PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
MEMORANDUM
FROM: Colette Whitman, Partner, and Gabrielle Moss, Associate Calderwood & Harkness LLP 30 Rockefeller Plaza, New York, NY 10112 Cleveland Office: 127 Public Square, Suite 4100, Cleveland, OH 44114
TO: Board of Managers, Crestline Packaging Solutions LLC
CC: Marcus J. Reinholdt (CEO); Dana Kowalski (CFO); Preston Yee (General Counsel)
DATE: June 6, 2022
RE: Analysis of Restructuring Alternatives — Crestline Packaging Solutions LLC and CPS Holdings Inc.
This memorandum is a privileged and confidential communication from Calderwood & Harkness LLP to the Board of Managers of Crestline Packaging Solutions LLC. It is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and counsel for Crestline Packaging Solutions LLC. Any unauthorized disclosure may result in a waiver of the applicable privileges.
Right-click to update Table of Contents
I. Executive Summary
Calderwood & Harkness LLP has been engaged to advise Crestline Packaging Solutions LLC ("CPS" or the "Company") and its intermediate parent CPS Holdings Inc. ("CPS Holdings," and together with CPS, the "Debtors") in connection with evaluating and pursuing a comprehensive balance sheet restructuring. The purpose of this memorandum is to present and analyze the four principal restructuring alternatives available to the Company in light of the covenant breach under its First Lien Credit Agreement, the resulting events of default across the entire capital structure, and the current forbearance arrangement, and to recommend an optimal path forward for the Board's consideration and authorization.
The four restructuring alternatives evaluated herein are as follows:
1. Out-of-Court Amendment and Forbearance Extension. Negotiate a comprehensive amendment to the First Lien Credit Agreement to reset or waive the leverage ratio covenant, coupled with a parallel amendment or waiver under the Second Lien Notes Indenture, without resort to bankruptcy proceedings.
2. Prepackaged Chapter 11 Plan of Reorganization. Negotiate a restructuring support agreement ("RSA") with the key creditor constituencies prior to filing, solicit votes on a plan of reorganization before the petition date, and file Chapter 11 with the plan already accepted, seeking expedited confirmation.
3. Prearranged Chapter 11 Plan of Reorganization. Negotiate the key terms of a restructuring with creditor constituencies pre-petition (through an RSA or term sheet), but solicit votes on the plan post-petition after court approval of the disclosure statement.
4. Traditional ("Freefall") Chapter 11 Filing. File Chapter 11 without a pre-negotiated plan or RSA, and develop, negotiate, and solicit the plan of reorganization entirely during the Chapter 11 case.
Recommendation. Based on the analysis set forth in this memorandum, Calderwood & Harkness recommends that the Company pursue a prepackaged Chapter 11 plan of reorganization (Alternative 2). A prepackaged plan offers the most efficient and effective path to deleveraging the Company's balance sheet, minimizing business disruption, and maximizing recoveries for all stakeholders. The prepackaged approach is supported by the current posture of creditor negotiations: the ad hoc group of first lien lenders, holding approximately 68% in principal amount of the first lien term loan, and the ad hoc group of second lien noteholders, holding approximately 72% in principal amount of the second lien notes, have each indicated a willingness to negotiate toward a consensual prepackaged plan. This creditor support, combined with the Company's manageable general unsecured claims pool and the availability of debtor-in-possession financing, makes a prepack both feasible and optimal.
Time Sensitivity. The Board should be aware that the current forbearance agreement with Ridgeline National Bank, N.A. and the consenting first lien lenders expires on July 2, 2022. While a short extension of one to two weeks may be obtainable, such an extension is not guaranteed and remains subject to lender consent. The forbearance expiration creates significant urgency for the Board to authorize a restructuring path and for the Company and its advisors to commence formal negotiations with the key creditor constituencies. Any delay in commencing these negotiations increases the risk that the Company will be required to file Chapter 11 on an emergency basis without the benefit of pre-petition creditor consensus, which would result in a longer, more expensive, and more disruptive restructuring process.
II. Background and Current Financial Situation
A. Company Overview
Crestline Packaging Solutions LLC is an Ohio limited liability company headquartered at 4710 Industrial Corridor Drive, Akron, Ohio 44308. The Company operates in the specialty chemical packaging and industrial containment manufacturing sector, producing high-density polyethylene ("HDPE") drums, intermediate bulk containers ("IBCs"), steel pails, and specialty containment vessels for customers in the chemical, petrochemical, and agricultural end markets.
CPS was formed in 2007 and has grown, both organically and through acquisitions, into a meaningful participant in the North American specialty packaging segment. As of the date of this memorandum, the Company employs approximately 1,420 individuals across four manufacturing facilities and one leased warehouse, as described below.
Manufacturing Facilities.
• Plant 1 (Headquarters): 4710 Industrial Corridor Drive, Akron, Ohio 44308. This facility serves as the Company's primary HDPE drum manufacturing plant and corporate headquarters. Approximately 480 employees are based at this location. Plant 1 houses the Company's principal blow molding and assembly lines for HDPE drums, as well as quality control, research and development, and corporate administrative functions.
• Plant 2: 2255 Commerce Parkway, Evansville, Indiana 47725. Plant 2 is dedicated to the manufacture of intermediate bulk containers (IBCs) and steel pails. Approximately 390 employees are based at this facility. Plant 2 includes welding, assembly, and finishing operations for steel pail production, as well as IBC assembly and testing lines.
• Plant 3: 8100 River Road, Baton Rouge, Louisiana 70820. Plant 3 manufactures specialty containment vessels, including custom-engineered containment solutions for the petrochemical and chemical industries. Approximately 310 employees work at this location. Plant 3 is a critical facility for the Company's higher-margin specialty products and houses specialized fabrication and testing equipment.
• Plant 4: 1480 State Route 59, Ravenna, Ohio 44266. Plant 4 is focused on extrusion and secondary processing operations that support the Company's HDPE drum and IBC product lines. Approximately 240 employees are based at this facility. Plant 4 operates multiple extrusion lines and provides sheet and component inputs to Plants 1 and 2.
