Orchids Paper Products Company – Files Chapter 11, Announces $175mn Stalking Horse Credit Bid by Black Diamond Capital Management Affiliate

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April 1, 2019 − Orchids Paper Products Company (NYSE American: TIS) and two affiliated Debtors (together, “Orchids Paper” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10729. The Company, a leading national supplier of high quality consumer tissue products primarily serving the at home private label consumer market, is represented by Christopher A. Ward of Polsinelli PC. Further board-authorized engagements include (i) Richard S. Infantino of Deloitte Transactions and Business Analytics LLP ("Deloitte") to serve as interim chief strategic officer (with Deloitte engaged to assist Mr Infantino), (ii) Houlihan Lokey Capital, Inc. as investment banker and (iii) Prime Clerk LLC as claims agent.

The Company’s petition notes between 1,000 and 5,000 creditors; estimated assets of $322.0mn and estimated liabilities of $260.9mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Fabrica De Papel ($4.4mn trade debt), (ii) Dixie Pulp & Paper ($1.6mn trade debt) and (iii) Little Rapids Corp. ($1.2mn trade debt).

Section 363 Sale and $175.0mn Stalking Horse Bid of Prepetition Lender Orchids Investment LLC

In a press release announcing the filing, Orchids Paper further announced that it had “entered into an option agreement (the ‘Option’) with Orchids Investment LLC (‘OI’). The Option gives the Company the right to execute an asset purchase agreement with OI (the ‘Purchase Agreement’), through which, should the Company exercise the Option, OI would acquire substantially all of the Company's assets in exchange for a credit bid of approximately $175,000,000 against the Company's obligations under its pre-petition secured credit facility plus other consideration. OI is indirectly owned by a fund affiliated with Black Diamond Capital Management, L.L.C. and Brant Paper Investment Company LLC.

The Company has filed a bid procedures and sale motion with the Court, and the Purchase Agreement will be subject to an auction at which higher and better offers may be made and will require Court approval. The bid by OI comprises the initial stalking horse bid in the auction process…the Company anticipates the transaction will move swiftly and aims to complete the process no later than August 2019.”

Debtor-in-Possession (“DIP”) Financing

OI also serves as the Company's pre-petition secured lender, and has agreed to provide debtor-in-possession ("DIP") financing to support the Company's day-to-day operations during the pendency of the bankruptcy case. 

Events Leading to the Chapter 11 Filing

The Debtors' press release states, "The Company began experiencing financial difficulty in late 2016 due to a number of factors, including unprecedented increases in input costs, most notably fiber and freight, which the industry has not yet been able to fully recover with price increases to customers; new competitive industry capacity driving down selling prices to defend and grow business; and construction cost overruns and start-up inefficiencies at its new production facility in Barnwell, South Carolina….Ultimately it was determined that using the chapter 11 process to facilitate a potential sale was the swiftest and most efficient way to preserve stakeholder value and sustain business operations."

In a declaration in support of the Chapter 11 filing (the “Infantino Declaration”) [Docket No. 19], Richard S. Infantino, a Managing Director of Deloitte and the Debtors’ Interim Chief Strategy Officer, detailed the events leading to [Company]’s Chapter 11 filing; including a series of operational issues which were (in turn) compounded as clients and suppliers reacted adversely to news of those issues. The operational issues included cost overruns in respect of the construction of a new facility, significantly increased raw material costs and increased transportation costs resulting from nationwide driver shortages. Further to public disclosure of these issues, the Debtors lost several key clients (including one that represented “19% of the Company’s converted product sales”) and were hit with disadvantageous credit terms from anxious suppliers.

The Declaration states, “At its new Barnwell, South Carolina facility, the two converting lines became operational in the first and third quarters of 2016, respectively. However, cost overruns in the construction of the facility and start-up inefficiencies with the operation of the converting lines and mill were, and continue to be, significant drains on the Company’s liquidity. The facility is still not running efficiently or producing product at the original equipment manufacturer’s goals. The Company continues to work with the original equipment manufacturer to address the operational issues with the converting lines and mill.

Compounding these problems have been significant industry wide price increases on various raw materials among other things. Specifically, the price of the various pulp grades and fiber substitutes used to manufacture the Company’s tissue products at both facilities has risen significantly in 2018….A majority of the Company’s tissue products are manufactured utilizing a variety of pulp substitutes including post-consumer sorted office products. From January 2018 to October 2018, the average recycle mix increased in price by about 39%. While all pulp and pulp substitute pricing began to ease at the end of 2018 and has continued to ease through February2019, current pricing of the Company’s average recycle mix is about 30% higher than at the beginning of 2018. 

At the same time there were driver shortages in the transportation industry, which have increased the Company’s freight costs and negatively impacted service levels to customers, sometimes resulting in customer penalties and chargebacks.

Significantly, on or about July 30, 2018, the Company received notice from a major customer that it intended to consolidate its supplier base and transition all of its product orders to a new supplier effective March 2019. This customer represented approximately 19% of the Company’s converted product sales. Subsequently, on or about September 2018, the Company learned that an important, yet less significant customer as a percent of sales, intended to reduce its business. On or about December 2018, the Company learned a significant customer would be pulling its towel business effective April 2019. These customer losses were not a result of product quality or customer service problems. In each instance, according to interactions with the Company’s sales personnel and management, these and other customers had expressed ongoing concern about the Company’s uncertain future based on its deteriorating financial condition as reported quarterly in the Company’s public filings.

Further exacerbating the Company’s deteriorating operating and financial condition, certain suppliers of raw materials and related manufacturing items moved the Company to CIA or significantly reduced credit terms in response to the Company’s public financial reporting. Approximately ten vendors forced the Company into CIA or reduced credit terms so the Company was effectively on CIA.”

About Orchids Paper

Orchids Paper Products Company is a leading national supplier of high quality consumer tissue products primarily serving the at home private label consumer market. The Company produces a full line of tissue products, including paper towels, bathroom tissue and paper napkins, to primarily to retail chains throughout the United States.

The Company is headquartered in Brentwood, Tennessee with manufacturing locations in Pryor, Oklahoma and Barnwell, South Carolina.

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