UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION
• - -
In re:
CRESTLINE PACKAGING SOLUTIONS LLC, et al.,
Debtors.
Case No. 22-51247
(Jointly Administered)
• - -
DECLARATION OF DANA KOWALSKI, CHIEF FINANCIAL OFFICER OF CRESTLINE PACKAGING SOLUTIONS LLC, IN SUPPORT OF CONFIRMATION OF THE PREPACKAGED PLAN OF REORGANIZATION
Filed in connection with confirmation hearing scheduled for August 29, 2022
• - -
I. INTRODUCTION AND BASIS OF TESTIMONY
1. My name is Dana Kowalski. I am the Chief Financial Officer of Crestline Packaging Solutions LLC ("Crestline," "CPS," or, together with CPS Holdings Inc., the "Debtors"). I submit this declaration (the "Declaration") pursuant to 28 U.S.C. § 1746, under penalty of perjury, in support of the confirmation of the Prepackaged Plan of Reorganization of Crestline Packaging Solutions LLC and CPS Holdings Inc. (Dkt. 47, the "Plan"). Except as otherwise noted, all capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan.
2. I have served as the Chief Financial Officer of Crestline since July 2019. In this capacity, I am responsible for the oversight and management of all financial operations, accounting, treasury, budgeting, financial reporting, and risk management for Crestline and its direct parent, CPS Holdings Inc. I report directly to the Debtors' board of managers and work closely with senior management, outside financial advisors, and legal counsel on all matters relating to the Debtors' business and financial affairs.
3. Since the commencement of the restructuring process in early 2022, I have been personally involved in all aspects of the Debtors' restructuring efforts, including negotiations with creditor constituencies, the development of the Debtors' business plan and financial projections, the preparation of the Disclosure Statement (Dkt. 48), and the formulation of the Plan. I have also been intimately involved in the negotiation and execution of the Restructuring Support Agreement dated July 8, 2022 (the "RSA"), the debtor-in-possession financing arrangements, and the solicitation process.
4. The facts set forth in this Declaration are based on my personal knowledge, my review of relevant documents and records maintained by the Debtors in the ordinary course of business, information provided to me by other officers and employees of the Debtors, and information provided to me by the Debtors' financial advisor, Aldersgate Advisory Group LLC ("Aldersgate"), and the Debtors' legal counsel, Calderwood & Harkness LLP ("Calderwood & Harkness"). If called upon to testify in these proceedings, I could and would competently testify to the matters set forth herein.
5. I am authorized to submit this Declaration on behalf of the Debtors. No other person or entity has authorized or directed me to make statements that are not truthful, and I make this Declaration of my own volition and in good faith.
II. BACKGROUND OF THE DEBTORS
A. Business Overview
6. Crestline Packaging Solutions LLC is an Ohio limited liability company headquartered at 4710 Industrial Corridor Drive, Akron, Ohio 44308. Crestline is a leading manufacturer of specialty chemical packaging and industrial containment products, including high-density polyethylene ("HDPE") drums, intermediate bulk containers ("IBCs"), steel pails, and specialty containment vessels. The company serves a diverse customer base in the chemical, petrochemical, and agricultural sectors, supplying packaging and containment solutions to some of the largest industrial companies in the United States.
7. Crestline was formed in 2007 and has grown steadily over the past fifteen years, building a reputation for quality, reliability, and innovation in the specialty packaging industry. The company's products are essential to its customers' operations, as they are required for the safe storage, transport, and handling of a wide range of chemical and industrial products subject to stringent regulatory requirements.
8. CPS Holdings Inc. ("CPS Holdings") is a Delaware corporation formed in connection with the leveraged buyout of Crestline by Thornfield Capital Partners LP ("Thornfield") in October 2017, as described in greater detail below. CPS Holdings is the direct parent of Crestline and serves as the holding company for the Crestline enterprise. CPS Holdings' registered agent is located at 1209 Orange Street, Wilmington, Delaware 19801, care of National Corporate Services, Inc. CPS Holdings is a co-debtor in these jointly administered Chapter 11 cases.
B. Operations and Workforce
9. As of the Petition Date, Crestline employed approximately 1,420 employees across four manufacturing facilities located in Ohio, Indiana, and Louisiana. Each facility serves a distinct function in the Debtors' manufacturing operations:
(a) Plant 1 (Akron, Ohio — Headquarters): Located at 4710 Industrial Corridor Drive, Akron, Ohio 44308, Plant 1 serves as the Debtors' corporate headquarters and is the primary manufacturing facility for HDPE drum production. Approximately 480 employees are based at Plant 1, including corporate staff, production workers, quality assurance personnel, and logistics teams.
(b) Plant 2 (Evansville, Indiana): Located at 2255 Commerce Parkway, Evansville, Indiana 47725, Plant 2 is dedicated to the manufacturing of intermediate bulk containers and steel pails. Approximately 390 employees work at this facility. Plant 2 is strategically located to serve the Debtors' Midwest and Southern customer base.
(c) Plant 3 (Baton Rouge, Louisiana): Located at 8100 River Road, Baton Rouge, Louisiana 70820, Plant 3 manufactures specialty containment vessels designed for the petrochemical and industrial sectors. Approximately 310 employees are based at this facility. Plant 3's proximity to the Gulf Coast petrochemical corridor provides the Debtors with a significant competitive advantage in serving that critical market.
(d) Plant 4 (Ravenna, Ohio): Located at 1480 State Route 59, Ravenna, Ohio 44266, Plant 4 houses the Debtors' extrusion and secondary processing operations. Approximately 240 employees work at Plant 4, which provides critical intermediate components and finished products to the other facilities.
10. In addition to the four manufacturing facilities, the Debtors lease a warehouse located at 900 Darrow Road, Akron, Ohio 44305, from Benchmark Real Estate Holdings LLC. This facility serves as supplemental warehousing and distribution space for the Akron-area operations.
