Stearns Holdings, LLC – Amended Plan Receives Late Changes to Reflect September 5th RSA and Continuing Objections of U.S. Trustee

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September 19, 2019 – The Debtors filed a Revised Amended Plan and a related Disclosure Statement [Docket Nos. 338 and 339, respectively] with each attaching redlines showing changes to the version of each document filed on September 11, 2019. The last minute amendments make some clarifications that appear to have been requested by PIMCO, a key signatory to the September 5th restructuring support agreement (the "RSA") and investment manager for holders of two thirds of the Debtors' 2020 Secured Notes. 

PIMCO otherwise features in an objection filed by the U.S Trustee [Docket No. 336] and now resolved (or rather deferred) with the addition of new language contained in the Disclosure Statement. PIMCO wants its fees covered, and the Debtors have committed to do so in the RSA, but the US Trustee finds that problematic. As the new language in the Disclosure Statement puts it: “The United States Trustee believes that such fees may not be paid pursuant to a plan of reorganization. The Debtors disagree and intend to seek Confirmation of the Plan." In other words, agree to disagree and leave it for the Court to decide at the Plan confirmation hearing. 

The U.S. Trustee also objected to the fact that several classes are treated as unimpaired despite the fact that the Debtors are not paying post-petition interest on claims in those classes. In other circumstances, this might be a more interesting one for the Court, although the generally small amounts in dispute (only $14.0mn in these two classes) and the fact that the Debtors are entitled to simply reinstate claims should mean that this gets resolved in short order (a third of these are go-forward trade claims anyway. These general unsecured creditors are getting 100% recoveries (before calculating any post-petition interest) and might just prefer that the U.S. Trustee declare victory and call it at that. The U.S. Trustee has already secured a big win on the behalf of general unsecureds, especially for the Class 5 creditors. In an earlier objection [Docket No. 31], the U.S. Trustee objected to the then apparent bifurcation of unsecured creditors into two classes receiving very different treatment: Class 4 (“Go-Forward Trade Claims”) entitled to vote and receiving a 95% recovery, with the 5% balance of their claims slipping into the unloved Class 5 (“General Unsecured Claims”) which got no vote and no recovery of all. As the present objection notes: "The Plan’s revisions renders the United States Trustee’s Objection to Disclosure Statement with respect to the discriminatory treatment between the creditors in Class 4 (“Go-Forward Trade Claims”) and Class 5 (“General Unsecured Claims”) moot because each of those classes of creditors will receive a 100% distribution under the Plan."

In any event, as to post-petition interest, the Disclosure Statement now states: "The Plan does not contemplate paying members of Classes 4 and 5 post-petition interest, because they are unsecured creditors and the Debtors are not solvent. The United States Trustee believes that a confirmable plan must pay post-petition interest in order to count these classes as unimpaired. The Debtors disagree and intend to seek Confirmation of the Plan."

Also reserved for the confirmation hearing is the issue of the Debtors use of an opt-out mechanic for third party releases. Further to the earlier objection filed by the U.S. Trustee, the debtors had revised their Disclosure Statement to include the following added text: "The office of the United States Trustee takes the position that the Plan is not confirmable because it contends the “opt-out” mechanic regarding the Third-Party Release is contrary to the Bankruptcy Code. Notwithstanding the objection of the United States Trustee, the Debtors believe the Third-Party Release and the “opt-out” mechanic are consistent with the law. The United States Trustee preserves its rights to object to the Third-Party Release and the “opt-out” mechanic at the Confirmation Hearing. The Debtors intend to set forth the legal authority in support of the Third-Party Release and the “opt-out” mechanic in a memorandum in support of Confirmation of the Plan that they will file prior to the Confirmation Hearing."

Further Background

Plan Overview

The Disclosure Statement provides the following brief overview: "Pursuant to the Plan, Blackstone Capital Partners VI NQ/NF L.P. and Blackstone Family Investment Partnership VI-NQ –ESC L.P. (together, ‘Blackstone’), in its capacity as plan sponsor (the “Plan Sponsor”), will inject a new money investment into the Debtors to fund recoveries to (i) holders of the 9.375% senior secured notes due August 15, 2020 pursuant to an indenture (the ‘Notes’) and (ii) holders of General Unsecured Claims. The Plan provides that holders of claims in Class 1 (Priority Non-Tax Claims),Class 3 (Other Secured Claims), Class 4 (Go-Forward Trade Claims), and Class 5 (General Unsecured Claims) will receive payment in full in cash on the effective date of the Plan or reinstatement or such other treatment that the Debtors elect that results in holders of claims being unimpaired. Claims in Class 6 (Artemis Note Claims), and Class 8 (Existing Stearns Holding Interests) will not receive any distributions under the Plan and are therefore deemed to have rejected the Plan. Claims in Class 7 (Intercompany Claims) are reinstated; cancelled, released, waived, and discharged; or otherwise settled in the Debtors’ sole discretion. Class 9 (Intercompany Interests), and Class 10 (Protos Interests) are reinstated for administrative convenience purposes. Holders of Claims in Class 2 (Notes Secured Claims) (the ‘Noteholders’) are impaired and therefore entitled to vote on the Plan. For the reasons stated herein, the Debtors urge the holders of Claims in Class 2 to accept the Plan.”

