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September 15, 2019 − GCX Limited and 15 affiliated Debtors (trading as Global Cloud Xchange, “GCX” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12031. The Debtors, a subsidiary of Indian conglomerate Reliance Communications ("RCOM") are a global data communications service provider, operating one of the world’s largest fiber networks. The Debtors are represented by M. Blake Cleary of Young Conaway Stargatt & Taylor, LLP. Further board-authorized engagements include (i) Paul Hastings LLP as general bankruptcy counsel, (ii) FTI Consulting, Inc. (“FTI”) as financial advisor, (iii) Lazard & Co., Limited (“Lazard”) as investment banker and (iv) Prime Clerk as claims agent.
The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Telecom Egypt Company ($16.0mn trade debt), (ii) Alcatel Submarine Networks SASU ($6.0mb trade debt) and (iii) E-Marine PJSC ($5.5mn trade debt). Punctuating a list of top 30 undecured creditors comprised of telecoms (all of whom have claims of at least $300k), is Milbank which is owed $556k for professional services and China's State Oceanic Administration which is owed $393k.
The Debtors are pursuing a "comprehensive financial restructuring to deleverage their balance sheet to ensure the long-term viability of the Debtors’ enterprise." Further to the terms of the Restructuring Support Agreement (the "RSA"), the Debtors and supporting noteholders have a agreed a debt-for-equity exchange with a possible toggle to a section 363 assets sale.
Restructuring Support Agreement
On September 15, 2019, the Debtors executed the RSA…with holders of approximately 76% of the Second Secured Note Claims (collectively, with other holders of Second Secured Note Claims that subsequently execute the Restructuring Support Agreement, the “Consenting Senior Secured Noteholders”). The Debtors and certain of the Consenting Senior Secured Noteholders (the “Senior Secured Noteholder Group”) have been in active discussions with additional holders of Senior Secured Note Claims and anticipate that the percentage of holders of Senior Secured Note Claims that execute the Restructuring Support Agreement and become Consenting Senior Secured Noteholders "will increase in the next few days."
Under the terms of the RSA, the Consenting Senior Secured Noteholders have agreed to support a consensual restructuring of the Debtors’ existing debt obligations through a Chapter 11 process (the "Reorganization Transaction"). The Reorganization Transaction will extinguish approximately $150.0mn in bond debt, leaving the reorganized Debtors wholly owned by the Senior Secured Noteholders.
In addition, the RSA also provides for a marketing process (the "Marketing Process") further to which bids for all or some portion of the Debtors’ business will be evaluated as a precursor to confirmation of the Plan. If the Marketing Process delivers better results, the Reorganization Transaction will toggle to a "Sale Transaction."
Reorganization Transaction. The Plan contemplates the below treatment for certain key classes of creditors under the Reorganization Transaction. As part of the Reorganization Transaction, the Debtors will enter into a new first lien exit facility, the proceeds of which will be used to refinance the DIP Facility, pay exit costs, and capitalize the balance sheet.
- Senior Secured Note Claims. On the Effective Date, or as soon as reasonably practicable thereafter, the holders of Senior Secured Note Claims will receive their Pro Rata share of (i) the Senior Secured Noteholder Equity Distribution; provided, that notwithstanding anything herein to the contrary, the distribution of the Senior Secured Noteholder Equity Distribution shall be made pursuant to, and subject to the terms and conditions of, the Equity Allocation Mechanism (if applicable), and (ii) the loans under the New Second Lien Facility, which will be in an amount equal to $200 million (the “New Second Lien Term Loans”).
- General Unsecured Claims. The holders of General Unsecured Claims will either receive (i) Cash in an amount equal to the Allowed amount of such Claim, payable on the later of the Effective Date and the date that is ten (10) Business Days after the date on which such Claim becomes an Allowed General Unsecured Claim, or as soon thereafter as is reasonably practicable; (ii) Reinstatement of such holder’s Allowed General Unsecured Claim; or (iii) other treatment sufficient to render such holder’s Allowed Other General Unsecured Claim Unimpaired.
- In addition to General Unsecured Claims, all Priority Non-Tax Claims, Other Secured Claims, Intercompany Claims, and Intercompany Interests are Unimpaired under the Plan.
- GCX Interests. On the Effective Date, or as soon as reasonably practicable thereafter, all GCX Interests shall be Extinguished in accordance with the Description of Transaction Steps and each such holder of a GCX Interest shall not receive or retain any distribution, property, or other value on account of its GCX Interest.
- Following the Effective Date, Reorganized GCX will adopt a post-emergence management incentive plan (the “Management Incentive Plan”), under which management will be eligible to receive a percentage of the New Equity Interests, on terms and conditions as agreed to by the New Board.
- The Reorganization Transaction is expected to leave the Debtors’ businesses intact and significantly deleverage the Debtors’ balance sheet. It is also expected to enhance the Debtors’ long-term growth prospects and operational performance.
Sale Transaction. Subject to the terms of the RSA and the Plan, the Debtors intend to implement the Sale Transaction if it would create higher or otherwise better value for creditors and equity holders of the Debtors than the Reorganization Transaction.
- Senior Secured Note Claims. On the Effective Date, (i) in the event that the amount of Sale Transaction Proceeds is equal to or exceeds the Cash Consideration Amount, the holders of Senior Secured Note Claims will receive such holder’s Pro Rata share of Cash payments equal to the aggregate amount of all Senior Secured Note Claims or (ii) in the event that the amount of Sale Transaction Proceeds is less than the Cash Consideration Amount, such holder’s Pro Rata share of Cash payments equal to the Sale Transaction Proceeds remaining after satisfying or reserving for the entirety of the Cash Consideration Amount excluding the amount of the Senior Secured Note Claims; provided, that in either (i) or (ii) a portion of the Cash consideration received by the Senior Secured Note Claims may be replaced by non-Cash consideration so long as the terms of such non-Cash consideration are acceptable to the Requisite Senior Secured Noteholders in their sole discretion. On the Effective Date, the Prepetition Indenture shall be deemed cancelled except as otherwise stated in the Plan.