11. I am pleased to report that all four manufacturing plants have continued to operate throughout the Chapter 11 cases without material interruption. The Debtors have maintained production schedules, fulfilled customer orders, and honored all post-petition obligations to employees, vendors, and customers. The continuity of operations during the Chapter 11 process is a testament to the dedication of the Debtors' workforce and the effectiveness of the first day relief granted by this Court.
C. 2017 Leveraged Buyout
12. In October 2017, Thornfield Capital Partners LP, a private equity fund based in New York, New York, acquired 100% of the equity interests of CPS Holdings Inc. for an aggregate enterprise value of approximately $410.0 million (the "LBO"). CPS Holdings was formed as a Delaware corporation in connection with the LBO to serve as the acquisition holding company.
13. Thornfield contributed equity of approximately $163.0 million in connection with the LBO, with the remainder of the acquisition price funded through the incurrence of debt at the operating company level. The debt financing consisted of the following:
(a) A $175.0 million first lien term loan and a $40.0 million revolving credit facility, each issued under a First Lien Credit Agreement dated October 13, 2017 (the "First Lien Credit Agreement"), with Ridgeline National Bank, N.A. ("Ridgeline") serving as administrative agent and collateral agent. The first lien facilities were secured by a first-priority lien on substantially all assets of Crestline.
(b) $60.0 million in aggregate principal amount of 9.75% Senior Secured Second Lien Notes due 2025 (the "Second Lien Notes"), issued under an Indenture dated October 13, 2017 (the "Second Lien Notes Indenture"), with Continental Fiduciary Trust Company serving as indenture trustee (CUSIP 22761TAA3). The Second Lien Notes were secured by a second-priority lien on substantially all assets of Crestline.
14. At the time of the LBO, the Debtors' leverage was approximately 5.7x total net debt to EBITDA, which was in line with market conditions for leveraged buyout financings in the industrial packaging sector during that period. The Debtors' financial performance in the years immediately following the LBO was generally in line with the underwriting case, with the company generating sufficient cash flow to service its debt obligations through fiscal year 2020.
III. EVENTS LEADING TO CHAPTER 11 FILING
A. Financial Deterioration
15. Beginning in fiscal year 2021, the Debtors experienced a significant deterioration in financial performance driven by a combination of factors largely beyond the Debtors' control. For fiscal year 2021, the Debtors reported revenue of approximately $312.6 million and EBITDA of approximately $38.4 million. Revenue declined approximately 18% from fiscal year 2020 to fiscal year 2021, driven primarily by (i) significant and sustained increases in the cost of high-density polyethylene resin, the Debtors' primary raw material input, which saw price increases of approximately 35% to 45% over the relevant period, and (ii) broader supply chain disruption arising from the COVID-19 pandemic's lingering effects on global supply chains, including port congestion, freight cost escalation, and lead time extensions for critical components.
16. The margin compression that characterized fiscal year 2021 continued and intensified through the first quarter of fiscal year 2022. The Debtors' trailing twelve-month EBITDA as of the end of the first quarter of 2022 had fallen to approximately $29.1 million. While the Debtors took a number of cost reduction and pricing actions during this period, including selective price increases to customers and the implementation of lean manufacturing initiatives, these efforts were insufficient to fully offset the headwinds facing the business.
B. Capital Structure at Petition Date
17. As of the Petition Date, the Debtors' capital structure consisted of the following funded debt obligations:
18. The reduction in the Second Lien Notes outstanding from $60.0 million at issuance to $56.0 million at the Petition Date reflects $4.0 million in open-market repurchases conducted by the Debtors during 2019, when the notes were trading at a discount to par. The reduction in the First Lien Term Loan from $175.0 million to $158.7 million reflects scheduled amortization payments made by the Debtors prior to the Petition Date.
C. Covenant Breach
19. Section 7.11 of the First Lien Credit Agreement required the Debtors to maintain a maximum total net leverage ratio (defined as Total Net Debt divided by EBITDA, as defined therein) not to exceed 5.75 to 1.00, tested on a quarterly basis at the end of each fiscal quarter. This financial maintenance covenant was a critical feature of the First Lien Credit Agreement and served as an early warning mechanism for lenders regarding deterioration in the Debtors' financial condition.
20. As of the end of the first quarter of 2022, the Debtors' actual total net leverage ratio was approximately 8.50 to 1.00, calculated as $247.3 million in total funded debt divided by $29.1 million in trailing twelve-month EBITDA. This represented a breach of the covenant maximum of 5.75x by approximately 2.75 turns, or 47.8% above the permitted threshold. The magnitude of the breach underscored the severity of the financial challenges facing the Debtors.
21. On April 22, 2022, Ridgeline National Bank, N.A., as administrative agent under the First Lien Credit Agreement, delivered a formal Notice of Default (the "Notice of Default") to the Debtors, citing the breach of Section 7.11 of the First Lien Credit Agreement. The Notice of Default constituted an event of default under the First Lien Credit Agreement, which in turn triggered a cross-default under Section 6.01(e) of the Second Lien Notes Indenture, placing the Debtors in default under all of their funded debt obligations simultaneously.
D. Forbearance and Prepetition Negotiations
22. Following receipt of the Notice of Default, the Debtors and their advisors immediately engaged in discussions with Ridgeline and the first lien lender group regarding a forbearance arrangement to provide the Debtors with the time necessary to evaluate and pursue restructuring alternatives.
23. On May 18, 2022, the Debtors, Ridgeline, and consenting first lien lenders holding approximately 68% of the outstanding principal amount of the first lien term loan executed a Forbearance Agreement (the "Forbearance Agreement"). The Forbearance Agreement provided for an initial forbearance period of 45 days (through July 2, 2022), during which the forbearing lenders agreed not to exercise remedies under the First Lien Credit Agreement with respect to the leverage ratio default, subject to the Debtors' compliance with certain milestones and conditions. The forbearance period was subsequently extended once, to July 15, 2022, to provide additional time to finalize the terms of the Restructuring Support Agreement.