Leased Warehouse. In addition to the four manufacturing facilities, the Company leases a warehouse facility located at 900 Darrow Road, Akron, Ohio 44305, from Benchmark Real Estate Holdings LLC. The monthly rent under the warehouse lease is $42,000, and the lease term expires on December 31, 2025. This facility is used for finished goods storage and distribution staging.
B. Corporate Structure and Equity Ownership
CPS Holdings Inc. is a Delaware corporation with its registered agent at 1209 Orange Street, Wilmington, Delaware 19801, c/o National Corporate Services, Inc. CPS Holdings is the direct parent of Crestline Packaging Solutions LLC and holds 100% of the membership interests of the Company. CPS Holdings was organized as the acquisition vehicle for the 2017 leveraged buyout described below and does not itself conduct any business operations.
Thornfield Capital Partners LP ("Thornfield"), a Delaware limited partnership headquartered at 590 Lexington Avenue, Suite 3200, New York, New York 10022, holds 100% of the equity of CPS Holdings. Thornfield is a middle-market private equity firm with assets under management of approximately $4.8 billion. The firm's Managing Partner is Julian Ashford, and the deal partner responsible for the CPS investment is Rebecca Strand.
Thornfield acquired CPS in a leveraged buyout that closed on October 13, 2017, at an enterprise value of $410.0 million. Thornfield's equity contribution to the acquisition was $163.0 million, representing approximately 39.8% of the total enterprise value. The remainder of the acquisition was funded through the first lien credit facilities and the second lien notes described in Section II.D below. The 2017 acquisition represented a TEV/EBITDA multiple of approximately 6.8x based on the Company's trailing twelve-month EBITDA at the time of closing.
C. Financial Performance and Margin Compression
The Company's financial performance has deteriorated materially since the peak performance year of FY2019, driven primarily by significant increases in resin input costs and broader supply chain disruptions affecting the specialty packaging industry. The following table summarizes key financial metrics for FY2019 through Q1 2022:
Revenue declined approximately 18% from FY2020 ($381.2 million) to FY2021 ($312.6 million). This decline was driven by a combination of factors, including (a) significant increases in the cost of high-density polyethylene resin, which is the Company's single largest raw material input, (b) broader supply chain disruptions resulting from COVID-19 pandemic aftereffects, global logistics bottlenecks, and labor market tightness, and (c) competitive pricing pressure from lower-cost domestic and international manufacturers. EBITDA declined from $52.8 million in FY2020 to $38.4 million in FY2021, a reduction of approximately 27.3%.
The deterioration has continued into FY2022. On a trailing twelve-month basis as of Q1 2022, EBITDA has declined to $29.1 million, reflecting continued and accelerating margin compression. EBITDA margins have contracted from nearly 15% in FY2019 to an estimated 9.8% on a TTM basis as of Q1 2022.
The Company's key resin supply relationship is governed by a five-year resin supply agreement with Northstar Polymers Inc., a Houston, Texas-based chemical company. This agreement was executed on March 1, 2019 and provides for quarterly pricing adjustments tied to published index pricing. While the agreement provides the Company with supply assurance and certain volume commitments, it has not insulated the Company from the broader market volatility in polyethylene resin pricing, which has increased approximately 45% since early 2021 on an index-adjusted basis.
D. Capital Structure
The Company's capital structure as of the anticipated petition date is summarized in the following table:
All of the Company's funded indebtedness was incurred in connection with the October 13, 2017 leveraged buyout closing. The first lien term loan has amortized from its original $175.0 million principal amount to $158.7 million through regularly scheduled quarterly amortization payments. In 2019, the Company repurchased $4.0 million in principal amount of the second lien notes in open market transactions, reducing the outstanding principal balance from $60.0 million to $56.0 million.
First Lien Credit Agreement. The First Lien Credit Agreement, dated as of October 13, 2017, governs both the revolving credit facility and the term loan. The administrative agent and collateral agent is Ridgeline National Bank, N.A., with offices at 200 Public Square, Cleveland, Ohio 44114. The first lien facilities are secured by a first-priority lien on substantially all assets of the Company, including accounts receivable, inventory, equipment, intellectual property, and the equity interests in CPS. First lien secured claims total $191.3 million, consisting of $158.7 million outstanding under the term loan and $32.6 million drawn on the revolving credit facility.
Second Lien Notes Indenture. The Second Lien Notes were issued pursuant to an indenture dated as of October 13, 2017 (the "Second Lien Indenture"). The indenture trustee is Continental Fiduciary Trust Company, with offices at 101 Barclay Street, New York, New York 10286. The second lien notes are secured by a second-priority lien on substantially all assets of the Company, subject to and subordinated to the first lien. Second lien claims total approximately $59.9 million, consisting of $56.0 million in outstanding principal and approximately $3.9 million in accrued and unpaid interest, including default rate interest at an additional 2.00% per annum that has been accruing since the date of the notice of default (April 22, 2022).
The intercreditor relationship between the first lien and second lien creditors is governed by an Intercreditor Agreement, also dated as of October 13, 2017, which establishes the payment priority and lien subordination of the second lien notes relative to the first lien credit facilities.
E. The Covenant Breach and Events of Default
Section 7.11 of the First Lien Credit Agreement requires the Company to maintain a maximum Total Net Debt to EBITDA leverage ratio not to exceed 5.75x, tested on a quarterly basis at the end of each fiscal quarter.
For the fiscal quarter ended March 31, 2022, the Company's actual leverage ratio was calculated as follows:
Total Net Debt: $247.3 million
Trailing Twelve-Month EBITDA: $29.1 million
Actual Leverage Ratio: $247.3M ÷ $29.1M = 8.50x
This represents a breach of 2.75 turns above the permitted maximum of 5.75x, or approximately 47.8% above the covenant threshold. The breach was material and reflected the sustained decline in EBITDA performance described in Section II.C above.
