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 19-11811. Fusion, a provider of integrated cloud solutions to small, medium, and large businesses, is represented by Sunny Singh of Weil, Gotshal & Manges LLP. Further board-authorized engagements include (i) PJT Partners LP as investment banker, (ii) FTI Consulting, Inc. as financial advisor, (iii) Kelley Drye & Warren LLP, as special tax, regulatory, litigation and corporate counsel, (iv) PricewaterhouseCoopers LLP as tax consultants and (v) Prime Clerk LLC as claims agent.

The Company’s petition notes between 10,000 and 25,000 creditors, estimated assets of $570.4mn and estimated liabilities of $760.7mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) AT&T Corporation ($24.7mn telco debt), (ii) Abante Rooter and Plumbing et al (5.0mn settlement) and (iii) Verizon Communications ($4.2mn telco debt). 

In a press release announcing the filing and RSA, Fusion advised that “The Restructuring Support Agreement outlines a clear path forward to significantly deleverage Fusion’s balance sheet, leading to a potential material reduction in interest expense, which would allow for more investment in enhanced customer experience, product innovation and infrastructure. With this support in place, Fusion expects to emerge from Chapter 11 before the end of the year as a financially stronger company that continues to be well positioned to deliver its comprehensive portfolio of innovative single-source cloud solutions with exceptional customer support."

Matthew Rosen, Fusion's Chairman and Chief Executive Officer, added: "For the past couple of months, Fusion has been in constructive discussions with our lenders as we evaluated multiple options to improve the company’s financial structure and position the Company for future growth. This has been a thoughtful and considered process, and we firmly believe that our voluntary Chapter 11 filing is the most appropriate course of action to protect and enhance the value of our business while securing the best possible outcome for our stakeholders."

Restructuring Support Agreement

On June 3, 2019, the Debtors entered into a restructuring support agreement (together with the term sheet attached thereto, the “RSA” which is attached as Exhibit A to Docket No. 2 and to the Debtors' June 3, 2019 8-K) with lenders holding more than 66 2/3% of the aggregate outstanding principal amount of the loans under Fusion's First Lien Credit and Guaranty Agreement. Pursuant to the RSA, the Consenting First Lien Lenders and the Debtors have agreed to the principal terms of a restructuring of the Company which is to be implemented pursuant to a Chapter 11 plan of reorganization and provides for either a standalone reorganization (the “Reorganization Transaction”) or a sale of some, all or substantially all of the Company’s assets or business to a third party (the “Sale Transaction”).

The RSA provides that the implementation of the Sale Transaction will be conducted pursuant to a sale and marketing process (the “Sale Process”), whereby, the Company will solicit bids for a potential Sale Transaction in accordance with the Bidding Procedures attached to the RSA. Pursuant to the terms of the Bidding Procedures, pursuit of a Sale Transaction by the Company may include bids for any form of sale, investment, acquisition or similar transaction. The Sale Process also provides that the Company may solicit bids to sell assets of the Company, including the equity interest in or assets of the Company’s two Canadian subsidiaries, independently or together with other assets.

The RSA contemplates different treatments for various key classes of creditors of the Company, including the holders of First Lien Claims, Second Lien Claims, unsecured claims and the Company’s equity, pursuant to the Reorganization Transaction, whereby such creditors will receive differing amounts of proceeds, if any. If the Company proceeds to consummation of a Sale Transaction, the Company will distribute proceeds of such transaction in accordance with the priority rules of the Bankruptcy Code.

The Soldan Declaration (defined below) further clarifies the first lien lenders' willingness to give way to one or more potential bidders for the Debtors' assets: "…efforts culminated in the execution of a Restructuring Support Agreement among the Company and the First Lien Ad Hoc Group that provides the Company with a clear path to a confirmable chapter 11 plan of reorganization and a viable recapitalization—in which, among other things, approximately $300 million in funded debt will be extinguished, leaving a significantly deleveraged reorganized Company wholly owned by the First Lien Lenders and an appropriately sized exit working capital facility (the 'Reorganization Transaction'). 

The Restructuring Support Agreement contemplates the continuation of the Company’s Prepetition Marketing Process (together with the postpetition sale and marketing process, the 'Sale Process'). The Sale Process will provide a public and competitive forum in which the Debtors will seek bids or proposals for potential transactions that, if representing higher or otherwise better value for the Debtors’ creditor constituencies than the Reorganization Transaction, will be pursued under a plan of reorganization as an alternative to the Reorganization Transaction. 