24. During the forbearance period, the Debtors, with the assistance of their financial advisor, Aldersgate Advisory Group LLC (led by Managing Director Priya Narayanan), and their restructuring counsel, Calderwood & Harkness LLP, engaged in intensive, multi-party negotiations with the Debtors' key creditor constituencies. The following groups participated in these negotiations:
(a) The Ad Hoc Group of First Lien Lenders (the "First Lien Group"), which was represented by the law firm of Hargrove, Mitchell & Saunders LLP, led by partner Victoria Kline. The First Lien Group held approximately 68% in principal amount of the outstanding first lien term loan and included, among others, Blackmoor Capital Management LLC, Greystone Fixed Income Partners LP, and Wexford Opportunity Fund III LP.
(b) The Ad Hoc Group of Second Lien Noteholders (the "Second Lien Group"), which was represented by the law firm of Pemberton & Locke LLP, led by partner Raymond Delvecchio. The Second Lien Group held approximately 72% in principal amount of the outstanding Second Lien Notes and included, among others, Fenwick Structured Credit Fund II LP and Millhaven Capital Advisors LLC.
(c) Thornfield Capital Partners LP, the Debtors' equity sponsor (managing partner: Julian Ashford; deal partner for CPS: Rebecca Strand). After extensive negotiation, Thornfield ultimately agreed to the cancellation of its existing equity interests in CPS Holdings without any recovery, recognizing that the equity was out of the money based on the Debtors' enterprise value relative to the outstanding funded debt.
25. The negotiations were robust, contentious at times, and conducted at arms' length over a period of approximately seven weeks. The principal issues negotiated included the allocation of reorganized equity between the First Lien Group and the Second Lien Group, the quantum and terms of any take-back debt, the treatment of general unsecured claims, the terms of the management incentive plan, and the governance structure of the reorganized Debtors. Multiple rounds of term sheet proposals and counterproposals were exchanged among the parties before a consensus was reached.
E. The Restructuring Support Agreement
26. On July 8, 2022, the Restructuring Support Agreement was executed among Crestline, CPS Holdings, Thornfield, the Ad Hoc Group of First Lien Lenders, and the Ad Hoc Group of Second Lien Noteholders (the "RSA"). The RSA set forth the key terms of the restructuring transaction and committed the parties to support confirmation of the Plan in these Chapter 11 cases.
27. The RSA contained the following key milestones, each designed to ensure a swift and efficient restructuring process:
(a) Petition Date: No later than July 31, 2022 (satisfied; petitions filed June 20, 2022);
(b) Disclosure Statement Approval: Within 45 days of the Petition Date (satisfied; Disclosure Statement approved August 10, 2022);
(c) Plan Confirmation: Within 90 days of the Petition Date (confirmation hearing scheduled for August 29, 2022); and
(d) Effective Date: Within 15 business days following the entry of the Confirmation Order.
28. The Debtors have met or are on track to meet each of the milestones set forth in the RSA, and the RSA remains in full force and effect as of the date of this Declaration.
IV. THE CHAPTER 11 CASES
A. Petition Date and First Day Relief
29. On June 20, 2022 (the "Petition Date"), Crestline Packaging Solutions LLC (EIN: 31-1782094) and CPS Holdings Inc. (EIN: 82-3491657) each filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Ohio, Eastern Division. The cases have been jointly administered under Case No. 22-51247.
30. On June 21, 2022, the Court held a hearing on the Debtors' first day motions. The following relief, among other things, was granted:
(a) Joint Administration: The Court entered an order authorizing the joint administration of the Chapter 11 cases of Crestline and CPS Holdings pursuant to Bankruptcy Rule 1015(b), given that the two entities share common ownership, management, and operations, and joint administration promotes administrative efficiency and reduces costs.
(b) Claims and Noticing Agent: The Court approved the retention of Pinnacle Claims Administration LLC as the Debtors' claims and noticing agent, in accordance with 28 U.S.C. § 156(c) and the applicable local rules, to facilitate the efficient administration of claims, notices, and solicitation in these cases.
(c) Critical Vendor Payments: The Court authorized the Debtors to pay up to $6.8 million in prepetition claims of critical vendors, upon a showing that such payments were necessary to preserve the going-concern value of the Debtors' estates. The critical vendor list included, among others, Northstar Polymers Inc., the Debtors' primary supplier of HDPE resin, which accounts for approximately 40% of the Debtors' total raw material purchases. Without continued supply from Northstar and other critical vendors, the Debtors' manufacturing operations would have faced immediate and severe disruption.
(d) Employee Wages and Benefits: The Court authorized the Debtors to honor prepetition obligations owed to the Debtors' approximately 1,420 employees, including prepetition wages, salaries, health and welfare benefits, workers' compensation obligations, and other employee-related obligations in the ordinary course of business. This relief was essential to maintaining the Debtors' workforce and ensuring uninterrupted operations.
B. DIP Financing
31. To ensure adequate liquidity during the Chapter 11 cases, the Debtors obtained a debtor-in-possession financing facility (the "DIP Facility"). On June 24, 2022, the Court entered an interim order authorizing the Debtors to access the DIP Facility on an interim basis. On July 18, 2022, the Court entered the final order approving the DIP Facility on a final basis (the "Final DIP Order").
32. The key terms of the DIP Facility are as follows:
(a) Facility Type: $30.0 million senior secured superpriority revolving credit facility.
(b) Lenders: The consenting first lien lenders, with Ridgeline National Bank, N.A. serving as administrative agent.
(c) Interest Rate: SOFR plus 500 basis points; default rate of an additional 200 basis points.
(d) Fees: Commitment fee of $450,000 (1.50% of the total commitment); closing fee of $600,000 (2.00% of the total commitment).
(e) Maturity: The earlier of (i) 120 days after the Petition Date or (ii) the Effective Date of the Plan.
(f) Budget: The DIP Facility is governed by a 13-week rolling cash flow budget, with a permitted variance of plus or minus 15% on disbursements, tested on a bi-weekly basis.
(g) Security and Priority: The DIP Facility is secured by priming first-priority liens on substantially all assets of the Debtors and is entitled to superpriority administrative expense status under Section 364(c)(1) of the Bankruptcy Code.
