February 13, 2019 – Total Finance Investment Inc. (“TFI” or the “Company”) and six affiliated Debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of Illinois, lead case number 19-03734. The Company, an operator of buy-here, pay-here (“BHPH”) used automobile dealerships located in Illinois and Wisconsin, is represented by Bojan Guzina of Sidley Austin. Further board-authorized engagements include: (i) Togut, Segal & Segal LLP as conflicts counsel, (ii) Development Specialists, Inc., retained to provide interim management services, (iii) Portage Point Partners, LLC, as financial advisors and (iv) Keefe, Bruyette & Woods as investment bankers.
The Company’s petition notes between 1,000 and 25,000 creditors; estimated assets between $100mn and $500mn; and estimated liabilities between $50mn and $100mn. The Debtors three largest unsecured creditors have combined trade claims that are less than $500k.
The Debtors have historically operated integrated businesses centered around a chain of buy-here, pay-here (“BHPH”) used automobile dealerships located in Illinois and Wisconsin. The Debtors sold used vehicles at their dealership locations, provided financing to customers to facilitate their purchase of the Debtors’ vehicles and certain add-on products, and operated an independent insurance broker through which the Debtors helped their customers secure automobile insurance coverage from third-party insurance providers. The Debtors specifically catered to the fast-growing and underserved population of “unbanked” and “underbanked” Hispanic consumers in Northern Illinois and Milwaukee, which historically made up approximately 70% of the Debtors’ customer base.
Restructuring Support Agreement and DIP Financing
On February 12, 2019, the Debtors entered a restructuring support agreement (the “RSA”) with BMO Harris Bank N.A (‘BMO’), the lender under the Debtors’ senior secured debt facility, and Westlake Services, LLC (“Westlake”) which contemplates an orderly liquidation of the Debtors’ auto dealership business, a transfer of servicing of the Debtors’ portfolio of consumer finance receivables (the “Portfolio”) to a third party servicer, a runoff of the Debtors’ portfolio of insurance premium financing receivables (the “Insurance Receivables”), a restructuring of the Debtors’ funded debt, and a proposed compromise of the Debtors’ unsecured obligations. Pursuant to the terms of the RSA, BMO and Westlake will agree to support a consensual restructuring of the Debtors’ businesses and to vote in favor of the Debtors’ Chapter 11 Plan when solicited to do so.
The RSA parties have agreed that the Plan will provide that all proceeds from the collection, sale or other disposition of the Debtors’ assets (including, without limitation, the Portfolio and Insurance Receivables) will be distributable to the holders of claims against the Debtors. As more fully described below, it is anticipated that all recoveries from these assets will, following the payment of all allowable administrative expense claims, servicing fees and certain wind-down costs, be distributed first to BMO on account of its first lien secured claim until such claim has been repaid in full with interest, second to Westlake on account of its second lien secured claim until such claim has been repaid in full with interest, third to 11 x 11 LLC (“11 x 11”) on account of its third lien secured claim until such claim has been repaid in full with interest, fourth to the holders of general unsecured claims until such claims have been repaid in full, and fifth, after payment in full of all allowed claims against the Debtors, any remaining recoveries from the Portfolio and other assets of the Debtors’ estates would be distributed to the Debtors’ equity holders.
BMO has also agreed to the Debtors’ use of cash collateral in accordance with an agreed-upon budget. BMO will also provide the Debtors with senior secured, priming debtor-in-possession financing (“DIP”) of up to $4 million (the “DIP Facility”).
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “DeLuca Declaration”), Andrew DeLuca, TFI’s General Counsel, detailed the events leading to the Company’s Chapter 11 filing. The DeLuca Declaration states, “In recent years, BHPH dealerships have been subject to increasing industry-wide pressures that have negatively impacted their operating results, driving a number of the Debtors’ BHPH competitors out of business. The used vehicle dealership market is highly fragmented and fiercely competitive—with approximately 1,800 used car dealerships in Illinois alone….The fragmented nature of the industry and relatively low barriers to entry have led to steep competition between dealerships, putting significant downward pressure on the margins BHPH dealerships earn on vehicle sales. Further, as a result of a protracted period of increased capital availability, indirect auto lenders such as banks, credit unions, and finance companies have in recent years moved to originate subprime auto loans and offer attractive financing terms to customers with lower than average credit scores, putting pressure on BHPH operators’ market share among their traditional customer base.
In addition to increased competition in the auto lending industry, the Debtors have also incurred significant expenses to ensure compliance with new regulations enacted by the Consumer Financial Protection Bureau. Furthermore, the political climate following the 2016 presidential election has had a negative impact on the spending habits of the Debtors’ traditional customer base in a manner that negatively impacted the Debtors’ operating results. Despite such challenges, the Debtors continued to operate one of the largest chains of BHPH dealerships in Illinois and were among the largest sellers of used vehicles in the greater Chicagoland area. The Debtors sold approximately 5,300 vehicles in 2018 and had approximately $100 million in revenues in the twelve months ended January 31, 2019.
As pressures on the Business mounted, the Debtors’ management took several steps to improve the Debtors’ cash flows and operating results. Despite these steps, however, the Debtors’ operating results have continued to deteriorate and, as of March 31, 2018, the Debtors were not in compliance with certain financial covenants under their senior secured debt facility with BMO Harris Bank N.A (‘BMO’). Starting on May 1, 2018, the Debtors entered into a series of forbearance agreements with BMO that afforded the Debtors ample time to explore a number of potential strategic options. During the forbearance period, the Debtors actively explored refinancing their prepetition funded debt and pursued various potential in- and out-of-court asset sales.
Ultimately, however, the Debtors—with the assistance of their legal and financial advisors—determined that an orderly liquidation of their auto dealership business and a transfer of servicing of the Portfolio to a third party servicer represented the best option for maximizing the value of the Debtors’ estates. Accordingly, the Debtors have commenced these chapter 11 cases in order to pursue such an orderly liquidation and transfer of servicing.”
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