The Restructuring Support Agreement provides the Company with a baseline restructuring proposal that ensures the business will be able to continue as a going concern during and after these chapter 11 cases. Nonetheless, the Company is open to considering other potential transaction structures to the extent any such transaction reflects a higher or better offer than those contemplated by the Restructuring Support Agreement. Indeed, the Company and First Lien Ad Hoc Group intend to constructively engage with the Second Lien Ad Hoc Group and the Majority Shareholder on a potential reorganization transaction that could be supported by all of the Company’s major debt and equity constituents."

DIP Financing

Fusion has secured backstop commitments from members of an ad hoc group of first lien lenders to provide a debtor-in-possession ("DIP") financing facility and expects to enter a related credit agreement further to which the Debtors will be in a position to borrow up to $59.5mn, including $39.5mn in new money term loans.

Prepetition Capital Structure

The following table provides a summary of the Debtors' prepetition funded debt capital structure

Interest Rate

Maturity Date

Outstanding Principal

Super Senior Loan Agreement

L + 10.0%

June 2019

$20.0mm

Total Super Senior Debt

$20.0mm

First Lien Credit Agreement

Tranche A Term Loans

L + 6.0%

May 2022

$43.3mm

Tranche B Term Loans

L + 8.5%

May 2023

$490.9mm

Revolving Loans

L + 6.0%

May 2022

$39.0mm

Total First Lien Debt

$573.7mm

 Second Lien Credit Agreement

L + 10.5%

Nov. 2023

$85.0mm

Total Secured Debt

$658.7mm

Green Unsecured Note

13.0%

Feb. 2024

$10.0mm

Bircan Unsecured Notes

12.0%

Mar. 2019

$3.3mm

Total Funded Debt

$691.5mm

Equity Ownership

Fusion is a public company with its SEC filings found here. As of December 31, 2018, 150,000,000 shares of Fusion $0.01 par value common stock had been authorized with 81,967,263 shares of common stock issued and outstanding. As of March 18, 2019, there were 213 record holders of the common stock, with approximately 60.7% held by BCHI Holdings, LLC (“BCHI”). Additionally, as of December 31, 2018, 10,000,000 shares of preferred stock had been authorized, with 5,045 shares of Series A-1, A-2 and A-4 preferred stock issued and outstanding, and 9,171 shares of Series B-2 preferred stock issued and outstanding, all of which are held by BCHI.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Soldan Declaration”), Keith Soldan, Fusion's Chief Financial Officer, detailed the events leading to Fusion's Chapter 11 filing: "The Company has historically driven its growth in part through strategic acquisitions. On August 26, 2017, in furtherance of that strategy, Fusion and Fusion BCHI Acquisition LLC (‘Fusion BCHI’) entered into a merger agreement with Birch, which underlying transaction closed on May 4, 2018. Because Birch was the larger entity, the transaction was structured as a reverse merger whereby Birch merged with and into Fusion BCHI, and the previous Birch shareholders acquired 65.2% of the outstanding common stock in the Company, held indirectly through BCHI Holdings, LLC. In connection with the Birch Merger, the Company also spun-off Lingo Management, LLC (‘Lingo’), along with certain related subsidiaries, to the previous Birch shareholders.

To finance the Birch Merger, the Company entered into the First Lien Credit Agreement and the Second Lien Credit Agreement. The Company used proceeds from the foregoing to: (a) refinance the Company’s and its subsidiaries’ existing indebtedness, (b) pay expenses related to the Birch Merger and associated transactions, and (c) pay down certain subordinated notes owed by Birch to Holcombe T. Green, Jr., R. Kirby Godsey, and Holcombe T. Green, III. The Company also applied a portion of the proceeds from the First Lien Credit Agreement toward its acquisition of MegaPath. 

The Company pursued the Birch Merger with a vision of leveraging its existing processes and structures to create synergies between Fusion’s and Birch’s joined customer bases, combine network infrastructure assets to improve operational efficiencies, and ultimately drive material growth in Fusion’s and Birch’s combined annual revenue. While the Company was able to improve operations and use the Birch Merger as a platform for expansion, the Birch business plan proved to be overly aggressive in terms of sustained customer bookings and price increases. Missed revenue projections left the Company with significantly less liquidity than originally anticipated. 

The Company’s liquidity position exposed the Company to default risk under both the First Lien Credit Agreement and Second Lien Credit Agreement. By the end of March 2019, the Company faced an upcoming $6.7 million amortization payment under the First Lien Credit Agreement and a $300,000 interest payment on the Green Note due on April 1, 2019 and April 2, 2019, respectively (together, the “Amortization and Interest Payments”). Given the Company’s limited working capital, it determined that it was unlikely to be able to make the Amortization and Interest Payments and such non-payment would likely trigger a cross-default under the Second Lien Credit Agreement."

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