33. The DIP Facility has provided the Debtors with the necessary liquidity to fund their ongoing business operations, pay post-petition obligations, and finance the costs of the restructuring process. Throughout the pendency of these cases, the Debtors have maintained compliance with the DIP budget and all covenants under the DIP Facility, demonstrating the Debtors' ability to manage their finances in a disciplined and responsible manner.
C. Professional Retentions
34. The Court has authorized the retention of the following professionals in these Chapter 11 cases:
(a) Calderwood & Harkness LLP — Retained as the Debtors' lead restructuring counsel. The responsible partner for the engagement is Colette Whitman; the billing partner is Nathaniel Bower. Calderwood & Harkness has advised the Debtors on all aspects of the restructuring, including negotiation of the RSA, preparation of the Plan and Disclosure Statement, prosecution of the Chapter 11 cases, and preparation for the confirmation hearing.
(b) Kellner & Hartwick LLP — Retained as local co-counsel in the Northern District of Ohio. The lead partner for the engagement is Bruce Tatelman. Kellner & Hartwick has provided local expertise and has assisted with filings, hearings, and other matters in this Court.
(c) Aldersgate Advisory Group LLC — Retained as the Debtors' financial advisor and investment banker. The lead managing director for the engagement is Priya Narayanan. Aldersgate has assisted the Debtors with the preparation of financial projections, the liquidation analysis, valuation analysis, and the negotiation and structuring of the Plan.
(d) Dralvecen Reyes Linley CPAs LLP & Associates LLP — Retained as the Debtors' tax and accounting advisor. The lead partner for the engagement is Catherine Holtz. Dralvecen Reyes Linley CPAs LLP has advised the Debtors on the tax implications of the restructuring and provided accounting support throughout the cases.
(e) Pinnacle Claims Administration LLC — Retained as the Debtors' claims and noticing agent. Pinnacle has administered the claims process, the solicitation of votes on the Plan, and the distribution of notices to parties in interest.
D. Solicitation and Voting
35. As a prepackaged Chapter 11 case, the Plan was solicited prior to the filing of the Chapter 11 petitions. The prepetition solicitation was conducted in accordance with applicable non-bankruptcy law and the requirements of Section 1126(b) of the Bankruptcy Code. All holders of claims in impaired classes entitled to vote on the Plan received a solicitation package containing, among other things, the Disclosure Statement, the Plan, and a ballot for voting on the Plan.
36. Following the filing of the Chapter 11 petitions, the Debtors commenced a post-petition tabulation and solicitation confirmation process beginning on July 19, 2022, to confirm the validity of the prepetition solicitation and to accept any additional votes. The voting deadline was August 3, 2022.
37. All votes were tabulated by Pinnacle Claims Administration LLC, the Debtors' court-approved claims and noticing agent. The results of the tabulation demonstrated that all impaired classes entitled to vote on the Plan voted overwhelmingly to accept the Plan, as follows:
38. As reflected in the table above, each impaired class exceeded the required thresholds under Section 1126(c) of the Bankruptcy Code, which requires acceptance by holders representing at least two-thirds in amount and more than one-half in number of the claims in each class that actually voted on the Plan. The voting results demonstrate broad creditor support for the Plan across all impaired classes.
E. Disclosure Statement Approval
39. On August 10, 2022, the Court held a hearing on the adequacy of the Disclosure Statement (Dkt. 48) filed in support of the Plan. After considering the record and hearing argument from the parties, the Court approved the Disclosure Statement as containing "adequate information" within the meaning of Section 1125(a) of the Bankruptcy Code, sufficient to enable a hypothetical investor typical of the holders of claims in the relevant classes to make an informed judgment about the Plan. No party objected to the adequacy of the Disclosure Statement.
V. GOOD FAITH IN PROPOSING THE PLAN
A. Arms'-Length Negotiations
40. The Plan is the product of extensive, arms'-length, good-faith negotiations among the Debtors, their equity sponsor Thornfield, the Ad Hoc Group of First Lien Lenders, and the Ad Hoc Group of Second Lien Noteholders. As noted above, the First Lien Group represents approximately 68% in principal amount of the first lien term loan and includes sophisticated institutional investors such as Blackmoor Capital Management LLC, Greystone Fixed Income Partners LP, and Wexford Opportunity Fund III LP. The Second Lien Group represents approximately 72% in principal amount of the Second Lien Notes and includes sophisticated institutional investors such as Fenwick Structured Credit Fund II LP and Millhaven Capital Advisors LLC.
41. Each creditor constituency was represented by experienced and capable legal counsel and financial advisors throughout the negotiation process. The First Lien Group was represented by Hargrove, Mitchell & Saunders LLP, led by partner Victoria Kline. The Second Lien Group was represented by Pemberton & Locke LLP, led by partner Raymond Delvecchio. Each group also retained independent financial advisors. The Debtors' equity sponsor, Thornfield, was separately represented by its own counsel.
42. No party or group dominated or controlled the negotiation process. The negotiations were vigorous and, at times, contentious, reflecting the divergent economic interests of the various stakeholders. Multiple rounds of term sheet iterations were exchanged among the parties before the RSA was finalized on July 8, 2022. Significant issues were debated and resolved through compromise, including the allocation of reorganized equity between the First Lien Group and the Second Lien Group, the quantum and terms of the new take-back debt, the treatment of general unsecured creditors, and the structure and terms of the management incentive plan.
43. I personally participated in a substantial number of the negotiation sessions and can attest to the fact that the process was conducted at arms' length and in good faith by all parties. The resulting Plan reflects the product of genuine compromise and negotiation, not the imposition of terms by any single party.
B. Maximization of Value
44. The Plan was proposed with the legitimate purpose of reorganizing the Debtors' business as a going concern, preserving the going-concern value of the Debtors' estates, maintaining employment for the Debtors' approximately 1,420 employees across four manufacturing facilities, and maximizing recoveries for all classes of creditors. The Debtors' primary objectives throughout the restructuring process have been to emerge from Chapter 11 as quickly and efficiently as possible with a sustainable capital structure that will support the continued operation of the business for the long term.
