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)
Chapter 11
Dkt. 48
DISCLOSURE STATEMENT FOR THE PREPACKAGED PLAN OF REORGANIZATION OF CRESTLINE PACKAGING SOLUTIONS LLC AND CPS HOLDINGS INC.
Plan of Reorganization Filed at Dkt. 47
Voting Deadline: August 3, 2022, at 5:00 p.m. (Eastern Time)
Hearing on Approval of Disclosure Statement: August 10, 2022, at 10:00 a.m. (Eastern Time)
Confirmation Hearing: August 29, 2022, at 10:00 a.m. (Eastern Time)
IMPORTANT: This Disclosure Statement has been prepared and submitted by the Debtors pursuant to Section 1125 of Title 11 of the United States Code (the "Bankruptcy Code") for the purpose of soliciting acceptances of the Prepackaged Plan of Reorganization of Crestline Packaging Solutions LLC and CPS Holdings Inc. (the "Plan"), filed at Dkt. 47 in the above-captioned Chapter 11 cases. Approval of this Disclosure Statement by the Bankruptcy Court does not constitute a determination by the Court of the merits of the Plan or a recommendation that the Plan be accepted or rejected. All holders of Claims and Interests are encouraged to read this Disclosure Statement and the Plan in their entirety and to consult with their own legal, financial, and tax advisors before casting their votes on the Plan.
NO SOLICITATION MATERIALS, OTHER THAN THIS DISCLOSURE STATEMENT, THE PLAN, AND THE RELATED MATERIALS APPROVED BY THE COURT, HAVE BEEN AUTHORIZED BY THE DEBTORS FOR USE IN SOLICITING ACCEPTANCES OR REJECTIONS OF THE PLAN.
Counsel for the Debtors:
CALDERWOOD & HARKNESS LLP 30 Rockefeller Plaza New York, NY 10112 Telephone: (212) 555-4000 Facsimile: (212) 555-4001
127 Public Square, Suite 4100 Cleveland, OH 44114 Telephone: (216) 555-7800 Facsimile: (216) 555-7801
Colette Whitman (Responsible Partner) Nathaniel Bower Gabrielle Moss Amy Chesterton
Local Co-Counsel:
KELLNER & HARTWICK LLP 600 Superior Avenue East, Suite 1800 Cleveland, OH 44114 Telephone: (216) 555-3200 Facsimile: (216) 555-3201
Bruce Tatelman (Lead Partner)
Financial Advisor to the Debtors:
ALDERSGATE ADVISORY GROUP LLC 280 Park Avenue, 12th Floor New York, NY 10017 Telephone: (212) 555-9100 Facsimile: (212) 555-9101
Priya Narayanan (Lead Managing Director)
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ARTICLE I — INTRODUCTION AND EXECUTIVE SUMMARY
I.A. Purpose of This Disclosure Statement
Crestline Packaging Solutions LLC ("Crestline" or "CPS") and CPS Holdings Inc. ("CPS Holdings" and, together with Crestline, the "Debtors"), as debtors and debtors-in-possession in the above-captioned Chapter 11 cases, hereby submit this Disclosure Statement (this "Disclosure Statement") pursuant to Section 1125 of Title 11 of the United States Code, 11 U.S.C. §§ 101–1532 (as amended, the "Bankruptcy Code"), in connection with the solicitation of acceptances for the Prepackaged Plan of Reorganization of Crestline Packaging Solutions LLC and CPS Holdings Inc. (as may be amended, supplemented, or modified from time to time, the "Plan"), a copy of which is attached hereto as Exhibit A and incorporated herein by reference.
The purpose of this Disclosure Statement is to provide holders of Claims against and Interests in the Debtors with adequate information, within the meaning of Section 1125(a) of the Bankruptcy Code, to enable such holders to make an informed judgment about whether to accept or reject the Plan. To that end, this Disclosure Statement describes, among other things: (i) the Debtors' businesses, operations, and organizational structure; (ii) the Debtors' prepetition capital structure; (iii) the events leading to the commencement of the Chapter 11 cases; (iv) the terms and provisions of the Plan, including the classification and treatment of Claims and Interests; (v) the voting procedures applicable to holders of Claims in impaired classes; (vi) the Debtors' valuation analysis; (vii) a liquidation analysis comparing estimated recoveries under the Plan to estimated recoveries in a hypothetical Chapter 7 liquidation; (viii) the financial projections prepared by the Debtors' management with the assistance of their financial advisor; (ix) certain risk factors associated with the Plan and the Debtors' businesses; (x) the requirements for confirmation of the Plan under Section 1129 of the Bankruptcy Code; and (xi) certain federal income tax consequences of the Plan to the Debtors and to holders of Claims.
All holders of Claims entitled to vote on the Plan are urged to read this Disclosure Statement in its entirety, including the Plan and all Exhibits and Appendices attached hereto, before casting their votes. No solicitation materials other than this Disclosure Statement, the Plan, and the ballot forms approved by the Bankruptcy Court have been authorized by the Debtors for use in connection with the solicitation of acceptances or rejections of the Plan.
Unless otherwise defined herein, capitalized terms used in this Disclosure Statement have the meanings ascribed to them in the Plan. In the event of any inconsistency between the descriptions contained in this Disclosure Statement and the terms of the Plan, the terms of the Plan shall govern and control in all respects.
I.B. Overview of the Debtors
Crestline Packaging Solutions LLC is an Ohio limited liability company headquartered at 4710 Industrial Corridor Drive, Akron, Ohio 44308 (EIN: 31-1782094). Crestline is a 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. Crestline's products serve customers across the chemical, petrochemical, and agricultural sectors, and the company has built a reputation over more than fifteen years as a reliable supplier of high-quality, regulatory-compliant packaging and containment solutions.
CPS Holdings Inc. is a Delaware corporation (EIN: 82-3491657) with its registered agent located at 1209 Orange Street, Wilmington, Delaware 19801 (c/o National Corporate Services, Inc.). CPS Holdings was formed in connection with the leveraged buyout of Crestline by Thornfield Capital Partners LP in 2017 and serves as the direct parent of Crestline. CPS Holdings does not conduct any independent operations or generate any revenue; its sole asset is its 100% ownership of the membership interests of Crestline.
As of the Petition Date, the Debtors employed approximately 1,420 individuals across four manufacturing facilities located in Ohio, Indiana, and Louisiana. For fiscal year 2021, the Debtors generated revenue of approximately $312.6 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $38.4 million.
Crestline was originally formed in 2007 and has grown into one of the leading specialty chemical packaging and industrial containment manufacturers in the Midwestern and Southern United States. In 2017, Thornfield Capital Partners LP ("Thornfield"), a private equity firm based in New York, acquired 100% of the equity of CPS Holdings in a leveraged buyout at an enterprise value of approximately $410 million, with Thornfield contributing approximately $163 million in equity and the balance funded through a first lien credit facility and second lien notes.
I.C. Summary of the Prepackaged Plan
The Plan is a prepackaged plan of reorganization that was negotiated among the Debtors, Thornfield Capital Partners LP, the Ad Hoc Group of First Lien Lenders (as defined below), and the Ad Hoc Group of Second Lien Noteholders (as defined below). The terms of the Plan were memorialized in a Restructuring Support Agreement (the "RSA") dated July 8, 2022, a copy of which is attached hereto as Exhibit B. The RSA sets forth the agreed-upon plan economics, key milestones, and the mutual commitments of the parties to support confirmation and consummation of the Plan.
The Plan contemplates a comprehensive deleveraging of the Debtors' balance sheet through a conversion of debt to equity, resulting in first lien lenders receiving the substantial majority of the reorganized equity and second lien noteholders receiving a minority equity position plus warrants. General unsecured creditors will receive a cash distribution from a designated cash pool. Existing equity interests held by Thornfield will be cancelled and extinguished without any distribution.
The following is a summary of the key economics of the Plan:
Class 1 — Other Priority Claims: Holders of Other Priority Claims will be paid in full in cash on the Effective Date or as soon thereafter as reasonably practicable. Estimated recovery: 100%. Class 1 is unimpaired and is deemed to accept the Plan.
Class 2 — First Lien Secured Claims ($191.3 million): Each holder of a First Lien Secured Claim will receive its pro rata share of (a) 92% of the reorganized equity of Crestline and (b) $12.5 million in aggregate principal amount of new first lien take-back term loan obligations. At the midpoint reorganized enterprise value of $195.0 million, the total recovery for Class 2 is estimated at approximately $180.4 million on $191.3 million in claims, representing a recovery of approximately 94.3% at the midpoint. Under the mid-low scenario, estimated recovery is approximately 72%. Class 2 is impaired and entitled to vote.
Class 3 — Second Lien Secured Claims ($59.9 million, including $3.9 million of accrued interest): Each holder of a Second Lien Secured Claim will receive its pro rata share of (a) 8% of the reorganized equity and (b) warrants entitling the holder to purchase an additional 5% of the reorganized equity at a strike price equal to the plan equity value, in each case subject to dilution by the Management Incentive Plan. Estimated recovery: approximately 12%. Class 3 is impaired and entitled to vote.
Class 4 — General Unsecured Claims ($14.8 million): Each holder of a General Unsecured Claim will receive its pro rata share of a $1.5 million cash pool. Estimated recovery: approximately 10.1%. Class 4 is impaired and entitled to vote.
Class 5 — Intercompany Claims: Intercompany Claims will be reinstated or cancelled at the Debtors' discretion. Class 5 is unimpaired or impaired, as applicable, and is deemed to accept or reject accordingly.
Class 6 — Existing Equity Interests (Thornfield Capital Partners LP): All existing equity interests in CPS Holdings will be cancelled and extinguished on the Effective Date. No distribution will be made to holders of existing equity interests. Estimated recovery: 0%. Class 6 is impaired and is deemed to reject the Plan.
Management Incentive Plan: The Plan provides for the reservation of 10% of the reorganized equity for a Management Incentive Plan (the "MIP") to be established post-Effective Date by the reorganized board of managers. The MIP will dilute all classes of reorganized equity (Classes 2 and 3) on a pro rata basis.
All impaired classes entitled to vote (Classes 2, 3, and 4) have voted to accept the Plan by the requisite statutory majorities under Section 1126(c) of the Bankruptcy Code, as set forth in Article XI below.
I.D. Recommendation of the Debtors
The Debtors believe that the Plan represents the best available outcome for all creditors and other stakeholders. As discussed in detail in Article VII below, the Plan provides materially higher recoveries to all impaired classes than would be available in a hypothetical Chapter 7 liquidation. Specifically, first lien lenders would recover approximately 54.6% in a Chapter 7 liquidation compared to approximately 72% to 94.3% under the Plan (depending on the valuation scenario); second lien noteholders would recover nothing in a Chapter 7 liquidation compared to approximately 12% under the Plan; and general unsecured creditors would receive nothing in a Chapter 7 liquidation compared to approximately 10.1% under the Plan.
The Plan is the product of extensive, arm's-length negotiations among the Debtors, their prepetition secured lenders, and other key stakeholders. The Debtors, their management, and their professional advisors have devoted considerable time and effort to developing a plan of reorganization that maximizes recoveries for all creditors while preserving the going-concern value of the Debtors' businesses and protecting the livelihoods of the Debtors' approximately 1,420 employees.
The Debtors recommend that all holders of Claims in Classes 2, 3, and 4 vote to accept the Plan.
ARTICLE II — BACKGROUND OF THE DEBTORS
II.A. Corporate History and Formation
Crestline Packaging Solutions LLC was formed in 2007 as an Ohio limited liability company. From its inception, Crestline focused on the manufacture and sale of specialty chemical packaging and industrial containment products, capitalizing on growing demand in the chemical, petrochemical, and agricultural sectors for high-quality, regulatory-compliant packaging solutions. Over the course of the following decade, Crestline grew steadily through a combination of organic expansion and strategic investments in manufacturing capabilities, ultimately establishing itself as one of the leading specialty packaging manufacturers in the Midwestern and Southern United States.
In 2017, Thornfield Capital Partners LP, a private equity firm headquartered at 590 Lexington Avenue, Suite 3200, New York, New York 10022, identified Crestline as an attractive acquisition target given the company's strong market position, diversified customer base, and opportunities for operational improvement. On October 13, 2017, Thornfield completed a leveraged buyout of Crestline at an enterprise value of approximately $410 million.
In connection with the 2017 leveraged buyout, CPS Holdings Inc. was formed as a Delaware corporation to serve as an intermediate holding entity. CPS Holdings was organized for the purpose of acquiring and holding 100% of the membership interests of Crestline and to serve as a co-obligor under the prepetition debt facilities. CPS Holdings does not conduct any independent operations, does not employ any personnel, and does not generate any revenue. Its sole asset is its ownership of 100% of the membership interests of Crestline.
II.B. Organizational Structure
The Debtors' organizational structure is straightforward. Thornfield Capital Partners LP, a Delaware limited partnership with its principal offices at 590 Lexington Avenue, Suite 3200, New York, New York 10022 (managing partner: Julian Ashford), owns 100% of the equity of CPS Holdings Inc. CPS Holdings Inc. in turn owns 100% of the membership interests of Crestline Packaging Solutions LLC. Rebecca Strand served as the deal partner for CPS at Thornfield and was responsible for overseeing Thornfield's investment in the company.
Both CPS Holdings Inc. and Crestline Packaging Solutions LLC are co-debtors in the above-captioned Chapter 11 cases, which are jointly administered under Case No. 22-51247. An organizational chart depicting the Debtors' corporate structure is attached hereto as Exhibit G.
II.C. Business Operations
Crestline is a manufacturer of specialty chemical packaging and industrial containment products. The company's product portfolio includes HDPE drums, intermediate bulk containers (IBCs), steel pails, and specialty containment vessels. These products are used extensively by customers in the chemical, petrochemical, and agricultural sectors for the storage, transport, and handling of hazardous and non-hazardous liquid and dry chemicals, fertilizers, solvents, and other industrial materials.
Crestline's products are manufactured to comply with applicable regulatory standards, including United States Department of Transportation ("DOT") hazardous materials packaging regulations (49 C.F.R. Parts 171–180) and relevant Environmental Protection Agency ("EPA") guidelines. The company's ability to consistently produce packaging that meets these stringent standards has been a significant competitive advantage and a key driver of customer loyalty.
II.C.1. Manufacturing Facilities
As of the Petition Date, the Debtors conduct manufacturing operations at four facilities located in Ohio, Indiana, and Louisiana. Each facility is dedicated to specific product lines and manufacturing processes, as summarized in the following table:
The Debtors' total workforce as of the Petition Date was approximately 1,420 employees across these four facilities. The Akron facility serves as both the corporate headquarters and the primary manufacturing site for the company's HDPE drum product line, which represents the largest single product category by revenue. Plant 2 in Evansville, Indiana produces IBCs and steel pails, serving customers primarily in the Midwestern agricultural and petrochemical markets. Plant 3 in Baton Rouge, Louisiana manufactures specialty containment vessels designed for the Gulf Coast petrochemical industry. Plant 4 in Ravenna, Ohio houses the company's extrusion and secondary processing capabilities, providing critical inputs to the HDPE drum and IBC production lines at other facilities.
In addition to its manufacturing facilities, the Debtors maintain a warehouse facility at 900 Darrow Road, Akron, Ohio 44305, which is leased from Benchmark Real Estate Holdings LLC. This warehouse provides approximately 85,000 square feet of storage capacity for finished goods and raw materials inventory.
II.D. Management
The Debtors' management team includes the following key officers:
Marcus J. Reinholdt — Chief Executive Officer. Mr. Reinholdt has served as Chief Executive Officer of Crestline since 2018, having been recruited by Thornfield Capital Partners LP following the 2017 leveraged buyout. Prior to joining Crestline, Mr. Reinholdt held senior leadership positions at several industrial manufacturing companies. Mr. Reinholdt has overseen the day-to-day operations of the company and has been actively involved in the prepetition restructuring negotiations.
Dana Kowalski — Chief Financial Officer. Ms. Kowalski has served as Chief Financial Officer of Crestline since 2019. She is responsible for the company's financial planning, treasury, accounting, and reporting functions. Ms. Kowalski has played a central role in the development of the financial projections and other financial information presented in this Disclosure Statement.
Preston Yee — General Counsel. Mr. Yee has served as General Counsel of Crestline since 2017 and is responsible for the company's legal affairs, including regulatory compliance, contract administration, and coordination with outside counsel in connection with the Chapter 11 cases.
II.E. Key Contracts and Relationships
The Debtors are party to a number of contracts and commercial relationships that are material to their ongoing business operations. The following is a summary of the most significant agreements:
Resin Supply Agreement with Northstar Polymers Inc. Crestline is party to a five-year Resin Supply Agreement dated March 1, 2019 with Northstar Polymers Inc., a specialty polymer manufacturer headquartered in Houston, Texas. Under this agreement, Northstar Polymers supplies the HDPE resin that is the primary raw material used in the production of Crestline's HDPE drums and IBCs. The Resin Supply Agreement includes volume-based pricing provisions and contains minimum purchase commitments on the part of Crestline. This contract is critical to the Debtors' manufacturing operations, and the Debtors intend to assume it under the Plan.
Equipment Lease with Meridian Industrial Leasing Corp. Crestline is party to a seven-year master equipment lease with Meridian Industrial Leasing Corp. covering the extrusion equipment located at Plant 4 in Ravenna, Ohio. Monthly lease payments under this agreement are $87,500. The leased equipment is essential to the extrusion and secondary processing operations conducted at Plant 4. The Debtors intend to assume this lease under the Plan.
Warehouse Lease with Benchmark Real Estate Holdings LLC. Crestline leases its warehouse facility at 900 Darrow Road, Akron, Ohio 44305 from Benchmark Real Estate Holdings LLC. The lease expires on December 31, 2025 and requires monthly rental payments of $42,000. As of the Petition Date, Crestline was approximately three months in arrears on its rent obligations, representing a cure amount of $126,000. The Debtors intend to assume this lease under the Plan and to pay the cure amount in full.
II.F. Financial Performance
The Debtors' financial performance has been significantly impacted by macroeconomic headwinds affecting the specialty packaging industry. The following table summarizes key financial metrics for the periods indicated:
Revenue declined approximately 18% from fiscal year 2020 to fiscal year 2021, driven primarily by significant increases in resin costs and broader supply chain disruptions that affected the availability and pricing of raw materials, transportation, and logistics. These factors significantly compressed the Debtors' operating margins, notwithstanding management's efforts to implement price increases and operational cost reductions. The margin compression continued into the first quarter of 2022, with trailing twelve-month ("TTM") EBITDA as of the end of Q1 2022 declining further to approximately $29.1 million.
ARTICLE III — PREPETITION CAPITAL STRUCTURE
III.A. The 2017 Leveraged Buyout
On October 13, 2017, Thornfield Capital Partners LP completed the acquisition of 100% of the equity of CPS Holdings Inc. (and, indirectly, 100% of the membership interests of Crestline Packaging Solutions LLC) in a leveraged buyout transaction at an aggregate enterprise value of approximately $410 million. Thornfield contributed approximately $163 million in equity to fund the acquisition, with the remainder of the purchase price funded through the debt facilities described below. At the time of the acquisition, Crestline had a well-established market position, a diversified revenue base, and demonstrated track record of profitability, and the transaction was underwritten based on financial projections that assumed continued growth in revenue and EBITDA.
III.B. First Lien Credit Facility
In connection with the 2017 leveraged buyout, the Debtors entered into a First Lien Credit Agreement dated October 13, 2017 (as amended from time to time, the "First Lien Credit Agreement"). Ridgeline National Bank, N.A., located at 200 Public Square, Cleveland, Ohio 44114, serves as both the administrative agent and the collateral agent under the First Lien Credit Agreement.
The First Lien Credit Agreement provides for two tranches of senior secured credit:
First Lien Revolving Credit Facility. The revolving credit facility provides for a total commitment of $40.0 million, of which $32.6 million was drawn and outstanding as of the Petition Date. The revolving credit facility bears interest at a rate equal to the Secured Overnight Financing Rate ("SOFR") plus 375 basis points and matures on October 13, 2022. The revolving credit facility is available for general corporate purposes and working capital needs.
First Lien Term Loan. The term loan was originally funded in the principal amount of $175.0 million, of which $158.7 million remained outstanding as of the Petition Date after scheduled amortization payments. The term loan bears interest at a rate equal to SOFR plus 425 basis points and matures on October 13, 2024.
The total first lien claims outstanding as of the Petition Date, consisting of the drawn revolving credit facility balance and the outstanding term loan principal, aggregate to approximately $191.3 million. The First Lien Credit Agreement contains customary affirmative and negative covenants, events of default, and representations and warranties. Critically, Section 7.11 of the First Lien Credit Agreement includes a maximum leverage ratio covenant requiring that the ratio of Total Net Debt to EBITDA (as defined in the First Lien Credit Agreement) not exceed 5.75x, tested on a quarterly basis. As discussed in Article IV below, the Debtors' breach of this covenant was the precipitating event leading to the Chapter 11 filing.
The obligations under the First Lien Credit Agreement are secured by first-priority liens on substantially all assets of the Debtors, including all tangible and intangible personal property, equipment, inventory, accounts receivable, intellectual property, and the equity interests of Crestline held by CPS Holdings.
III.C. Second Lien Notes
Concurrently with the closing of the 2017 leveraged buyout, the Debtors issued $60.0 million in aggregate principal amount of 9.75% Senior Secured Second Lien Notes due 2025 (the "Second Lien Notes") pursuant to an indenture dated October 13, 2017 (the "Second Lien Notes Indenture"). Continental Fiduciary Trust Company, located at 101 Barclay Street, New York, New York 10286, serves as the indenture trustee under the Second Lien Notes Indenture.
The Second Lien Notes bear interest at a fixed rate of 9.75% per annum, payable semi-annually, and mature on October 13, 2025. The Second Lien Notes are identified by CUSIP number 22761TAA3.
In 2019, the Debtors repurchased $4.0 million in aggregate principal amount of the Second Lien Notes in the open market, reducing the outstanding principal balance to $56.0 million. As of the Petition Date, the outstanding Second Lien Notes consisted of $56.0 million in aggregate principal amount plus accrued and unpaid interest of approximately $3.9 million, for a total of approximately $59.9 million. The accrued interest amount includes default rate interest at an additional 2.00% per annum, which began accruing on April 22, 2022, the date on which Ridgeline National Bank, N.A. delivered a Notice 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.
The obligations under the Second Lien Notes are secured by second-priority liens on substantially all assets of the Debtors, junior in priority to the liens securing the First Lien Credit Agreement, pursuant to an intercreditor agreement among the first lien agent, the second lien trustee, and the Debtors.
III.D. Capital Structure Summary (Petition Date — June 20, 2022)
The following table summarizes the Debtors' funded debt capital structure as of the Petition Date:
In addition to the funded debt described above, as of the Petition Date the Debtors had approximately $14.8 million in general unsecured claims, consisting primarily of trade payables, accrued liabilities, and other unsecured obligations incurred in the ordinary course of business.
III.E. Equity
As described above, Thornfield Capital Partners LP holds 100% of the equity of CPS Holdings Inc., which in turn holds 100% of the membership interests of Crestline Packaging Solutions LLC. Thornfield's initial equity contribution at the time of the 2017 leveraged buyout was approximately $163 million. No additional equity contributions have been made by Thornfield since the closing of the acquisition.
Given the Debtors' current financial condition and the substantial indebtedness encumbering the Debtors' assets, the Debtors believe that there is no residual equity value available for distribution to holders of existing equity interests. Under the Plan, all existing equity interests in CPS Holdings will be cancelled and extinguished on the Effective Date without any distribution to Thornfield.
ARTICLE IV — EVENTS LEADING TO THE CHAPTER 11 FILING
IV.A. Financial Deterioration and Covenant Breach
Beginning in 2020 and accelerating throughout 2021 and into the first quarter of 2022, the Debtors experienced significant financial deterioration driven by two principal factors: (i) substantial increases in the cost of HDPE resin, the primary raw material used in the production of the Debtors' largest product lines; and (ii) broader supply chain disruptions affecting the availability of raw materials, transportation, and logistics across the specialty packaging and industrial containment sectors. These macroeconomic headwinds, which affected the entire specialty packaging industry, were exacerbated by the lingering effects of the COVID-19 pandemic on global supply chains.
Revenue declined approximately 18% from fiscal year 2020 to fiscal year 2021, and operating margins compressed significantly as the Debtors were unable to fully pass through increased raw material costs to customers in a timely manner. The company's EBITDA declined from $38.4 million in fiscal year 2021 to $29.1 million on a trailing twelve-month basis as of the end of Q1 2022, reflecting the continued pressure on margins.
As a direct result of this financial deterioration, the Debtors' leverage ratio exceeded the maximum permitted under the First Lien Credit Agreement. As of the end of Q1 2022, the Debtors' Total Net Debt was approximately $247.3 million and their TTM EBITDA was approximately $29.1 million, resulting in a leverage ratio of approximately 8.50x. The maximum leverage ratio covenant set forth in Section 7.11 of the First Lien Credit Agreement requires that Total Net Debt to EBITDA not exceed 5.75x, tested on a quarterly basis. The Debtors' actual leverage ratio of 8.50x exceeded the covenant maximum by approximately 2.75 turns, representing a breach magnitude of approximately 47.8% above the covenant threshold.
IV.B. Notice of Default
On April 22, 2022, Ridgeline National Bank, N.A., in its capacity as administrative agent and collateral agent under the First Lien Credit Agreement, delivered a formal Notice of Default to the Debtors citing a breach of the maximum leverage ratio covenant set forth in Section 7.11 of the First Lien Credit Agreement. The delivery of the Notice of Default constituted an "Event of Default" under the First Lien Credit Agreement and triggered certain acceleration rights and remedies available to the first lien lenders, including the right to accelerate the outstanding indebtedness and exercise remedies against the collateral.
The Notice of Default also triggered a cross-default under Section 6.01(e) of the Second Lien Notes Indenture, which provides that an event of default under the First Lien Credit Agreement constitutes an event of default under the Second Lien Notes Indenture. As a result of the cross-default, default rate interest of an additional 2.00% per annum began accruing on the outstanding Second Lien Notes effective April 22, 2022, increasing the total accrued interest on the Second Lien Notes.
IV.C. Forbearance Agreement
Following the delivery of the Notice of Default, the Debtors engaged in discussions with Ridgeline National Bank and the first lien lenders regarding a potential standstill or forbearance to provide the Debtors with time to explore restructuring alternatives. On May 18, 2022, the Debtors, Ridgeline National Bank, and consenting first lien lenders holding approximately 68% of the outstanding first lien term loan principal entered into a Forbearance Agreement (the "Forbearance Agreement"). Pursuant to the Forbearance Agreement, the consenting first lien lenders agreed to forbear from exercising their rights and remedies arising from the leverage covenant breach for a period of 45 days through July 2, 2022.
The Forbearance Agreement was subsequently extended by one additional period, through July 15, 2022, to allow the parties to finalize the terms of the Restructuring Support Agreement. The purpose of the Forbearance Agreement and its extension was to provide the Debtors and their key creditor constituencies with the breathing room necessary to negotiate the terms of a consensual, prepackaged restructuring in a constructive environment, without the threat of acceleration, enforcement actions, or the immediate need for an emergency bankruptcy filing.
IV.D. Prepetition Restructuring Negotiations
During the forbearance period, the Debtors and their key creditor constituencies engaged in intensive, multi-party negotiations to develop a consensual restructuring framework. The Debtors retained the following professional advisors to assist with these efforts:
Calderwood & Harkness LLP was retained as the Debtors' bankruptcy counsel pursuant to an engagement letter dated June 8, 2022. A retainer in the amount of $500,000 was received on June 10, 2022. Calderwood & Harkness has served as lead counsel to the Debtors throughout the restructuring process and in the Chapter 11 cases.
Aldersgate Advisory Group LLC was retained as financial advisor and investment banker to the Debtors. Aldersgate has provided the Debtors with financial advisory services, including the preparation of the valuation analysis, liquidation analysis, and financial projections included in this Disclosure Statement, as well as assistance with the negotiation of the Plan economics and the debtor-in-possession financing facility.
The Debtors' principal creditor constituencies organized as follows:
Ad Hoc Group of First Lien Lenders. Beginning in approximately March 2022, certain holders of the first lien term loan organized informally as the Ad Hoc Group of First Lien Lenders. As of the date of the RSA, the members of the Ad Hoc Group held approximately 68% in principal amount of the outstanding first lien term loan. The Ad Hoc Group of First Lien Lenders is represented by Hargrove, Mitchell & Saunders LLP (lead partner: Victoria Kline; lead associate: Thomas Frey), with offices at 51 West 52nd Street, New York, New York 10019. The key members of the Ad Hoc Group of First Lien Lenders include:
• Blackmoor Capital Management LLC — $41.2 million in first lien term loan holdings (principal: Arthur Ng);
• Greystone Fixed Income Partners LP — $28.6 million in first lien term loan holdings (principal: Sandra Ibanez); and
• Wexford Opportunity Fund III LP — $37.9 million in first lien term loan holdings (principal: Derek Loomis).
Ad Hoc Group of Second Lien Noteholders. Certain holders of the Second Lien Notes also organized as the Ad Hoc Group of Second Lien Noteholders, holding approximately 72% in principal amount of the outstanding Second Lien Notes. The Ad Hoc Group of Second Lien Noteholders is represented by Pemberton & Locke LLP (lead partner: Raymond Delvecchio; lead associate: Nia Patterson), with offices at 1 Liberty Plaza, New York, New York 10006. The key members of the Ad Hoc Group of Second Lien Noteholders include:
• Fenwick Structured Credit Fund II LP — $18.3 million in Second Lien Notes holdings (principal: Liam Driscoll); and
• Millhaven Capital Advisors LLC — $22.1 million in Second Lien Notes holdings (principal: Karen Ostrowski).
The negotiations among the Debtors, Thornfield, the Ad Hoc Group of First Lien Lenders, and the Ad Hoc Group of Second Lien Noteholders were intensive and conducted throughout May and June 2022. The principal areas of negotiation included the allocation of reorganized equity between the first lien lenders and the second lien noteholders, the terms and amount of the new take-back debt, the treatment of general unsecured claims, the scope of third-party releases, the terms of the Management Incentive Plan, the governance structure for the reorganized company, and the key milestones and conditions to consummation of the Plan.
IV.E. The Restructuring Support Agreement
On July 8, 2022, the Debtors, Thornfield Capital Partners LP, the Ad Hoc Group of First Lien Lenders, and the Ad Hoc Group of Second Lien Noteholders executed the Restructuring Support Agreement (the "RSA"), which memorializes the parties' agreement on the terms of the Plan and establishes a framework for the Chapter 11 cases. A copy of the RSA, including the attached term sheet and milestone schedule, is attached hereto as Exhibit B.
The RSA establishes the following key milestones:
• Petition Date: No later than July 31, 2022 (actual Petition Date: June 20, 2022);
• Disclosure Statement Approval: Within 45 days of the Petition Date;
• Plan Confirmation: Within 90 days of the Petition Date;
• Effective Date: Within 15 business days of the entry of the Confirmation Order.
The RSA sets forth the agreed-upon plan economics described in Article V below and requires each of the consenting creditor parties to vote in favor of the Plan and to support its confirmation and consummation. The RSA also contains termination provisions that permit any party to terminate the RSA upon the occurrence of certain specified events, including the failure to meet the milestones set forth above (subject to extensions as agreed by the parties).
IV.F. The Chapter 11 Filing
On June 20, 2022 (the "Petition Date"), Crestline Packaging Solutions LLC and CPS Holdings Inc. each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Ohio (Eastern Division). The Chapter 11 cases are jointly administered under Case No. 22-51247.
On June 21, 2022, the day following the Petition Date, the Bankruptcy Court held a hearing on the Debtors' "first day" motions, which sought various forms of relief to ensure the continuation of the Debtors' business operations and to minimize disruption to employees, customers, and vendors. Among other relief, the Court authorized critical vendor payments of up to $6.8 million to ensure the continued supply of essential raw materials and services to the Debtors' manufacturing operations.
On June 24, 2022, the Court entered an Interim Order approving the debtor-in-possession financing facility described in Article V.F below on an interim basis. On July 18, 2022, the Court entered a Final Order approving the DIP financing on a final basis.
ARTICLE V — SUMMARY OF THE PREPACKAGED PLAN OF REORGANIZATION
The following is a summary of the material provisions of the Plan. This summary is qualified in its entirety by reference to the full text of the Plan, which is attached hereto as Exhibit A. In the event of any inconsistency between this summary and the terms of the Plan, the terms of the Plan shall govern and control.
V.A. Administrative and Priority Claims (Unclassified)
In accordance with Section 1123(a)(1) of the Bankruptcy Code, Administrative Expense Claims and Priority Tax Claims are not classified under the Plan and are treated as follows:
Administrative Expense Claims. Each holder of an Allowed Administrative Expense Claim will receive, in full and final satisfaction, settlement, release, and discharge of such Claim, payment in full in cash on the Effective Date, or as soon thereafter as is reasonably practicable, or on such other date and upon such other terms as may be agreed upon by the holder of such Claim and the Debtors or the reorganized Debtors.
Priority Tax Claims. Each holder of an Allowed Priority Tax Claim will receive, in full and final satisfaction, settlement, release, and discharge of such Claim, payment in full in cash on the Effective Date, or, at the Debtors' election, in regular installment payments of cash in an aggregate amount equal to the Allowed Amount of such Claim, together with interest at the applicable rate under Section 511 of the Bankruptcy Code, over a period not exceeding five years from the Petition Date, in accordance with Section 1129(a)(9)(C) of the Bankruptcy Code.
Professional Fee Claims. All Professional Fee Claims will be paid in full in cash upon allowance by the Bankruptcy Court. The Debtors estimate total professional fees and expenses of approximately $9.3 million, as detailed in Article V.K below.
V.B. Classification and Treatment of Claims and Interests
The Plan classifies Claims against and Interests in the Debtors into the following six classes. The classification and treatment of each class is described below.
V.B.1. Class 1 — Other Priority Claims
Classification: Class 1 consists of all Allowed priority Claims against the Debtors, other than Administrative Expense Claims and Priority Tax Claims, entitled to priority under Section 507(a) of the Bankruptcy Code.
Treatment: Each holder of an Allowed Class 1 Claim will receive, in full and final satisfaction, settlement, release, and discharge of such Claim, payment in full in cash on the Effective Date, or as soon thereafter as is reasonably practicable.
Estimated Recovery: 100%.
Voting Status: Unimpaired. Holders of Class 1 Claims are conclusively presumed to have accepted the Plan pursuant to Section 1126(f) of the Bankruptcy Code and are not entitled to vote.
V.B.2. Class 2 — First Lien Secured Claims
Classification: Class 2 consists of all Allowed Claims arising under or in connection with the First Lien Credit Agreement, including the First Lien Revolving Credit Facility and the First Lien Term Loan, against either or both of the Debtors.
Amount: Approximately $191.3 million, consisting of $158.7 million in outstanding first lien term loan principal and $32.6 million drawn on the revolving credit facility.
Treatment: On the Effective Date, each holder of an Allowed Class 2 Claim will receive, in full and final satisfaction, settlement, release, and discharge of such Claim, its pro rata share of: (a) 92% of the reorganized equity of Reorganized Crestline (subject to dilution by the Management Incentive Plan); and (b) $12.5 million in aggregate principal amount of the New First Lien Take-Back Term Loan (as described in Article V.D below), allocated pro rata among all holders of Allowed Class 2 Claims.
Estimated Recovery: Under the midpoint valuation scenario, with a reorganized equity value of $182.5 million, the value of 92% of the reorganized equity is approximately $167.9 million. Together with the $12.5 million New First Lien Take-Back Term Loan, the total estimated recovery for Class 2 is approximately $180.4 million on $191.3 million in Claims, representing a recovery of approximately 94.3% at the midpoint. Under the mid-low valuation scenario, the estimated recovery is approximately 72%.
Voting Status: Impaired. Holders of Class 2 Claims are entitled to vote on the Plan.
V.B.3. Class 3 — Second Lien Secured Claims
Classification: Class 3 consists of all Allowed Claims arising under or in connection with the Second Lien Notes Indenture, including all outstanding principal and accrued and unpaid interest (including default rate interest), against either or both of the Debtors.
Amount: 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 accruing from April 22, 2022).
Treatment: On the Effective Date, each holder of an Allowed Class 3 Claim will receive, in full and final satisfaction, settlement, release, and discharge of such Claim, its pro rata share of: (a) 8% of the reorganized equity of Reorganized Crestline (subject to dilution by the Management Incentive Plan); and (b) warrants entitling the holder to purchase an additional 5% of the reorganized equity of Reorganized Crestline, with a strike price equal to the plan equity value (i.e., the midpoint reorganized equity value of $182.5 million), subject to dilution by the Management Incentive Plan.
Estimated Recovery: The value of 8% of the reorganized equity at the midpoint reorganized equity value of $182.5 million is approximately $14.6 million. The warrants for 5% of the reorganized equity will have additional value to the extent that the actual reorganized equity value exceeds the plan equity value. Taking into account the equity value and the out-of-the-money nature of the warrants at issuance, the estimated recovery for Class 3 is approximately 12%.
Voting Status: Impaired. Holders of Class 3 Claims are entitled to vote on the Plan.
V.B.4. Class 4 — General Unsecured Claims
Classification: Class 4 consists of all Allowed general unsecured Claims against either or both of the Debtors, including trade payables, accrued liabilities, and other unsecured obligations.
Amount: Approximately $14.8 million.
Treatment: On the Effective Date, each holder of an Allowed Class 4 Claim will receive, in full and final satisfaction, settlement, release, and discharge of such Claim, its pro rata share of a cash pool in the aggregate amount of $1.5 million.
Estimated Recovery: Approximately 10.1% ($1.5 million ÷ $14.8 million).
Voting Status: Impaired. Holders of Class 4 Claims are entitled to vote on the Plan.
V.B.5. Class 5 — Intercompany Claims
Classification: Class 5 consists of all Claims held by one Debtor against another Debtor or by a non-debtor affiliate against a Debtor.
Treatment: Intercompany Claims will be reinstated, adjusted, or cancelled and extinguished, in each case at the Debtors' or reorganized Debtors' discretion, without any further action or distribution on account thereof.
Voting Status: Unimpaired or impaired, as applicable. To the extent unimpaired, holders of Class 5 Claims are deemed to accept the Plan; to the extent impaired, holders are deemed to reject.
V.B.6. Class 6 — Existing Equity Interests
Classification: Class 6 consists of all existing equity interests in CPS Holdings Inc., including all issued and outstanding shares of common stock and any other equity securities, options, warrants, or rights to acquire equity in CPS Holdings.
Holder: Thornfield Capital Partners LP (through its 100% ownership of the equity of CPS Holdings Inc.).
Treatment: On the Effective Date, all existing equity interests in CPS Holdings Inc. will be cancelled and extinguished without any distribution to the holders thereof. No holder of an existing equity interest will receive or retain any property under the Plan on account of such equity interest.
Estimated Recovery: 0%.
Voting Status: Impaired. Holders of Class 6 Interests are conclusively deemed to have rejected the Plan pursuant to Section 1126(g) of the Bankruptcy Code and are not entitled to vote.
V.C. Recovery Summary Table
The following table summarizes the classification, treatment, and estimated recovery for each class of Claims and Interests under the Plan:
V.D. New First Lien Take-Back Term Loan
On the Effective Date, Reorganized Crestline Packaging Solutions LLC, as borrower, will enter into a new first lien take-back term loan credit agreement (the "New First Lien Take-Back Term Loan") with Ridgeline National Bank, N.A. as administrative agent. The material terms of the New First Lien Take-Back Term Loan are as follows:
Borrower: Reorganized Crestline Packaging Solutions LLC.
Administrative Agent: Ridgeline National Bank, N.A.
Principal Amount: $12.5 million in aggregate principal amount.
Interest Rate: SOFR plus 550 basis points per annum, with a 1.00% SOFR floor.
Maturity: Five years from the Effective Date (anticipated maturity date: August 31, 2028, based on an anticipated Effective Date of approximately September 30, 2022).
Amortization: 1.00% per annum of the original principal amount ($125,000 per year), payable in equal quarterly installments of $31,250, with the remaining principal balance due at maturity.
Lenders: Allocated pro rata among holders of Allowed Class 2 Claims that elect to participate.
Collateral: First-priority lien on substantially all assets of Reorganized Crestline.
A summary of the material terms of the New First Lien Take-Back Term Loan is attached hereto as Exhibit H.
V.E. Management Incentive Plan (MIP)
The Plan provides for the establishment of a Management Incentive Plan (the "MIP") to be adopted by the reorganized board of managers following the Effective Date. The MIP will reserve a pool equal to 10% of the reorganized equity of Reorganized Crestline for issuance to eligible participants.
The key terms of the MIP are as follows:
Pool Size: 10% of the reorganized equity of Reorganized Crestline.
Participants: To be determined by the reorganized board of managers in its discretion.
Vesting Schedule: Awards under the MIP will vest as follows: (i) 50% of each award will vest on a time-based schedule, subject to a three-year cliff vesting period from the date of grant; and (ii) 50% of each award will vest based on the achievement of performance targets, consisting of EBITDA targets to be established by the reorganized board.