- General Unsecured Claims. The holders of General Unsecured Claims will receive their Pro Rata share of Cash in an amount equal to the Allowed amount of such Claim, payable on the later of the Effective Date and the date that is ten (10) Business Days after the date on which such Claim becomes an Allowed General Unsecured Claim, or as soon thereafter as is reasonably practicable.
- GCX Interests. On the Effective Date, or as soon as reasonably practicable thereafter, the holders of GCX Interests will receive such holder’s Pro Rata share of value in the amount (if any) by which the amount of Sale Transaction Proceeds exceeds the Cash Consideration Amount. The Debtors will seek entry of an order confirming the Plan (the “Confirmation Order”) and the Sale Transaction or the Reorganization Transaction, as applicable, by the Bankruptcy Court no later than 75 days after the Petition Date. In addition, regardless of whether the Debtors move to confirm the Sale Transaction or the Reorganization Transaction embodied in the Plan, Reorganized GCX will be the ultimate holding company for the Reorganized Debtors and their assets. Reorganized GCX is expected to be organized pursuant to the laws of Bermuda and will issue the New Equity Interests in the Reorganization Transaction.
As part of the restructuring contemplated by the Restructuring Support Agreement, certain of the Consenting Senior Secured Noteholders are providing debtor-in-possession financing in the aggregate amount of up to $54.5 million (the “DIP Facility”) to support the Debtors’ operations during the Chapter 11 Cases. The DIP Facility will be paid in full in Cash or refinanced in full in Cash in connection with a Reorganization Transaction or a Sale Transaction, as applicable.
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 (“Priority Non-Tax Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
- Class 2 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
- Class 3 (“Senior Secured Note Claims”) is impaired, entitled to vote on the Plan. The estimated recovery is unknown.
- Class 4 (“General Unsecured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
- Class 5 (“Intercompany Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is NA.
- Class 6 (“Intercompany Interests”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The estimated recovery is NA.
- Class 7 (“GCX Interests”) is impaired, entitled to vote on the Plan. The estimated recovery unknown. The projected Plan recoveries for Class 7 and do not take into account the potential value of the releases provided by the Debtors and third parties under the Plan, which value is speculative and uncertain. Approximate recoveries in a Sale Transaction, if any, will be determined by the sale proceeds.
- Class 8 (“Subordinated Securities Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
Events Leading to the Chapter 11 Filing
The Disclosure Statement provides the following detail: "While the Debtors’ business as a whole remains operationally sound [notwithsatnding the clear operational shortcomings described below], the Debtors have experienced a number of market factors and other unexpected challenges in recent years, including declining revenue and high costs, and have been negatively impacted by the financial distress of their ultimate parent, RCOM.
In the midst of these challenges, the Debtors faced a liquidity shortfall that left them unable to repay the outstanding principal and interest under their Senior Secured Notes by the Maturity Date and no ability to recapitalize the Company.
The Company’s recurring revenues have declined in recent years due to, in part, increasing competition from existing, newly developed and planned cable systems along certain of the Company’s existing and planned network routes, as well as from satellite companies. Another factor in revenue declines has been an increased reluctance by customers to enter into long-term IRU contracts. In addition, the Company faces high fixed operating costs in connection with maintaining the GCX Global Network, costs which are incurred regardless of the volume of customer orders the Company receives.
RCOM, the Company’s ultimate parent, has suffered a number of financial challenges in recent years due to high debt, rising spectrum costs, and significant disruption in India’s telecom industry, resulting in the commencement of a Corporate Insolvency Resolution Proceeding in May 2019 (the 'Indian Insolvency Proceeding'). As part of the Indian Insolvency Proceeding, RCOM’s board of directors has been suspended and its powers are currently exercised by a court appointed resolution professional (the 'RP') who is responsible for managing RCOM as a going concern under the supervision of a committee of creditors. The Indian Insolvency Proceeding has negatively affected certain customers’ perception of the Company and has made these customers reluctant to enter into new contracts (including IRU contracts) with the Company. Moreover, the Company has experienced declining line quality in select terrestrial circuits supplied by RCOM resulting in increased churn within impacted customer pools."
Proposed Key Dates
- Voting Deadline: October 15, 2019
- Initial Plan Supplement Deadline: October 30, 2019
- Objection Deadline: November 6, 2019
- Combined Hearing: November 13, 2019
About the Debtors
The Debtors, together with their non-Debtor affiliates that are subsidiaries of GCX are a global data communications service provider, operating one of the world’s largest fiber networks. The Company provides its services through a global network of subsea cables, landing stations, terrestrial networks, IP network, and managed network platforms controlled by a fully global network operating center (collectively, the “GCX Global Network”). The GCX Global Network connects to most of the major telecommunications hubs across the globe, from the developed markets in the U.S. and Europe to key emerging markets in the Middle East and Asia, including India and China. The GCX Global Network consists of, among other things, five owned subsea systems with over 66,000 route kilometers (“rkms”) of cable, landed at 46 landing stations in 27 countries. This system further consists of owned and leased terrestrial networks with a total length of over 9,839 rkms in 34 metropolitan areas across 14 countries. These subsea, terrestrial, and managed networks make the Company’s operation an integral element to communications for thousands of customer and non-customer businesses and millions of people worldwide.
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