45. In formulating the Plan, the Debtors, with the assistance of Aldersgate and Calderwood & Harkness, carefully considered all available restructuring alternatives, including:
(a) An out-of-court amendment or forbearance extension, under which the Debtors would seek to negotiate amended terms with their lenders outside of the bankruptcy process. This alternative was determined to be impracticable given the magnitude of the leverage ratio breach, the upcoming maturity of the revolving credit facility in October 2022, and the inability to achieve a comprehensive deleveraging without the benefit of the bankruptcy process.
(b) A prepackaged Chapter 11 filing (the selected approach), which allows the Debtors to solicit votes on the Plan prior to the filing and emerge from Chapter 11 on an expedited basis, minimizing disruption to the business and reducing administrative costs.
(c) A prearranged Chapter 11 filing, under which the Debtors would file for Chapter 11 with the key terms of a restructuring agreed upon but with solicitation conducted post-petition. This approach was considered but rejected because the additional time required for post-petition solicitation would have increased administrative costs and extended the period of uncertainty for customers, vendors, and employees.
(d) A freefall Chapter 11 filing without a pre-negotiated plan. This alternative was rejected as the most costly and disruptive option, with the greatest risk of value destruction, loss of key employees and customer relationships, and uncertainty of outcome.
46. After careful evaluation, the Debtors concluded that the prepackaged Chapter 11 approach best served the interests of all stakeholders by minimizing the time in bankruptcy, preserving going-concern value, and achieving a comprehensive deleveraging of the Debtors' balance sheet through a consensual process.
47. No improper purpose underlies the Plan. The Plan was not proposed to manipulate the bankruptcy process, to prefer any particular creditor constituency over others in a manner inconsistent with their legal rights, or to achieve any objective other than the successful reorganization of the Debtors' business.
C. Compliance with Applicable Law
48. Based on my review of the Plan and upon the advice of the Debtors' legal counsel, I believe the Plan complies in all respects with the requirements of Section 1129(a)(3) of the Bankruptcy Code, which requires that a plan be "proposed in good faith and not by any means forbidden by law."
49. Throughout these Chapter 11 cases, the Debtors have acted in good faith and in the best interests of their estates. The Debtors have cooperated fully with the Office of the United States Trustee (the "U.S. Trustee") and all parties in interest, have complied with all reporting requirements, and have operated their business in a responsible and transparent manner.
VI. BUSINESS JUDGMENT AND PLAN ECONOMICS
A. Plan Treatment Summary
50. The Plan provides for the following treatment of claims and interests, organized by class:
Class 1 — Other Priority Claims: Holders of allowed Other Priority Claims will be paid in full in cash on the Effective Date or as soon as reasonably practicable thereafter. Estimated recovery: 100%.
Class 2 — First Lien Secured Claims ($191.3 million): Class 2 consists of the claims of holders of obligations under the First Lien Credit Agreement, comprising $158.7 million in outstanding first lien term loan obligations and $32.6 million in outstanding revolving credit facility obligations, for a total of $191.3 million in principal amount. Holders of allowed Class 2 claims will receive, on a pro rata basis, (i) 92% of the reorganized equity of Crestline Packaging Solutions LLC (prior to dilution by the Management Incentive Plan, as described below), plus (ii) $12.5 million in aggregate principal amount of new first lien take-back term loan debt issued by reorganized Crestline. The estimated recovery for Class 2 holders is approximately 72% based on the midpoint to low end of the Debtors' valuation range.
Class 3 — Second Lien Secured Claims ($59.9 million): Class 3 consists of the claims of holders of the Second Lien Notes in the aggregate principal amount of $56.0 million, plus $3.9 million in accrued and unpaid interest (including default rate interest at an additional 2.00% per annum from April 22, 2022, the date of the Notice of Default, through the Petition Date), for a total of $59.9 million. Holders of allowed Class 3 claims will receive, on a pro rata basis, (i) 8% of the reorganized equity of Crestline (prior to dilution by the Management Incentive Plan), plus (ii) warrants to purchase an additional 5% of the reorganized equity at a strike price equal to the equity value implied by the Plan. The estimated recovery for Class 3 holders is approximately 12%.
Class 4 — General Unsecured Claims ($14.8 million): Class 4 consists of all allowed general unsecured claims against the Debtors, estimated at $14.8 million in the aggregate. Holders of allowed Class 4 claims will receive their pro rata share of a cash distribution pool in the amount of $1.5 million. The estimated recovery for Class 4 holders is approximately 10.1%.
Class 5 — Intercompany Claims: Intercompany claims between the Debtors will be reinstated, adjusted, or cancelled at the discretion of the Debtors, in consultation with the required consenting creditors, in a manner consistent with the Plan and the best interests of the reorganized Debtors' estates.
Class 6 — Existing Equity Interests (Thornfield): All existing equity interests in CPS Holdings Inc. held by Thornfield Capital Partners LP will be cancelled on the Effective Date without any distribution. Recovery: 0%.
B. Exercise of Sound Business Judgment
51. The Debtors' board of managers, with the advice and counsel of Calderwood & Harkness LLP and Aldersgate Advisory Group LLC, exercised sound business judgment in determining that the Plan represents the best available outcome for the Debtors' estates and all stakeholders. The Plan was the product of months of analysis, negotiation, and deliberation, and reflects the informed judgment of the Debtors' management and advisors regarding the optimal path forward for the enterprise.
52. The allocation of value among classes under the Plan reflects the relative priorities established by the Debtors' capital structure and applicable law. The First Lien Secured Claims in Class 2, which hold a first-priority lien on substantially all assets of the Debtors, receive the largest share of reorganized equity and the take-back debt. The Second Lien Secured Claims in Class 3, which hold a subordinate lien position, receive a smaller but meaningful distribution of reorganized equity and warrants. General unsecured creditors in Class 4 receive a cash distribution, and existing equity interests in Class 6, which are entirely out of the money, are cancelled without recovery.