On April 22, 2022, Ridgeline National Bank, N.A., in its capacity as administrative agent under the First Lien Credit Agreement, delivered a formal Notice of Default to the Company and its counsel, citing the breach of Section 7.11 as an Event of Default under Section 8.01 of the First Lien Credit Agreement. The Notice of Default placed the first lien lenders' remedies — including acceleration of all outstanding obligations and enforcement of the security interest in the collateral — in available status, subject to the terms of the Forbearance Agreement described below.
The Notice of Default under the First Lien Credit Agreement triggered a cross-default under Section 6.01(e) of the Second Lien Notes Indenture, which provides that an event of default under the indenture occurs upon the acceleration (or entitlement to acceleration) of any indebtedness of the Company in an aggregate principal amount exceeding $5.0 million. The first lien default placed the entire $247.3 million capital structure in a state of default.
F. The Forbearance Agreement
Following the delivery of the Notice of Default and intensive negotiations between the Company, its counsel, and counsel for the ad hoc group of first lien lenders, the Company, Ridgeline National Bank, N.A. (as administrative agent), and the consenting first lien lenders (holding approximately 68% of the outstanding principal amount of the first lien term loan) executed a Forbearance Agreement on May 18, 2022.
Under the Forbearance Agreement, the consenting first lien lenders agreed to forbear from exercising their remedies under the First Lien Credit Agreement for a period of 45 days, expiring on July 2, 2022. The Company believes, based on discussions with counsel for the ad hoc group, that a short extension of the forbearance period — estimated at one to two weeks — may be obtainable to allow the Company to finalize definitive restructuring documentation. However, any extension is not guaranteed and remains subject to the consent of the required lenders.
The Forbearance Agreement contains several conditions to the continued forbearance, including the following:
(a) Continued compliance by the Company with DIP-style reporting covenants, including delivery of weekly cash flow reports, monthly unaudited financial statements, and immediate notice of any material adverse change in the Company's business or financial condition;
(b) No additional defaults under the First Lien Credit Agreement or any other material agreement;
(c) No asset sales outside the ordinary course of business;
(d) No incurrence of any new indebtedness; and
(e) Good faith engagement in restructuring negotiations with the first lien lenders and their advisors.
The Forbearance Agreement does not bind the second lien noteholders, who have not formally executed a forbearance or standstill arrangement. However, the ad hoc group of second lien noteholders, through their counsel at Pemberton & Locke LLP, has indicated informally that it does not intend to take enforcement action during the forbearance period, subject to satisfactory progress in restructuring negotiations.
G. Creditor Constituencies
Ad Hoc Group of First Lien Lenders. Beginning in March 2022, following the Company's public disclosure of the anticipated covenant breach, an ad hoc group of first lien term loan lenders organized to coordinate their interests. The ad hoc group holds approximately 68% in principal amount of the first lien term loan, or approximately $107.7 million of the $158.7 million outstanding. The key members of the ad hoc group are:
• Blackmoor Capital Management LLC — a CLO and credit fund manager holding $41.2 million in principal amount of the first lien term loan. The principal responsible for the CPS position is Arthur Ng. Blackmoor's offices are located at 399 Park Avenue, 18th Floor, New York, New York 10043.
• Greystone Fixed Income Partners LP — a credit fund holding $28.6 million in principal amount of the first lien term loan. The principal responsible for the CPS position is Sandra Ibanez. Greystone's offices are located at One Financial Center, Suite 2800, Boston, Massachusetts 02111.
• Wexford Opportunity Fund III LP — a distressed debt fund holding $37.9 million in principal amount of the first lien term loan. The principal responsible for the CPS position is Derek Loomis. Wexford's offices are located at 1801 Century Park East, Suite 1450, Los Angeles, California 90067.
The ad hoc group of first lien lenders is represented by Hargrove, Mitchell & Saunders LLP, with offices at 51 West 52nd Street, New York, New York 10019. The lead partner on the engagement is Victoria Kline, and the lead associate is Thomas Frey.
Ad Hoc Group of Second Lien Noteholders. An ad hoc group of second lien noteholders has also organized and holds approximately 72% in principal amount of the second lien notes, or approximately $40.4 million of the $56.0 million outstanding. The key members of the ad hoc group are:
• Fenwick Structured Credit Fund II LP — holding $18.3 million in principal amount of the second lien notes. The principal responsible for the CPS position is Liam Driscoll. Fenwick's offices are located at 200 Clarendon Street, 40th Floor, Boston, Massachusetts 02116.
• Millhaven Capital Advisors LLC — holding $22.1 million in principal amount of the second lien notes. The principal responsible for the CPS position is Karen Ostrowski. Millhaven's offices are located at 600 Travis Street, Suite 5500, Houston, Texas 77002.
The ad hoc group of second lien noteholders is represented by Pemberton & Locke LLP, with offices at 1 Liberty Plaza, New York, New York 10006. The lead partner on the engagement is Raymond Delvecchio, and the lead associate is Nia Patterson.
Both ad hoc groups have executed customary confidentiality agreements with the Company and have engaged in preliminary discussions regarding potential restructuring terms. The positions of these groups are discussed further in Section III below in the context of the restructuring alternatives analysis.
III. Analysis of Restructuring Alternatives
This Section presents a detailed analysis of each of the four restructuring alternatives available to the Company, assessing the advantages, disadvantages, risks, and overall feasibility of each approach. The alternatives are presented in order from least to most court-intensive.
A. Alternative 1: Out-of-Court Amendment / Extended Forbearance
1. Description. Under this alternative, the Company would seek to negotiate a comprehensive amendment to the First Lien Credit Agreement with Ridgeline National Bank, N.A. and the first lien lenders to reset or permanently waive the leverage ratio covenant under Section 7.11, cure the existing event of default, and restore the Company to compliance with its credit facilities on a going-forward basis. In parallel, the Company would need to negotiate an amendment or waiver under the Second Lien Notes Indenture to cure the cross-default triggered by the first lien event of default.