Restructuring Support Agreement 

The Disclosure Statement provides: Following negotiations by and among the Debtors, Blackstone, and PIMCO, the parties agreed to a good faith compromise of all Claims and causes of action against the Debtors (the ‘Global Settlement’). The Global Settlement is set forth in the Restructuring Support Agreement (the ‘RSA’), dated as of September 5, 2019, by and among the Debtors, Blackstone (together with other equity holders that are party to the RSA, the ‘Consenting Equity Holders’), and PIMCO (together with other Noteholders that are party to the RSA, the ‘Consenting Noteholders’). 

The commitments under the RSA represent a significant step forward in these Chapter 11 Cases. Indeed, the RSA ensures that PIMCO, as the Debtors’ most significant prepetition creditor holding approximately 65.84% of the aggregate principal amount of the Notes, will support the terms of a consensual restructuring with the Debtors and Blackstone. Therefore, the RSA removes the specter of potential value-destructive litigation with PIMCO, including with respect to Confirmation of the Plan. Further, as a result of the Global Settlement, the auction process relating to the Original Blackstone Investment Agreement was terminated. In accordance with the Global Settlement, the Plan Sponsor has agreed to, among other things, (a) pursuant to the Amended Investment Agreement, provide the sum of (i) $65 million in cash; and (ii) cash in an amount sufficient to fund all payments to Claims in Class 5 to be made on the Effective Date (the ‘New Money Investment’), in exchange for 100% of the interests in Stearns Holdings, LLC, as reorganized; and (b) release each Noteholder from any Claims and causes of action pursuant to Section 9.3 of the Plan, except for any Noteholder that (i) opts out of the releases contained in Section 9.3 by checking the box on its timely submitted applicable Ballot or (ii) votes to reject the Plan. 

The Global Settlement will fully and finally satisfy all Claims held by the Consenting Noteholders. In connection with the Global Settlement and in full and final satisfaction of their Claims and causes of action, the Consenting Noteholders have obtained significant value for holders of the Notes Secured Claims, as these holders will receive a pro rata distribution of (a) $65 million; (b) warrants to purchase non-voting Class B units in the Reorganized Debtors worth 15% of the aggregate value appreciation of the Reorganized Debtors above the New Money Investment (the ‘Warrants’); and (c) 5% senior unsecured notes due 2024 issued by the Reorganized Debtors on the Effective Date (the ‘New Notes’). This represents a substantial improvement as compared to the distribution that such holders would have received prior to the execution of the RSA and implementation of the Global Settlement. The Noteholders shall also receive releases from the Debtors and the Releasing Parties. Accordingly, the Global Settlement ends potentially expensive, extensive, and time-consuming litigation over Confirmation and provides for an expedited and efficient conclusion to these Chapter 11 Cases for the benefit of all stakeholders. The Global Settlement also provides a substantial benefit to holders of Go-Forward Trade Claims and General Unsecured Claims. Because the Consenting Noteholders have agreed to waive any portion of a Notes Claim that is unsecured, if any, pursuant to section 506(a) of the Bankruptcy Code, the Debtors are able to provide treatment to holders of Go-Forward Trade Claims and other holders of General Unsecured Claims such that those holders’ Claims are unimpaired.

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

  • Class 1 (“Priority Non-Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $31,000 and the estimated recovery is 100%.
  • Class 2 (“Notes Secured Claim”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $189.8mn  and the estimated recovery is 41%. Pursuant to the RSA, Noteholders will receive their pro rata share of (a) $65.0mn in cash; (b) warrants to purchase nonvoting Class B units in the Reorganized Debtors worth 15% of the aggregate value appreciation of the Reorganized Debtors above the New Money Investment; and (c) the New Notes in the aggregate principal amount of (x) $15.0mn, less (y) 90% of payments to be made on the Effective Date from the New Money Investment to holders of General Unsecured Claims (with such payments to be deemed capped at $12.5mn for purposes of calculating the reduction of the principal amount of the New Notes). The value of the New Notes will be dependent upon the amount of payments made to Class 5 (General Unsecured Claims) on the Effective Date. The Debtors estimate that the value of the New Notes may range from approximately $3.75mn to $7.53mn.
  • Class 3 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $58,000 and the estimated recovery is 100%.
  • Class 4 (“Go-Forward Trade Claims”) is unimpaired and not entitled to vote on the Plan. The estimated aggregate amount of claims is $4,291,000 and the estimated recovery is 100%. At the sole option of the Debtors, or the Reorganized Debtors, as applicable: (A) each such holder shall receive cash in an amount equal to such Go-Forward Trade Claim; (B) such holder’s allowed Go-Forward Trade Claim shall be Reinstated; or (C) such holder shall receive such other treatment so as to render such holder’s allowed Go-Forward Trade Claim unimpaired.
  • Class 5 (“General Unsecured Claims”) is unimpaired and not entitled to vote on the Plan. The estimated aggregate amount of claims is $9,944,000 and the estimated recovery is 100%. At the sole option of the Debtors, or the Reorganized Debtors, as applicable: (A) each such holder shall receive cash in an amount equal to such General Unsecured Claim; (B) such holder’s allowed General Unsecured Claim shall be Reinstated; or (C) such holder shall receive such other treatment so as to render such holder’s allowed General Unsecured Claim unimpaired.
  • Class 6 (“Artemis Note Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
  • Class 7 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.
  • Class 8 (“Existing Stearns Holdings Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
  • Class 9 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.
  • Class 10 (“Protos Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.

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