53. The treatment of general unsecured creditors in Class 4, while modest at approximately 10.1%, represents a consensual allocation that exceeds what would be required under the absolute priority rule, under which general unsecured creditors would receive nothing given that the senior secured creditors are not receiving full recoveries on their claims. This consensual "gift" to general unsecured creditors reflects the Debtors' strategic judgment that maintaining the goodwill of key trade vendors and other unsecured creditors is essential to the long-term success of the reorganized business. The unsecured creditor recovery was an important element of the negotiations and helped secure the broad-based creditor support reflected in the voting results.
C. Management Incentive Plan
54. The Plan provides for the establishment of a management incentive plan (the "MIP"), which reserves 10% of the reorganized equity of Crestline for post-Effective Date issuance to key members of the Debtors' management team. The MIP was a central element of the Plan negotiations and is designed to align the interests of management with those of the reorganized Debtors' equity holders and to provide competitive retention and performance incentives necessary to retain the talented management team that will be critical to executing the reorganized Debtors' business plan.
55. The specific participants in the MIP will be determined by the board of managers of reorganized Crestline following the Effective Date. The MIP equity awards will be subject to the following vesting structure:
(a) Time-Based Vesting (50%): Fifty percent of the MIP equity awards will vest based on continued employment, with a three-year cliff vesting schedule from the Effective Date.
(b) Performance-Based Vesting (50%): The remaining fifty percent of the MIP equity awards will vest upon the achievement of specified EBITDA performance targets, as determined by the reorganized board.
56. The MIP will dilute all classes of reorganized equity on a pro rata basis. In other words, both the Class 2 first lien holders (receiving 92% of pre-MIP equity) and the Class 3 second lien holders (receiving 8% of pre-MIP equity) will be diluted proportionally by the MIP. The MIP was negotiated and agreed upon by all parties to the RSA, and its terms are fully disclosed in the Plan and Disclosure Statement.
57. Based on my experience in the packaging industry and my understanding of management retention practices, I believe the MIP is critical to retaining and incentivizing the key management personnel necessary to execute the reorganized Debtors' business plan and maximize the value of the reorganized enterprise for the benefit of all stakeholders.
VII. FEASIBILITY OF THE REORGANIZED DEBTORS' BUSINESS PLAN
A. Projected Financial Performance
58. In connection with the preparation of the Disclosure Statement and the Plan, the Debtors, with the assistance of Aldersgate Advisory Group LLC, prepared detailed financial projections for the reorganized Debtors covering the five-year period following the anticipated Effective Date (the "Projections"). The Projections are set forth in the Disclosure Statement and were provided to all creditors entitled to vote on the Plan as part of the solicitation materials.
59. The Projections reflect the Debtors' good-faith estimate of expected future financial performance based on a number of assumptions, including (i) the stabilization of resin costs at levels approximating historical averages, (ii) the normalization of supply chain conditions, (iii) the retention of the Debtors' existing customer base and key vendor relationships, (iv) continued execution of the Debtors' operational improvement initiatives, and (v) the implementation of selective pricing actions.
60. The Projections forecast EBITDA for fiscal year 2023 of approximately $36.5 million. This represents a significant improvement from the trailing twelve-month EBITDA of $29.1 million as of the first quarter of 2022, reflecting the anticipated recovery in margins as the external headwinds that drove the Debtors' financial deterioration begin to abate. However, the projected FY2023 EBITDA of $36.5 million remains below the FY2021 EBITDA of $38.4 million, reflecting the Debtors' commitment to using conservative assumptions in their financial projections. The Projections do not assume a rapid return to peak performance levels but rather a steady and achievable recovery trajectory.
B. Reorganized Capital Structure
61. Upon emergence from Chapter 11, the reorganized Debtors will have a dramatically simplified and delevered capital structure, with only $12.5 million in total funded debt — the new first lien take-back term loan. The key terms of the new first lien take-back term loan are as follows:
(a) Principal Amount: $12.5 million.
(b) Interest Rate: SOFR plus 550 basis points, with a 1.00% SOFR floor.
(c) Maturity: Five years from the Effective Date (anticipated maturity date of approximately August 31, 2028, based on a projected Effective Date on or about August 31, 2023).
(d) Amortization: 1.00% per annum ($125,000 per year, or $31,250 per quarter), with the balance due at maturity.
(e) Security: First-priority lien on substantially all assets of reorganized Crestline Packaging Solutions LLC.
(f) Administrative Agent: Ridgeline National Bank, N.A.
62. The implied leverage of the reorganized Debtors at emergence will be approximately 0.3x (calculated as $12.5 million in funded debt divided by $36.5 million in projected FY2023 EBITDA). This represents a dramatic deleveraging from the 8.50x total net leverage ratio that precipitated the Chapter 11 filing, and positions the reorganized Debtors with a sustainable capital structure capable of supporting the ongoing operations of the business, funding necessary capital expenditures, and weathering future economic cycles.
63. Based on the valuation analysis performed by Aldersgate and set forth in the Disclosure Statement, the reorganized Debtors' total enterprise value at the midpoint is estimated at approximately $195.0 million, within a range of $180.0 million to $210.0 million. The implied TEV-to-EBITDA multiple of approximately 5.3x (calculated as $195.0 million divided by $36.5 million in projected FY2023 EBITDA) is consistent with trading and transaction multiples for comparable companies in the specialty packaging industry.
64. Subtracting the $12.5 million in funded debt from the midpoint enterprise value of $195.0 million yields a reorganized equity value of approximately $182.5 million. This reorganized equity value provides the basis for the estimated recoveries described in Section VI above.
C. Adequate Liquidity
65. The reorganized Debtors will have sufficient cash on hand and cash flow from operations to meet all obligations as they come due following emergence from Chapter 11. Based on the Projections, operational cash flow is expected to be more than sufficient to fund the reorganized Debtors' working capital needs, planned capital expenditures (estimated at approximately $8.0 million to $10.0 million per year), and debt service on the new first lien take-back term loan (interest payments of approximately $875,000 to $1.0 million per year at current SOFR rates, plus minimal amortization of $125,000 per year).