The amendment to the First Lien Credit Agreement would require the consent of the "Required Lenders" as defined therein — generally, lenders holding a majority (greater than 50%) in principal amount of the outstanding term loan and revolving credit commitments. The parallel amendment or waiver under the Second Lien Notes Indenture would require consent of holders of a majority in principal amount of the outstanding second lien notes for most amendments, though certain provisions of the indenture (including provisions relating to payment terms, maturity, and lien priority) may require unanimous consent of all holders.
Alternatively, the Company could continue to extend the existing forbearance agreement on a rolling basis while pursuing operational improvements designed to reduce leverage and restore compliance with the existing covenant. However, a forbearance extension does not cure the default; it merely delays the exercise of creditor remedies.
2. Advantages. An out-of-court approach, if achievable, would offer several advantages:
• Avoidance of Bankruptcy Stigma. A Chapter 11 filing can create adverse perceptions among customers, suppliers, employees, and other business counterparties. An out-of-court resolution would preserve the Company's reputation and avoid the potential loss of business that can accompany a bankruptcy filing, particularly in the specialty packaging industry where customer relationships and supply chain reliability are critical competitive differentiators.
• Lowest Direct Cost. Professional fees in an out-of-court restructuring are typically significantly lower than in a Chapter 11 case. The Company would avoid the substantial costs of bankruptcy court proceedings, including court-appointed professionals, noticing and claims administration, and U.S. Trustee fees.
• Speed of Implementation. If creditor consensus can be achieved, an out-of-court amendment can be documented and executed in a relatively short timeframe — potentially two to four months — without the procedural requirements of a bankruptcy case.
• Preservation of Equity. An out-of-court amendment that does not involve debt-for-equity conversion would preserve Thornfield Capital Partners' equity position in CPS Holdings.
3. Disadvantages and Risks
Despite these potential advantages, an out-of-court amendment faces several significant disadvantages and risks that, in our assessment, render it not viable as a standalone path forward:
Failure to Address Fundamental Over-Leverage. The most critical deficiency of an amendment-only approach is that it does not address the Company's fundamental over-leverage problem. Even with a covenant reset to a higher permitted leverage ratio, the Company would still carry $247.3 million in total funded debt against trailing twelve-month EBITDA of $29.1 million — a leverage ratio of 8.50x. At this level, the Company's debt service obligations consume a disproportionate share of operating cash flow, leaving insufficient capital for maintenance capital expenditures, working capital needs, and investment in the business. An amendment that simply moves the covenant threshold would defer, not solve, the balance sheet problem.
Consent Thresholds and Holdout Risk. An out-of-court amendment requires the affirmative consent of creditors meeting the specified threshold under the applicable credit documents. Unlike a Chapter 11 plan of reorganization, which can bind dissenting creditors through the confirmation process (including through "cramdown" under Section 1129(b) of the Bankruptcy Code), an out-of-court amendment cannot compel holdout creditors to participate. Any lender or noteholder that declines to consent to the amendment would retain its rights under the existing credit documents, including the right to accelerate its claims and pursue remedies against the collateral. This holdout risk is particularly acute with respect to the second lien notes, where the indenture may require unanimous consent for certain amendments.
Cross-Default Complication. The cross-default under the Second Lien Notes Indenture adds a layer of complexity to any out-of-court resolution. The Company would need to achieve a parallel resolution with the second lien noteholders — either through a formal amendment of the indenture or through a standstill or forbearance arrangement — to fully cure the default across the capital structure. Negotiating two parallel creditor consents simultaneously increases the transaction complexity and the risk of failure.
Imminent Revolver Maturity. The first lien revolving credit facility matures on October 13, 2022 — approximately four months from the date of this memorandum. The Company currently has $32.6 million drawn on the revolver, and this facility is the Company's primary source of day-to-day liquidity. The imminent maturity creates a liquidity cliff that an amendment alone does not solve absent a refinancing of the revolver. Given the Company's current credit profile — including the existing events of default, the leverage ratio of 8.50x, and the ongoing margin compression — a refinancing of the revolver in the current market is not achievable on any commercially reasonable terms.
First Lien Lender Opposition. The ad hoc group of first lien lenders, which holds approximately 68% of the first lien term loan, has signaled through its counsel at Hargrove, Mitchell & Saunders LLP that it is unwilling to agree to an amendment-only approach. The ad hoc group has stated clearly that it views the Company's leverage as unsustainable and insists on a structural deleveraging — meaning a reduction in the Company's outstanding debt, not merely a resetting of financial covenants. Without the support of the ad hoc group, which holds more than the required majority threshold, a first lien amendment is not achievable.
Absence of Binding Mechanism. In an out-of-court context, there is no mechanism to bind dissenting creditors, impair claims, or compel the conversion of debt to equity. The Company cannot achieve a meaningful reduction in its $247.3 million debt burden without the voluntary agreement of every affected creditor — a practical impossibility in a capital structure of this size and complexity.
4. Assessment. For the reasons stated above, we do not consider an out-of-court amendment or extended forbearance to be a viable standalone path forward for the Company. The magnitude of the leverage breach (8.50x against a 5.75x covenant), the opposition of the ad hoc group of first lien lenders to an amendment-only approach, the imminent maturity of the revolving credit facility, and the absence of any mechanism to equitize debt or reduce principal without unanimous creditor consent all militate strongly against this alternative. We recommend that the Board not pursue this path.
B. Alternative 2: Prepackaged Chapter 11 Plan of Reorganization (Recommended)
1. Description. A prepackaged Chapter 11 plan of reorganization (a "prepack") is a restructuring transaction in which the key terms of the reorganization are negotiated and agreed upon with the principal creditor constituencies before the Chapter 11 filing, and votes on the plan of reorganization are solicited and obtained from impaired classes of claims and interests prior to the petition date. The debtor then files its Chapter 11 case with the plan, the disclosure statement, and the completed ballots in hand, and seeks expedited confirmation from the bankruptcy court.
Under this alternative, the Company would pursue the following sequence of actions:
(a) Negotiate and Execute a Restructuring Support Agreement (RSA). The Company would negotiate a comprehensive RSA with the key creditor constituencies — the ad hoc group of first lien lenders, the ad hoc group of second lien noteholders, and the equity sponsor Thornfield Capital Partners — setting forth the agreed-upon terms of the plan of reorganization, the timeline for filing and confirmation, and the obligations of the parties during the restructuring process.
(b) Prepare Solicitation Materials. Calderwood & Harkness and Aldersgate Advisory Group LLC would prepare the plan of reorganization, the disclosure statement, and the solicitation packages (including ballots and voting instructions) for distribution to holders of impaired claims and interests prior to the filing.
(c) Conduct Pre-Petition Solicitation. The Company would solicit acceptances of the plan from holders of impaired claims in the relevant classes prior to the petition date, in accordance with Section 1126(b) of the Bankruptcy Code and applicable non-bankruptcy solicitation law (including, as applicable, federal securities law requirements).
(d) File Chapter 11 Petitions. After the voting deadline and tabulation of ballots, the Company and CPS Holdings would file voluntary petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Ohio, Eastern Division (located at the Howard M. Metzenbaum U.S. Courthouse, 201 Superior Avenue, Cleveland, Ohio 44114).
(e) Seek Expedited Confirmation. Concurrently with the filing, the Company would file the plan, the disclosure statement, and the completed ballots, together with a motion to approve the adequacy of the prepetition solicitation and to schedule a combined hearing on approval of the disclosure statement and confirmation of the plan.
The expected timeline for this alternative contemplates the Company spending approximately 60 to 90 days in Chapter 11 proceedings, from the petition date through the effective date of the plan.
2. Proposed Plan Economics
Based on preliminary discussions with counsel for the ad hoc group of first lien lenders and counsel for the ad hoc group of second lien noteholders, and subject to further negotiation and the completion of Aldersgate's valuation and feasibility analyses, the anticipated recovery structure under the proposed plan of reorganization is as follows:
The proposed plan contemplates a comprehensive deleveraging of the Company's balance sheet through the conversion of the first lien and second lien claims into equity of the reorganized Company. Existing equity interests held by Thornfield Capital Partners LP would be cancelled and receive no distribution. The plan would reduce the Company's total funded debt from $247.3 million to $12.5 million — a reduction of approximately 95%.
New First Lien Take-Back Term Loan. The plan contemplates the issuance of a new first lien take-back term loan in the principal amount of $12.5 million, to be held by the first lien lenders as part of their plan distribution. The anticipated terms of the take-back term loan are as follows:
• Principal Amount: $12.5 million
• Interest Rate: SOFR + 550 basis points (with a 1.00% SOFR floor)
• Maturity: 5 years from the effective date
• Amortization: 1.00% per annum ($125,000 annually; $31,250 per quarter)
• Security: First-priority lien on substantially all assets of the reorganized Company
• Covenants: To be negotiated; expected to include maintenance leverage covenant, minimum liquidity, and restricted payments
Management Incentive Plan (MIP). The plan contemplates the reservation of 10% of the reorganized equity for a management incentive plan, which would dilute the equity distributions to all creditor classes on a pro rata basis. The MIP would be subject to the following terms:
• 50% of the MIP awards would vest on a time-based schedule, with a three-year cliff vesting period
• 50% of the MIP awards would vest on a performance-based schedule, tied to EBITDA targets to be established by the reorganized board of managers
• Participants in the MIP would be determined by the reorganized board of managers in its discretion
3. Valuation and Liquidation Analysis
Calderwood & Harkness has engaged Aldersgate Advisory Group LLC to serve as the Company's financial advisor and investment banker in connection with the restructuring. Aldersgate's lead managing director on the engagement is Priya Narayanan, based at Aldersgate's offices at 280 Park Avenue, 12th Floor, New York, New York 10017. Aldersgate's valuation and liquidation analyses are currently in progress, and the figures set forth below are preliminary and subject to revision in connection with the completion of Aldersgate's final work product.
Reorganization Valuation.
Based on Aldersgate's preliminary analysis, the estimated reorganized enterprise value of the Company is $195.0 million at the midpoint, with a range of $180.0 million at the low end to $210.0 million at the high end. Aldersgate's primary valuation methodology is a discounted cash flow ("DCF") analysis, corroborated by a comparable company trading multiples analysis. The valuation implies a TEV/EBITDA multiple of approximately 5.3x on projected FY2023 EBITDA of $36.5 million. The projected EBITDA improvement from the TTM Q1 2022 level of $29.1 million to $36.5 million reflects anticipated stabilization of resin input costs, the benefit of cost reduction initiatives currently underway, and the normalization of supply chain conditions.
The estimated reorganized equity value at the midpoint is calculated as follows:
Reorganized Enterprise Value (midpoint): $195.0 million
Less: New First Lien Take-Back Term Loan: ($12.5 million)
Reorganized Equity Value (midpoint): $182.5 million
At the midpoint valuation, the recoveries under the proposed plan are as follows:
• First Lien Secured Claims (Class 2): 92% of reorganized equity = $167.9 million, plus $12.5 million take-back term loan = $180.4 million total recovery on $191.3 million in claims, or approximately 94.3% recovery. Under the low-end valuation scenario ($180.0 million TEV), the first lien recovery declines to approximately 72%, reflecting the lower equity value attributable to the first lien class. The ~72% figure used in the recovery table above reflects the low-to-mid scenario to provide a conservative estimate to the Board.
• Second Lien Secured Claims (Class 3): 8% of reorganized equity = $14.6 million at midpoint, plus warrants for an additional 5% of reorganized equity (with a strike price at plan equity value). The equity distribution alone implies a recovery of approximately 24.4% at midpoint on $59.9 million in total second lien claims. Under the low-end scenario, the recovery is approximately 12%. The warrants provide additional upside potential if the reorganized Company's equity value exceeds plan projections.
Liquidation Analysis (Chapter 7 Scenario).
Aldersgate has also prepared a preliminary liquidation analysis estimating the recoveries that creditors would receive in a hypothetical Chapter 7 liquidation of the Company's assets. The estimated total liquidation value is $96.2 million at the low end and $112.5 million at the high end, with a midpoint of $104.4 million. The liquidation analysis reflects the following key assumptions: (a) a forced sale of the four manufacturing facilities at significant discounts to going-concern value, reflecting the specialized nature of the equipment and facilities; (b) liquidation of accounts receivable at approximately 75-80% of book value; (c) liquidation of inventory at approximately 50-60% of book value, reflecting the limited secondary market for specialty packaging components; and (d) payment of Chapter 7 administrative costs, including trustee fees and commissions, wind-down costs, and employee severance obligations.
Under the midpoint liquidation scenario:
• First Lien Recovery in Liquidation: $104.4 million ÷ $191.3 million = approximately 54.6%.
• Second Lien Recovery in Liquidation: $0. After satisfaction of first lien claims (to the extent of available liquidation proceeds), no residual value would be available for distribution to second lien noteholders.
• General Unsecured Creditor Recovery in Liquidation: $0.
• Equity Recovery in Liquidation: $0.
Conclusion. The proposed plan of reorganization provides materially higher recoveries to all impaired classes of claims than a Chapter 7 liquidation. First lien lenders would receive an estimated 72% to 94% recovery under the plan, compared to approximately 55% in liquidation. Second lien noteholders would receive an estimated 12% to 24% recovery under the plan, compared to 0% in liquidation. General unsecured creditors would receive approximately 10% under the plan, compared to 0% in liquidation. The plan therefore satisfies the "best interests of creditors" test under Section 1129(a)(7) of the Bankruptcy Code.
4. DIP Financing
During the Chapter 11 case, the Company will require debtor-in-possession ("DIP") financing to fund ongoing operations, working capital needs, and professional fees. The Company's existing revolving credit facility, which matures on October 13, 2022, will not be available to fund operations in the ordinary course during a Chapter 11 case absent a DIP financing arrangement.
Based on preliminary discussions with Ridgeline National Bank, N.A. and the ad hoc group of first lien lenders, the anticipated DIP financing facility will have the following terms:
• Type: Senior secured superpriority revolving credit facility
• Borrower: Crestline Packaging Solutions LLC (as debtor-in-possession)
• Administrative Agent: Ridgeline National Bank, N.A.
• Lenders: Ridgeline National Bank, N.A. and consenting first lien lenders
• Commitment Amount: $30.0 million
• Interest Rate: SOFR + 500 basis points; default rate of an additional 200 basis points
• Commitment Fee: 1.50% on undrawn commitments ($450,000 on $30.0 million)
• Closing Fee: 2.00% ($600,000)
• Maturity: Earlier of (i) 120 days after the petition date or (ii) the effective date of the plan of reorganization
• Budget: 13-week rolling cash flow budget, tested bi-weekly; permitted disbursement variance of ±15%
• Security: First-priority superpriority administrative expense claim under Section 364(c)(1) and first-priority lien under Section 364(c)(2) and (c)(3) on all unencumbered assets, and priming lien under Section 364(d) on all pre-petition collateral, subject to carve-out for professional fees
• Milestones: Customary milestones for a prepackaged case, including deadlines for filing the plan, obtaining disclosure statement approval, and achieving confirmation
The DIP facility will be subject to court approval, with interim approval sought at the first day hearing and final approval sought approximately 25 to 30 days after the petition date. Calderwood & Harkness will prepare the DIP motion and related orders for filing concurrently with the voluntary petitions.
5. Key Material Contracts
The Company is party to several material contracts that will need to be addressed in connection with the Chapter 11 case. Under Section 365 of the Bankruptcy Code, the Company (as debtor-in-possession) has the ability to assume (i.e., affirm and continue to perform) or reject (i.e., terminate) executory contracts and unexpired leases. The following contracts are anticipated to be assumed under the plan:
Resin Supply Agreement with Northstar Polymers Inc. The five-year resin supply agreement with Northstar Polymers Inc. (Houston, Texas), executed March 1, 2019, is a critical supplier relationship that must be preserved to ensure the Company's continued access to its primary raw material input. The Company intends to assume this agreement under the plan. Any cure amounts necessary to assume this contract will be identified in the cure notice process and paid on or before the effective date of the plan.
Equipment Lease with Meridian Industrial Leasing Corp. The Company is party to a seven-year master lease with Meridian Industrial Leasing Corp. for extrusion equipment at Plant 4 (Ravenna, Ohio). The monthly lease payment is $87,500. This equipment is essential to the Company's extrusion and secondary processing operations and cannot be readily replaced. The Company intends to assume this lease under the plan.
Warehouse Lease with Benchmark Real Estate Holdings LLC. The Company's warehouse lease at 900 Darrow Road, Akron, Ohio 44305, with Benchmark Real Estate Holdings LLC, will also be assumed. The Company is currently three months in arrears on rent payments under this lease, resulting in a cure amount of approximately $126,000 (3 months × $42,000 per month) that must be paid to the landlord as a condition to assumption under Section 365(b)(1) of the Bankruptcy Code.
The Company's counsel and financial advisor will conduct a comprehensive review of all executory contracts and unexpired leases to identify additional contracts for assumption or rejection in connection with the plan.
6. Critical Vendor Payments
In connection with the first day motions filed at the commencement of the Chapter 11 case, the Company intends to seek bankruptcy court authorization to pay up to $6.8 million in prepetition claims of critical vendors. These critical vendor payments are essential to ensure the uninterrupted supply of raw materials (principally resin, steel, and other inputs), continued access to critical logistics and transportation services, and the maintenance of the Company's manufacturing operations across all four plants.
The critical vendor motion will identify the specific vendors whose prepetition claims are eligible for payment, the amounts owed to each such vendor, and the basis for the Company's determination that each vendor is "critical" to the Company's ongoing operations and cannot be replaced on commercially reasonable terms. The motion will be supported by declarations from the Company's senior management and supply chain personnel establishing the factual basis for the critical vendor designation.
Critical vendor orders are routinely granted in Chapter 11 cases involving manufacturing companies, particularly where the debtor can demonstrate that (a) the vendor is a sole-source or limited-source supplier, (b) the vendor has indicated that it will cease or curtail shipments absent payment of prepetition claims, and (c) the loss of the vendor relationship would cause material harm to the debtor's business and the estate.
7. Professional Fees
The following is a summary of the estimated professional fees anticipated in connection with the prepackaged Chapter 11 case:
Calderwood & Harkness will require a prepetition retainer of $500,000, to be wired to the firm's client trust account prior to the filing. All professional fees incurred during the Chapter 11 case will be subject to bankruptcy court review and approval under Section 330 of the Bankruptcy Code and the applicable fee guidelines of the U.S. Trustee for Region 9.
In addition to the Debtors' professionals listed above, the ad hoc group of first lien lenders and the ad hoc group of second lien noteholders will each retain their own counsel and financial advisors, the fees and expenses of which will be payable by the Debtors' estates pursuant to the RSA and the plan or as otherwise ordered by the court. The estimated fees of creditor professionals are not included in the table above, but based on our experience with comparable cases, we estimate that creditor professional fees will total an additional $4.0 million to $6.0 million in the aggregate.
8. D&O Insurance
The Company's directors and officers liability insurance ("D&O Insurance") is a critical component of the restructuring. Members of the Board of Managers and the Company's senior officers will need the protection of D&O coverage both during and after the Chapter 11 case, including coverage for claims arising from pre-petition conduct.
The Company has obtained a "tail" D&O policy from Apex Indemnity Insurance Company, located at 233 South Wacker Drive, Suite 4800, Chicago, Illinois 60606. The tail policy provides aggregate coverage of $15.0 million and extends the reporting period for claims under the Company's existing D&O policy for a period of six years following the effective date of the plan. The tail premium is $1.2 million.
The tail premium must be paid at or prior to the petition date, or, alternatively, the Company will seek authorization to pay the premium as a first day order. Payment of the tail premium prior to the petition date is strongly preferred, as it eliminates any risk that the payment could be challenged or delayed during the Chapter 11 case. Calderwood & Harkness recommends that the Board authorize payment of the $1.2 million tail premium to Apex Indemnity Insurance Company as soon as practicable, and in any event no later than the petition date.
9. Proposed Timeline
The following is the proposed timeline for the prepackaged Chapter 11 plan of reorganization:
This timeline is aggressive but achievable based on our experience with prepackaged Chapter 11 cases and the current posture of creditor negotiations. The timeline assumes that the RSA is executed on or about mid-July 2022, that pre-petition solicitation is completed within approximately two weeks, and that the Company files Chapter 11 no later than July 31, 2022. The total time in Chapter 11 is estimated at approximately 60 to 90 days, with emergence expected in October to November 2022.
10. Advantages. A prepackaged Chapter 11 plan offers the following significant advantages:
Shortest Time in Bankruptcy. A prepack is the fastest form of Chapter 11 restructuring, with typical cases lasting 60 to 90 days from the petition date to the effective date. This compressed timeline minimizes the period of uncertainty for the Company's employees, customers, suppliers, and other business counterparties. By contrast, a prearranged case typically requires four to six months, and a traditional freefall case can last nine to eighteen months or longer.
Pre-Filing Vote Solicitation. Because votes on the plan are solicited and tabulated before the Chapter 11 filing, the Company enters bankruptcy with the plan already accepted by the requisite majorities of impaired creditor classes. This eliminates the need for a lengthy post-petition solicitation period and substantially reduces the risk that the plan will not achieve the voting thresholds required for confirmation under Section 1126(c) of the Bankruptcy Code (two-thirds in amount and one-half in number of each impaired class).
Binding on All Creditors. Confirmation of the plan under Section 1129 of the Bankruptcy Code binds all creditors and interest holders, including those who voted against the plan or did not vote. This eliminates the holdout problem that makes an out-of-court restructuring infeasible in the Company's circumstances.
Structural Deleveraging. The plan will equitize the Company's first lien and second lien debt, reducing total funded debt from $247.3 million to $12.5 million (the new first lien take-back term loan). This reduction of approximately 95% in funded debt will create a sustainable capital structure with leverage of approximately 0.3x based on projected FY2023 EBITDA of $36.5 million, providing the reorganized Company with significant financial flexibility to operate and invest in its business.
Preservation of Going-Concern Value. The prepack preserves the going-concern value of the Company's four manufacturing facilities and the approximately 1,420 jobs at those facilities. The quick passage through Chapter 11 minimizes the risk of customer or supplier defection and protects the enterprise value that is available for distribution to creditors.
Creditor Support. The ad hoc group of first lien lenders (holding approximately 68% of the first lien term loan) and the ad hoc group of second lien noteholders (holding approximately 72% of the second lien notes) have indicated through their respective counsel a willingness to negotiate toward a consensual prepackaged plan. This level of creditor engagement and support is a strong positive indicator for the feasibility of a prepack.
Automatic Stay. The filing of the Chapter 11 petition triggers the automatic stay under Section 362 of the Bankruptcy Code, which provides the Company with immediate relief from all creditor collection actions, litigation, and enforcement of liens. The automatic stay provides essential breathing room during the pendency of the Chapter 11 case.
Contract Management. The Bankruptcy Code provides the Company with powerful tools for managing its contractual obligations, including the ability to assume favorable contracts (such as the Northstar resin supply agreement and key equipment leases) and to reject burdensome contracts that are no longer economically justified. The ability to cure arrearages on assumed leases through the plan (such as the $126,000 cure amount on the Benchmark warehouse lease) is an additional benefit.
Manageable Unsecured Claims Pool. The Company's general unsecured claims are estimated at approximately $14.8 million — a manageable pool that can be addressed with a modest cash distribution of $1.5 million (approximately 10.1% recovery). The relatively small size of the unsecured claims pool simplifies the plan structure and reduces the risk of objections from the general unsecured creditor class.
11. Disadvantages and Risks
A prepackaged Chapter 11 is not without risks and disadvantages, which the Board should consider:
Public Disclosure and Stigma. A Chapter 11 filing is a public proceeding, and the filing itself — together with the associated court filings, schedules, and financial disclosures — will be publicly available. While a prepack minimizes the period of bankruptcy exposure, the filing may nonetheless create concern among the Company's customers, suppliers, and employees. The Company should prepare a comprehensive communication plan for customers, suppliers, employees, and other stakeholders to be rolled out concurrently with the filing.
Professional Fees. The estimated professional fees of approximately $9.3 million for the Debtors' professionals, plus an additional $4.0 million to $6.0 million for creditor professionals, represent a significant cost. However, these costs must be weighed against the value created by the restructuring — specifically, the reduction of $247.3 million in funded debt to $12.5 million and the preservation of the Company's going-concern value.
RSA Negotiation Timeline. The Company must negotiate and execute the RSA with the ad hoc groups and Thornfield within an extremely tight timeframe, given the July 2, 2022 expiration of the forbearance agreement (with possible extension to mid-July). If the RSA negotiations take longer than anticipated, the Company may need to file Chapter 11 without a fully executed RSA, which would convert the case into a prearranged or freefall structure with attendant increased cost and risk.
Voting Threshold Risk. Although the current holdings of the ad hoc groups (68% of the first lien term loan and 72% of the second lien notes) exceed the Section 1126(c) voting thresholds (two-thirds in amount and one-half in number), there is no guarantee that all members of the ad hoc groups will ultimately vote in favor of the plan, or that the "one-half in number" requirement will be satisfied in each class. The RSA should include binding voting commitments from all RSA parties to mitigate this risk.
Securities Law Compliance. The pre-petition solicitation of the second lien noteholders must comply with applicable federal and state securities laws. Because the second lien notes are securities (CUSIP 22761TAA3), the solicitation of votes from noteholders in connection with a plan that offers equity distributions must be conducted in compliance with the registration requirements of the Securities Act of 1933, or pursuant to an available exemption, such as Section 4(a)(2) or Regulation D (Rule 506) safe harbors. Calderwood & Harkness will work with the Company's securities counsel to ensure that the solicitation is conducted in full compliance with all applicable requirements.
12. Assessment. Recommended path. For the reasons set forth above, Calderwood & Harkness recommends that the Board authorize the Company to pursue a prepackaged Chapter 11 plan of reorganization as the optimal restructuring path. The prepack optimally balances speed, cost, certainty, and stakeholder recovery. It addresses the Company's fundamental over-leverage problem, resets the capital structure to a sustainable level, preserves the going-concern value of the business and the jobs of approximately 1,420 employees, and provides the highest achievable recoveries for all impaired classes of creditors. The strong engagement and preliminary support of the key creditor constituencies makes a prepack both feasible and achievable within the required timeframe.
C. Alternative 3: Prearranged Chapter 11 Plan of Reorganization
1. Description. A prearranged Chapter 11 plan of reorganization is structurally similar to a prepackaged plan, with one critical difference: in a prearranged case, the plan is not voted on prior to the Chapter 11 filing. Instead, the Company files the Chapter 11 case with a proposed plan and disclosure statement (or at least the key terms thereof), and solicits votes from impaired classes post-petition, after the bankruptcy court has reviewed and approved the disclosure statement under Section 1125 of the Bankruptcy Code.
Under this alternative, an RSA or detailed term sheet would still be negotiated and executed with the key creditor constituencies before the filing. The RSA would commit the parties to support a plan of reorganization on agreed-upon terms, and the ad hoc groups would agree to vote in favor of the plan during the post-petition solicitation period. However, the formal solicitation of votes — including the distribution of the disclosure statement, ballots, and voting instructions — would occur during the Chapter 11 case after the court has entered an order approving the disclosure statement as containing "adequate information" under Section 1125(a).
2. Advantages. A prearranged plan offers several advantages relative to a traditional freefall filing:
• Pre-Filing Consensus. Like a prepack, a prearranged plan benefits from the negotiation and execution of an RSA before the filing. The Company enters Chapter 11 with the key terms of the restructuring agreed upon by the principal creditor constituencies, providing a clear roadmap for the case and reducing the risk of prolonged negotiations or competing plan proposals.
• Additional Negotiation Time. A prearranged approach provides the Company with more time to negotiate complex plan terms that may not be fully resolved prior to the petition date. If, for example, the parties are unable to reach final agreement on the specific percentages of equity allocation, the treatment of certain disputed claims, or the terms of the management incentive plan before the forbearance expires, a prearranged case allows these issues to be resolved post-petition while the Company is protected by the automatic stay.
• Court-Supervised Solicitation. In a prearranged case, the disclosure statement is reviewed and approved by the bankruptcy court before solicitation begins. This provides an additional layer of judicial oversight and may reduce the risk that a party in interest later challenges the adequacy of the disclosure or the solicitation procedures, as could potentially occur in connection with a pre-petition solicitation under Section 1126(b).
3. Disadvantages and Risks
Despite these advantages, a prearranged plan has several significant disadvantages relative to a prepackaged plan that, in our assessment, make it a suboptimal alternative:
Longer Time in Chapter 11. A prearranged case typically requires four to six months in Chapter 11, compared to two to three months for a prepack. The additional time is attributable to the post-petition solicitation process: the Company must obtain court approval of the disclosure statement, distribute solicitation materials, allow a voting period (typically 28 to 45 days), tabulate ballots, and then proceed to a separate confirmation hearing. Each of these steps adds weeks to the case timeline.