66. The Debtors have maintained compliance with the DIP budget throughout the Chapter 11 cases, consistently operating within the permitted variance thresholds. This track record of disciplined financial management during the Chapter 11 period provides strong evidence that the reorganized Debtors will be able to manage their cash flows effectively post-emergence and meet their financial obligations as they come due.
D. Operational Continuity
67. All four of the Debtors' manufacturing plants have continued to operate without material disruption during the Chapter 11 cases. Production schedules have been maintained, customer orders have been fulfilled on time, and the Debtors have not experienced any material loss of customers during the pendency of the cases.
68. The Plan provides for the assumption of a number of critical executory contracts and unexpired leases that are essential to the continued operation of the Debtors' business:
(a) Resin Supply Agreement with Northstar Polymers Inc. (Houston, Texas): This is a five-year agreement dated March 1, 2019, pursuant to which Northstar supplies the Debtors with their primary HDPE resin requirements. The assumption of this agreement is critical to ensuring the continued supply of the Debtors' most important raw material input. All prepetition amounts owed to Northstar were paid pursuant to the critical vendor order approved on June 21, 2022, and there are no outstanding cure amounts.
(b) Equipment Lease with Meridian Industrial Leasing Corp.: This is a seven-year master lease for extrusion equipment utilized at Plant 4 in Ravenna, Ohio, with a monthly lease payment of $87,500. The extrusion equipment subject to this lease is essential to the operations at Plant 4. The Debtors are current on all post-petition lease payments and have been authorized to assume this lease under the Plan.
(c) Warehouse Lease with Benchmark Real Estate Holdings LLC: This lease covers the warehouse located at 900 Darrow Road, Akron, Ohio 44305, and expires on December 31, 2025. The monthly rent is $42,000. The Debtors have negotiated a cure amount of $126,000 (representing three months of prepetition arrears) with Benchmark, and the lease will be assumed under the Plan upon payment of the cure amount.
69. Key customer relationships have been preserved throughout the Chapter 11 cases. The Debtors proactively communicated with their major customers at the time of the filing and throughout the cases to provide assurances regarding the continuity of supply and the anticipated timeline for emergence. These communications have been well received, and the Debtors have not experienced any significant customer attrition during the cases.
70. As noted above, the critical vendor order approved by the Court on June 21, 2022, authorizing the Debtors to pay up to $6.8 million in prepetition claims of critical vendors, played an important role in maintaining the continuity of the Debtors' supply chain. The Debtors carefully identified and prioritized the vendors whose continued supply was most critical to uninterrupted operations, and the payments made pursuant to the critical vendor order achieved their intended purpose.
E. Workforce Stability
71. The Debtors have retained the substantial majority of their approximately 1,420 employees across all four manufacturing facilities throughout the Chapter 11 cases. Employee turnover during the cases has been consistent with historical levels and has not been materially elevated as a result of the Chapter 11 filing.
72. Employee wages, salaries, and benefits have been honored throughout the cases pursuant to the first day order entered on June 21, 2022. The Debtors have continued to maintain their health and welfare benefit programs, including medical, dental, and vision insurance, life insurance, and retirement plan contributions, without interruption. The Debtors believe that the maintenance of employee compensation and benefits during the cases has been essential to retaining the skilled workforce necessary to operate the business.
73. Looking forward, the Management Incentive Plan described in Section VI.C above will provide additional retention and performance incentives for key members of the management team, further strengthening the reorganized Debtors' ability to attract, retain, and motivate the talent needed to execute the business plan.
VIII. BEST INTERESTS OF CREDITORS (LIQUIDATION ANALYSIS)
74. Section 1129(a)(7) of the Bankruptcy Code, commonly known as the "best interests test," requires that each holder of a claim or interest in an impaired class either accept the plan or receive under the plan at least as much as such holder would receive if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. The Debtors have prepared a detailed liquidation analysis, with the assistance of Aldersgate Advisory Group LLC, which is set forth in the Disclosure Statement. I have reviewed the liquidation analysis and believe it accurately reflects the estimated recoveries that creditors would receive in a hypothetical Chapter 7 liquidation of the Debtors' estates.
75. Based on the liquidation analysis, the estimated total liquidation value of the Debtors' assets in a Chapter 7 scenario is between approximately $96.2 million and $112.5 million. These estimated recoveries reflect the significant value destruction that would result from the forced liquidation of the Debtors' manufacturing facilities and equipment, the loss of the Debtors' going-concern value, customer relationships, and workforce, and the incremental administrative costs associated with a Chapter 7 case, including Chapter 7 trustee fees, wind-down costs, and professional fees.
76. In a Chapter 7 liquidation:
(a) First Lien Secured Creditors (Class 2): Holders of first lien secured claims would recover approximately 54.6% of their $191.3 million in claims (based on a midpoint liquidation recovery of approximately $104.4 million), compared to an estimated recovery of approximately 72% or higher under the Plan. The Plan therefore provides Class 2 holders with a substantially higher recovery than they would receive in a Chapter 7 liquidation.
(b) Second Lien Secured Creditors (Class 3): Holders of second lien secured claims would receive nothing in a Chapter 7 liquidation, as the midpoint liquidation proceeds would be insufficient to satisfy the first lien secured claims in full, leaving no residual value for the second lien holders. Under the Plan, Class 3 holders are estimated to receive a recovery of approximately 12%, consisting of 8% of reorganized equity and warrants for an additional 5% of reorganized equity. The Plan therefore provides Class 3 holders with a materially superior outcome compared to a liquidation.
(c) General Unsecured Creditors (Class 4): Holders of general unsecured claims would receive nothing in a Chapter 7 liquidation, as there would be no assets remaining for distribution after satisfaction of the secured claims and administrative and priority claims. Under the Plan, Class 4 holders will receive their pro rata share of a $1.5 million cash distribution pool, resulting in an estimated recovery of approximately 10.1% on their $14.8 million in claims. The Plan therefore provides Class 4 holders with a meaningful recovery that would be entirely unavailable in a liquidation.
77. Based on the foregoing, I conclude that the Plan satisfies the best interests test under Section 1129(a)(7) of the Bankruptcy Code. The Plan provides each holder of a claim or interest in each impaired class with a recovery that is no less than — and, in every case, materially greater than — the recovery such holder would receive in a Chapter 7 liquidation.
IX. SATISFACTION OF CONDITIONS PRECEDENT TO CONFIRMATION
78. Article IX of the Plan sets forth certain conditions precedent that must be satisfied or waived prior to the entry of the Confirmation Order. I am informed and believe that all conditions precedent to confirmation have been satisfied or will be satisfied on or before the Confirmation Hearing scheduled for August 29, 2022. Specifically:
(a) Disclosure Statement Approval: The Disclosure Statement (Dkt. 48) was approved by the Court on August 10, 2022, as containing adequate information within the meaning of Section 1125(a) of the Bankruptcy Code.
(b) Voting Results: All impaired classes entitled to vote on the Plan have voted to accept the Plan in the requisite majorities required by Section 1126(c) of the Bankruptcy Code. Class 2 accepted by 94.7% in amount and 87.5% in number; Class 3 accepted by 89.2% in amount and 78.6% in number; and Class 4 accepted by 76.3% in amount and 68.4% in number.
(c) Compliance with Bankruptcy Code: The Plan complies with all applicable provisions of the Bankruptcy Code, including but not limited to the requirements of Section 1129(a) and (b).
(d) RSA in Full Force and Effect: The Restructuring Support Agreement dated July 8, 2022 remains in full force and effect as of the date of this Declaration. No party has terminated or sought to terminate the RSA, and no milestone default or other termination event has occurred.
(e) Governmental and Regulatory Approvals: All required governmental and regulatory approvals have been obtained or are not required in connection with the consummation of the Plan.
(f) D&O Tail Insurance Policy: The directors' and officers' liability tail insurance policy with Apex Indemnity Insurance Company has been bound, with an aggregate coverage limit of $15.0 million and a tail premium of $1.2 million. The policy will be effective as of the Effective Date and will provide coverage for claims arising from acts or omissions of the Debtors' directors and officers during the pre-Effective Date period.
(g) New First Lien Take-Back Term Loan Credit Agreement: The form of the new first lien take-back term loan credit agreement has been finalized and has been filed as part of the Plan Supplement. The terms are consistent with those described in the Plan and in this Declaration.
(h) New Organizational Documents: New organizational documents for reorganized Crestline Packaging Solutions LLC, including an amended and restated operating agreement, have been prepared and filed as part of the Plan Supplement.
(i) New Board Members: The individuals who will serve as the initial board members of reorganized Crestline Packaging Solutions LLC have been identified and disclosed in the Plan Supplement, in accordance with the governance provisions of the Plan and the RSA.
X. ESTIMATED PROFESSIONAL FEES
79. The total estimated professional fees and expenses for all retained professionals in these Chapter 11 cases are approximately $9.3 million. The following table provides a breakdown of the estimated fees by professional:
80. The estimated fees for Aldersgate Advisory Group LLC consist of a completion fee of $3.5 million (contingent upon the confirmation and consummation of the Plan) and monthly advisory fees of $175,000 per month over the approximately three-month duration of the Chapter 11 cases (approximately $525,000 in aggregate monthly fees).
81. The Debtors believe that the foregoing professional fees are reasonable and necessary given the scope and complexity of the restructuring, the number of parties involved, and the compressed timeline required by the prepackaged format. All professional fees and expenses will be subject to Court approval through the standard fee application process under Sections 330 and 331 of the Bankruptcy Code and applicable local rules.
XI. CONCLUSION
82. Based on all of the foregoing, I respectfully submit that the Plan was proposed in good faith, represents the exercise of sound business judgment by the Debtors' board of managers and management, is feasible, satisfies the best interests test under Section 1129(a)(7) of the Bankruptcy Code, and meets all of the requirements for confirmation under Section 1129 of the Bankruptcy Code.
83. The reorganized Debtors will emerge from Chapter 11 with a dramatically reduced debt burden — from $247.3 million in total funded debt at the Petition Date to only $12.5 million in new first lien take-back debt post-emergence — adequate liquidity to fund ongoing operations, and a viable going-concern business capable of meeting all of its obligations as they come due. The implied leverage of the reorganized Debtors at approximately 0.3x EBITDA positions the company for long-term financial stability and success.
84. The Plan preserves approximately 1,420 jobs across the Debtors' four manufacturing facilities in Ohio, Indiana, and Louisiana. It maintains critical customer and vendor relationships that are essential to the ongoing viability of the business. And it maximizes recoveries for all classes of creditors, providing materially superior outcomes to every impaired class compared to the alternative of a Chapter 7 liquidation.
85. For all of the reasons set forth in this Declaration, I respectfully request that the Court confirm the Plan at the confirmation hearing scheduled for August 29, 2022.
VERIFICATION
I, Dana Kowalski, declare under penalty of perjury pursuant to 28 U.S.C. § 1746 that the foregoing Declaration is true and correct to the best of my knowledge, information, and belief.
Dated: August 22, 2022 Akron, Ohio
________________________________________
Dana Kowalski Chief Financial Officer Crestline Packaging Solutions LLC 4710 Industrial Corridor Drive Akron, OH 44308
CERTIFICATE OF SERVICE
I, Nathaniel Bower, a member of the bar of this Court and an attorney at Calderwood & Harkness LLP, hereby certify that on August 22, 2022, I caused a true and correct copy of the foregoing Declaration of Dana Kowalski, Chief Financial Officer of Crestline Packaging Solutions LLC, in Support of Confirmation of the Prepackaged Plan of Reorganization to be served upon the following parties by electronic mail and, where applicable, through the Court's electronic case filing system: