UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION
^1 The Debtors in these Chapter 11 cases, together with the last four digits of each Debtor's federal tax identification number, are: Crestline Packaging Solutions LLC (EIN: xx-xxx4837) and CPS Holdings Inc. (EIN: xx-xxx9162). The Debtors' headquarters and mailing address for purposes of these Chapter 11 cases is 4710 Industrial Corridor Drive, Akron, OH 44308.
APPLICATION OF DEBTORS FOR ENTRY OF AN ORDER AUTHORIZING THE RETENTION AND EMPLOYMENT OF ALDERSGATE ADVISORY GROUP LLC AS FINANCIAL ADVISOR AND INVESTMENT BANKER TO THE DEBTORS, NUNC PRO TUNC TO THE PETITION DATE
I. PRELIMINARY STATEMENT
The above-captioned debtors and debtors in possession, Crestline Packaging Solutions LLC ("Crestline") and CPS Holdings Inc. ("CPS Holdings," and together with Crestline, the "Debtors"), by and through their undersigned counsel, Calderwood & Harkness LLP, hereby move this Court (the "Application") for entry of an order, substantially in the form attached hereto as Exhibit B (the "Proposed Order"), pursuant to section 327(a) of title 11 of the United States Code (the "Bankruptcy Code"), Rules 2014(a) and 2016 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), and the applicable Local Rules of the United States Bankruptcy Court for the Northern District of Ohio, authorizing the retention and employment of Aldersgate Advisory Group LLC ("Aldersgate") as financial advisor and investment banker to the Debtors, nunc pro tunc to the Petition Date of June 20, 2022 (the "Petition Date").
Aldersgate, led by Managing Director Priya Narayanan, is a nationally recognized restructuring advisory firm with extensive experience advising debtors, creditor constituencies, and other parties in interest in complex Chapter 11 proceedings. Aldersgate's experience is particularly deep in matters involving manufacturing and industrial companies — precisely the sector in which the Debtors operate. Aldersgate's professionals possess sophisticated expertise in corporate finance, valuation, financial modeling, capital markets advisory, and the negotiation of complex restructuring transactions.
The Debtors require Aldersgate's specialized financial advisory expertise in connection with all aspects of the prosecution and confirmation of their prepackaged plan of reorganization (the "Plan"), including, without limitation: (a) the preparation of the liquidation analysis to be included in the Debtors' Disclosure Statement; (b) the development of financial feasibility projections demonstrating the Debtors' ability to satisfy their obligations under the Plan; (c) a comprehensive valuation analysis of the reorganized Debtors; (d) assistance with the Debtors' debtor-in-possession ("DIP") financing arrangements; (e) negotiation support in connection with the various creditor constituencies; and (f) the provision of expert testimony in support of both the adequacy of the Disclosure Statement and the confirmation of the Plan. Aldersgate's continued engagement is essential to the Debtors' ability to successfully emerge from Chapter 11 on the timeline contemplated by the Restructuring Support Agreement.
In support of this Application, the Debtors rely upon and incorporate herein by reference the Declaration of Priya Narayanan in Support of the Application to Retain Aldersgate Advisory Group LLC as Financial Advisor and Investment Banker to the Debtors (the "Narayanan Declaration"), attached hereto as Exhibit A, which sets forth, inter alia, the qualifications of Aldersgate, the services to be rendered, the terms of Aldersgate's compensation, and the disclosures required under Bankruptcy Rule 2014.
In further support of this Application, the Debtors respectfully represent as follows:
II. JURISDICTION AND VENUE
This Court has jurisdiction over this Application pursuant to 28 U.S.C. §§ 157 and 1334, and the General Order of Reference from the United States District Court for the Northern District of Ohio. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), as it concerns the administration of the Debtors' estates. The Debtors confirm that they consent to the entry of final orders or judgments by this Court with respect to this Application if it is determined that this Court, absent consent of the parties, cannot enter final orders or judgments consistent with Article III of the United States Constitution.
Venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. Crestline's principal place of business is located in Akron, Ohio, and the Debtors' principal assets are located within the Northern District of Ohio.
The statutory and procedural bases for the relief requested herein are section 327(a) of the Bankruptcy Code, Bankruptcy Rules 2014 and 2016, and the applicable Local Rules of the United States Bankruptcy Court for the Northern District of Ohio.
III. BACKGROUND
A. General Background of the Debtors
Crestline Packaging Solutions LLC is an Ohio limited liability company formed in 2009, with its principal executive offices and headquarters located at 4710 Industrial Corridor Drive, Akron, Ohio 44308. CPS Holdings Inc. is a Delaware corporation, with its registered agent located at 1209 Orange Street, Wilmington, Delaware 19801, care of National Corporate Services, Inc. CPS Holdings is the direct parent entity of Crestline and was organized to serve as the holding company in connection with the 2017 leveraged acquisition of Crestline described more fully below.
Crestline is a leading manufacturer of specialty chemical packaging and industrial containment products. The Debtors' product offerings include high-density polyethylene ("HDPE") drums (both open-head and tight-head configurations), intermediate bulk containers ("IBCs"), steel pails in various capacities, and specialty containment vessels designed for the safe storage and transportation of hazardous and non-hazardous chemicals, petrochemical products, agricultural chemicals, and related industrial materials. Crestline serves a diversified customer base spanning the chemical, petrochemical, agricultural, and general industrial sectors, with long-standing relationships with several Fortune 500 companies as well as mid-market producers and distributors of specialty chemicals.
As of the Petition Date, the Debtors operated four manufacturing facilities located across three states:
• Plant 1 — Akron, Ohio (headquarters and primary manufacturing facility, approximately 285,000 square feet);
• Plant 2 — Evansville, Indiana (approximately 180,000 square feet);
• Plant 3 — Baton Rouge, Louisiana (approximately 155,000 square feet); and
• Plant 4 — Ravenna, Ohio (approximately 120,000 square feet, principally dedicated to specialty containment products).
As of the Petition Date, the Debtors employed approximately 1,420 people across all four facilities, including approximately 1,180 hourly manufacturing and warehouse employees and approximately 240 salaried employees in management, engineering, sales, finance, and administrative functions.
For the fiscal year ended December 31, 2021 ("FY2021"), the Debtors generated consolidated net revenue of approximately $312.6 million and consolidated EBITDA (as defined under the First Lien Credit Agreement, adjusted for certain non-recurring items) of approximately $38.4 million, representing a consolidated EBITDA margin of approximately 12.3%. However, the Debtors' financial performance deteriorated significantly in the first quarter of 2022. Trailing twelve-month EBITDA as of the end of the first quarter of 2022 ("TTM Q1 2022") declined to approximately $29.1 million, reflecting severe margin compression caused by a dramatic increase in the cost of key raw materials (principally high-density polyethylene resin, the price of which increased approximately 34% year-over-year), compounded by persistent supply chain disruptions, elevated logistics and freight costs, and an inability to pass through the full magnitude of input cost increases to customers on a timely basis due to contractual pricing mechanisms and competitive dynamics.
B. Capital Structure and Events Leading to Filing
The Debtors' current capital structure is the product of a leveraged buyout transaction completed in October 2017 (the "LBO"). On October 13, 2017, Thornfield Capital Partners LP ("Thornfield"), a private equity firm headquartered in New York, New York, acquired 100% of the equity interests in Crestline through CPS Holdings at an aggregate enterprise value of approximately $410.0 million. The LBO was financed with approximately $163.0 million in equity contributed by Thornfield (together with certain co-investors) and the balance funded through a combination of first lien and second lien debt facilities.
As of the Petition Date, the Debtors' funded debt obligations consisted of the following:
All three debt instruments originated under agreements dated October 13, 2017, in connection with the closing of the LBO. The First Lien Revolving Credit Facility and the First Lien Term Loan are governed by a First Lien Credit Agreement, dated as of October 13, 2017 (as amended, restated, amended and restated, supplemented, or otherwise modified from time to time, the "First Lien Credit Agreement"), among Crestline, as borrower, CPS Holdings, as guarantor, Ridgeline National Bank, N.A. ("Ridgeline"), as administrative agent and collateral agent, and the lenders party thereto from time to time. The 9.75% Senior Secured Second Lien Notes due 2025 (the "Second Lien Notes") were issued pursuant to an Indenture, dated as of October 13, 2017 (the "Second Lien Indenture"), among Crestline, as issuer, CPS Holdings, as guarantor, and Continental Fiduciary Trust Company, as indenture trustee.
As a consequence of the decline in the Debtors' financial performance, in the first quarter of 2022, the Debtors breached the maximum consolidated total net leverage ratio financial maintenance covenant set forth in Section 7.11 of the First Lien Credit Agreement. As of the last day of the fiscal quarter ended March 31, 2022, the Debtors' actual consolidated total net leverage ratio was approximately 8.50x — substantially in excess of the maximum permitted ratio of 5.75x. Upon notification of the covenant breach, Ridgeline, acting in its capacity as administrative agent under the First Lien Credit Agreement, delivered a Notice of Default to the Debtors on April 22, 2022, in accordance with Section 8.01 of the First Lien Credit Agreement.
The delivery of the Notice of Default under the First Lien Credit Agreement constituted a cross-default event under Section 6.01(e) of the Second Lien Indenture, resulting in the simultaneous acceleration of the Debtors' obligations under the Second Lien Notes.
Faced with the prospect of imminent enforcement actions and the risk of involuntary liquidation of critical operating assets, the Debtors promptly engaged in discussions with their principal creditor constituencies. Following several weeks of intensive negotiations, on May 18, 2022, the Debtors entered into a Forbearance Agreement (the "Forbearance Agreement") with consenting first lien lenders holding approximately 68% in principal amount of the outstanding first lien term loan commitments. The Forbearance Agreement provided for a temporary standstill with respect to the exercise of remedies arising from the leverage ratio default, initially for a period of 45 days through July 2, 2022. The forbearance period was subsequently extended by amendment to July 15, 2022, to permit the Debtors to finalize the terms of a consensual restructuring.
On June 20, 2022, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in this Court. The Chapter 11 cases are being jointly administered for procedural purposes under Case No. 22-51247. The Debtors are pursuing confirmation of a prepackaged plan of reorganization pursuant to a Restructuring Support Agreement, dated as of July 8, 2022 (the "RSA"), entered into by the Debtors, Thornfield, members of the Ad Hoc Group of First Lien Lenders holding approximately 78% in principal amount of the first lien term loan, and members of the Ad Hoc Group of Second Lien Noteholders holding approximately 62% in principal amount of the Second Lien Notes. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
C. The Debtors' Need for a Financial Advisor
The complexity of the Debtors' capital structure, the multi-party nature of the restructuring negotiations among first lien lenders, second lien noteholders, the equity sponsor, and other constituencies, and the significant financial analyses required to support the Disclosure Statement and Plan confirmation process all necessitate the retention of a sophisticated financial advisory firm with deep restructuring experience. In particular, the confirmation of the Debtors' prepackaged Plan will require, among other things: (a) a detailed liquidation analysis demonstrating that creditors will receive at least as much under the Plan as they would receive in a hypothetical Chapter 7 liquidation; (b) a comprehensive enterprise valuation of the reorganized Debtors, which is central to the allocation of reorganized equity among creditor classes; and (c) financial feasibility projections demonstrating that the reorganized Debtors will not require further financial reorganization in the foreseeable future.
After careful evaluation of several qualified restructuring advisory firms, the Debtors selected Aldersgate based on its outstanding qualifications, its extensive experience in complex Chapter 11 proceedings involving manufacturing and industrial companies, its familiarity with the Debtors' industry and capital structure, the depth and quality of its professional team, and the competitiveness of its proposed fee structure. Aldersgate was initially engaged on a prepetition basis to assist the Debtors in evaluating restructuring alternatives and preparing the financial analyses necessary to support the Debtors' restructuring negotiations with their creditor constituencies. Aldersgate's prepetition engagement commenced in May 2022, prior to the Petition Date, and Aldersgate has been performing advisory services on a continuous basis since that time.
The Debtors now seek to formalize Aldersgate's retention on a postpetition basis and to obtain Court approval to continue Aldersgate's engagement as financial advisor and investment banker to the Debtors, nunc pro tunc to the Petition Date of June 20, 2022, to ensure that there is no gap in the authorization of Aldersgate's services and to permit Aldersgate to seek compensation for services rendered since the Petition Date.
IV. ALDERSGATE'S QUALIFICATIONS
Aldersgate Advisory Group LLC is a limited liability company organized under the laws of the State of Delaware, with its principal office located at 280 Park Avenue, 12th Floor, New York, New York 10017. Aldersgate specializes in providing financial advisory and investment banking services to companies, their boards of directors, creditor committees, secured lenders, bondholders, equity sponsors, and other parties in interest in connection with complex restructuring, bankruptcy, distressed M&A, and special situation transactions.
Since its founding, Aldersgate has advised on dozens of significant restructuring and Chapter 11 engagements across a wide range of industries, with particular concentration in the manufacturing, industrial, chemicals, and energy sectors. Aldersgate's advisory professionals bring deep expertise in all aspects of in-court and out-of-court restructurings, including liability management, capital structure optimization, DIP financing, Section 363 sales, plan formulation and confirmation, valuation, expert testimony, and negotiation of complex multi-party restructuring agreements.
The Debtors' engagement will be led by Priya Narayanan, Lead Managing Director of Aldersgate. Ms. Narayanan has over 18 years of experience in restructuring and corporate finance advisory, including service as a lead financial advisor to debtors, official and ad hoc creditor committees, and other parties in interest in numerous Chapter 11 proceedings involving manufacturing, industrial, and specialty chemicals companies. Ms. Narayanan holds a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania and a Master of Business Administration degree from the Columbia University Graduate School of Business. Prior to co-founding Aldersgate, Ms. Narayanan served as a Managing Director in the restructuring group of a major global investment bank.
In addition to Ms. Narayanan, the Aldersgate team assigned to the Crestline engagement includes experienced professionals with backgrounds in corporate finance, valuation, financial modeling, capital markets, and distressed debt analysis. The team's collective experience ensures that the Debtors will receive the highest caliber of financial advisory services throughout the pendency of these Chapter 11 cases.
V. SERVICES TO BE RENDERED
Aldersgate has provided and will continue to provide the following services in connection with the Debtors' Chapter 11 cases, as more fully described in the Narayanan Declaration:
(a) Advising the Debtors with respect to their restructuring alternatives and strategies, including analysis of the Debtors' business operations, financial condition, capital structure, and available restructuring paths;
(b) Preparing and assisting with the development of the Debtors' financial projections and business plans, including the five-year financial projections to be included in the Disclosure Statement;
(c) Preparing the liquidation analysis for inclusion in the Debtors' Disclosure Statement, which analysis will estimate the recoveries that creditors would receive in a hypothetical Chapter 7 liquidation of the Debtors' assets, in order to demonstrate that the Plan satisfies the "best interests of creditors" test under section 1129(a)(7) of the Bankruptcy Code;
(d) Preparing a comprehensive valuation analysis of the reorganized Debtors, utilizing a discounted cash flow ("DCF") analysis as the primary valuation methodology and a comparable company trading multiples analysis as a corroborative methodology, in order to determine the total enterprise value of the reorganized Debtors and support the allocation of plan consideration among creditor classes;
(e) Preparing financial feasibility projections demonstrating the ability of the reorganized Debtors to meet their obligations under the Plan, including debt service on the new first lien take-back term loan and working capital requirements, including projected FY2023 EBITDA of approximately $36.5 million, reflecting the anticipated benefits of cost-reduction initiatives and normalization of raw material pricing;
(f) Advising the Debtors in connection with the negotiation of the Restructuring Support Agreement and the economic terms of the prepackaged Plan, including the allocation of reorganized equity (92% to first lien lenders converting their claims and 8% to second lien noteholders in satisfaction of their claims) and the terms of the $12.5 million new first lien take-back term loan to be issued on the Effective Date;
(g) Assisting the Debtors with the DIP financing process, including the negotiation and structuring of the $30.0 million superpriority revolving DIP credit facility provided by Ridgeline National Bank, N.A. as DIP agent and lender, and the preparation of the financial analyses necessary to support the DIP financing motion;
(h) Assisting the Debtors in their negotiations with the Ad Hoc Group of First Lien Lenders (represented by Hargrove, Mitchell & Saunders LLP, Victoria Kline and Thomas Frey) and the Ad Hoc Group of Second Lien Noteholders (represented by Pemberton & Locke LLP, Raymond Delvecchio and Nia Patterson), including with respect to plan recovery allocations, new money contributions, and governance terms;
(i) Providing expert testimony in connection with the Disclosure Statement hearing and the Plan Confirmation Hearing, including testimony regarding the liquidation analysis, the valuation analysis, the financial feasibility projections, and such other financial matters as may be necessary to support confirmation of the Plan; and
(j) Assisting with such other financial advisory and investment banking tasks as may be requested by the Debtors and their counsel from time to time during the pendency of these Chapter 11 cases.
VI. COMPENSATION AND TERMS OF ENGAGEMENT
The terms of Aldersgate's engagement are set forth in an engagement letter between Aldersgate and Crestline, dated as of May 12, 2022 (the "Engagement Letter"), a true and correct copy of which is attached to the Narayanan Declaration. The principal compensation terms are summarized below.
A. Monthly Advisory Fee
Pursuant to the Engagement Letter, Aldersgate will receive a monthly advisory fee of One Hundred Seventy-Five Thousand Dollars ($175,000) per month (the "Monthly Advisory Fee") during the pendency of the engagement, payable on the first business day of each calendar month. The Monthly Advisory Fee compensates Aldersgate for the ongoing availability and dedication of senior professionals to the Debtors' engagement and reflects the substantial time commitment required to advise the Debtors on a day-to-day basis throughout the Chapter 11 process.
For purposes of estimating total Monthly Advisory Fees, the Debtors currently anticipate that the active engagement period will span approximately three months, from June 2022 through September 2022, based on the timeline contemplated by the RSA for emergence from Chapter 11. On that basis, total Monthly Advisory Fees are estimated at approximately $525,000. The Debtors note, however, that the actual duration of the engagement — and therefore the aggregate Monthly Advisory Fees — may vary depending upon the progress of the Chapter 11 cases and the timeline for Plan confirmation and effectiveness.
B. Restructuring Completion Fee
Pursuant to the Engagement Letter, upon the occurrence of a "Restructuring Transaction" (as defined in the Engagement Letter, which includes, without limitation, the confirmation and effectiveness of a plan of reorganization under the Bankruptcy Code), Aldersgate will earn a restructuring completion fee of Three Million Five Hundred Thousand Dollars ($3,500,000) (the "Completion Fee"). The Completion Fee is intended to compensate Aldersgate for the successful conclusion of the restructuring engagement and reflects the significant value delivered by Aldersgate in connection with the formulation, negotiation, and confirmation of the Plan.
The Completion Fee shall be payable upon the Effective Date of the Plan or, if the Restructuring Transaction takes an alternative form, upon the closing of such transaction. Monthly Advisory Fees previously paid to Aldersgate will not be credited against the Completion Fee. The Completion Fee structure is consistent with market practice for financial advisory engagements in Chapter 11 cases and appropriately aligns the interests of the financial advisor with the successful conclusion of the restructuring.
C. Total Estimated Compensation
Based on the foregoing, total estimated fees for Aldersgate's engagement are approximately $4,025,000, consisting of the $3,500,000 Completion Fee and approximately $525,000 in Monthly Advisory Fees (based on an estimated three-month active engagement period). The Debtors note that this estimate forms a component of the aggregate estimated professional fees across all retained professionals in these Chapter 11 cases, which are estimated at approximately $9.3 million. Aldersgate's estimated fees thus represent approximately 43% of total estimated professional fees.
D. Expense Reimbursement
In addition to the advisory fees described above, Aldersgate shall be entitled to reimbursement of all reasonable and necessary out-of-pocket expenses incurred by Aldersgate and its professionals in connection with the performance of services under the Engagement Letter. Reimbursable expenses include, without limitation, travel expenses (including airfare, ground transportation, and lodging), meals, data processing and technology costs, research and information services, telecommunications charges, photocopying and printing costs, courier and delivery charges, filing fees, and similar charges. All expense reimbursement shall be subject to the approval of this Court in connection with Aldersgate's interim and final fee applications.
E. Indemnification. The Engagement Letter provides for customary indemnification of Aldersgate, its affiliates, and their respective officers, directors, members, managers, employees, agents, representatives, and controlling persons (collectively, the "Indemnified Persons") against certain losses, claims, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) arising out of, resulting from, or in connection with the engagement or Aldersgate's role as financial advisor to the Debtors, to the fullest extent permitted by applicable law; provided, however, that the foregoing indemnification obligations shall not extend to any losses, claims, damages, liabilities, or expenses that are determined by a court of competent jurisdiction in a final, non-appealable judgment to have resulted primarily from Aldersgate's bad faith, gross negligence, or willful misconduct.
The Debtors submit that the indemnification provisions set forth in the Engagement Letter are consistent with the customary terms regularly approved by bankruptcy courts in Chapter 11 cases for financial advisory engagements of this nature. The indemnification provisions are, in all events, subject to the approval of this Court and applicable law.
F. Fee Approval Process
All compensation payable and expenses reimbursable to Aldersgate shall be subject to the approval of this Court under sections 330 and 331 of the Bankruptcy Code, and any applicable orders of this Court governing the filing and approval of interim and final fee applications by retained professionals. Aldersgate will file interim and final fee applications in accordance with the Bankruptcy Code, the Bankruptcy Rules, the Local Rules of this Court, and any order entered by this Court establishing procedures for compensation and reimbursement of professionals. The Debtors reserve the right, as do all parties in interest, to object to any fees or expenses sought by Aldersgate in connection with its fee applications.
VII. ALDERSGATE'S DISINTERESTEDNESS AND ABSENCE OF ADVERSE INTERESTS
Pursuant to Bankruptcy Rule 2014(a), the Debtors are required to disclose, to the best of the applicant's knowledge, all of the professional's connections with the debtors, creditors, any other party in interest, their respective attorneys and accountants, the United States Trustee, and any person employed in the office of the United States Trustee. As set forth in detail in the Narayanan Declaration (Exhibit A), Aldersgate has conducted a comprehensive review of its files, records, and databases to identify any connections with the Debtors and other significant parties in interest in these Chapter 11 cases.
The parties searched include, without limitation, the following:
(a) The Debtors: Crestline Packaging Solutions LLC and CPS Holdings Inc.;
(b) Equity Sponsor: Thornfield Capital Partners LP, and its principals Julian Ashford and Rebecca Strand;
(c) Administrative Agent, Collateral Agent, and DIP Agent: Ridgeline National Bank, N.A.;
(d) Members of the Ad Hoc Group of First Lien Lenders: Blackmoor Capital Management LLC (Arthur Ng), Greystone Fixed Income Partners LP (Sandra Ibanez), and Wexford Opportunity Fund III LP (Derek Loomis);
(e) Members of the Ad Hoc Group of Second Lien Noteholders: Fenwick Structured Credit Fund II LP (Liam Driscoll) and Millhaven Capital Advisors LLC (Karen Ostrowski);
(f) Indenture Trustee: Continental Fiduciary Trust Company;
(g) Key Personnel of the Debtors: Marcus J. Reinholdt (Chief Executive Officer), Dana Kowalski (Chief Financial Officer), and Preston Yee (General Counsel);
(h) Counsel to the Debtors: Calderwood & Harkness LLP (Colette Whitman, Nathaniel Bower, Gabrielle Moss, Amy Chesterton);
(i) Local Co-Counsel to the Debtors: Kellner & Hartwick LLP (Bruce Tatelman);
(j) Tax and Accounting Advisor to the Debtors: Dralvecen Reyes Linley CPAs LLP & Associates LLP (Catherine Holtz);
(k) Claims and Noticing Agent: Pinnacle Claims Administration LLC;
(l) Counsel to the Ad Hoc Group of First Lien Lenders: Hargrove, Mitchell & Saunders LLP (Victoria Kline, Thomas Frey);
(m) Counsel to the Ad Hoc Group of Second Lien Noteholders: Pemberton & Locke LLP (Raymond Delvecchio, Nia Patterson);
(n) Directors' and Officers' Insurance Carrier: Apex Indemnity Insurance Company;
(o) Critical Vendors and Contract Counterparties: Northstar Polymers Inc., Meridian Industrial Leasing Corp., Benchmark Real Estate Holdings LLC; and
(p) The United States Trustee for Region 9.
As disclosed in the Narayanan Declaration, Aldersgate has identified certain connections with parties in interest, including certain prior unrelated engagements in which Aldersgate provided financial advisory services to entities affiliated with certain of the first lien lenders in matters not involving the Debtors. Aldersgate has determined that these connections are de minimis in nature, do not constitute interests adverse to the Debtors or their estates, and do not give rise to any disqualifying conflicts of interest. The nature of these connections is fully disclosed in the Narayanan Declaration.
Based on the foregoing review and the representations set forth in the Narayanan Declaration, Aldersgate does not hold or represent any interest adverse to the Debtors' estates within the meaning of section 327(a) of the Bankruptcy Code. Aldersgate is a "disinterested person" as that term is defined in section 101(14) of the Bankruptcy Code, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In the event that Aldersgate discovers any new material connections or potential conflicts during the course of its engagement, Aldersgate has committed to promptly disclose such connections to the Debtors and the Court by way of a supplemental declaration.
VIII. LEGAL BASIS FOR RETENTION
A. Section 327(a) of the Bankruptcy Code
Section 327(a) of the Bankruptcy Code provides, in pertinent part:
"Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title." 11 U.S.C. § 327(a).
Section 327(a), made applicable to debtors in possession by section 1107(a) of the Bankruptcy Code, authorizes a debtor in possession to employ professional persons, including financial advisors and investment bankers, provided that such professionals (i) do not hold or represent an interest adverse to the estate, and (ii) are "disinterested persons" within the meaning of section 101(14) of the Bankruptcy Code.
As set forth above and in the Narayanan Declaration, Aldersgate satisfies both requirements. Aldersgate does not hold or represent any interest adverse to the Debtors' estates, and Aldersgate qualifies as a "disinterested person" under section 101(14). Accordingly, the retention of Aldersgate as financial advisor and investment banker to the Debtors is appropriate and authorized under section 327(a).
B. Nunc Pro Tunc Retention
The Debtors seek to retain Aldersgate nunc pro tunc to the Petition Date of June 20, 2022. It is well established that bankruptcy courts have the authority to approve the retention of professionals nunc pro tunc to the petition date in order to avoid any gap in the authorization of services during the initial post-filing period. See, e.g., In re Cott Corp., No. 18-11781 (Bankr. D. Del.); In re Rustic Hills Marketplace, Ltd., 288 B.R. 844 (Bankr. N.D. Ohio 2003); In re THC Fin. Corp., 686 F.2d 799 (9th Cir. 1982) (recognizing nunc pro tunc retention in appropriate circumstances). The nunc pro tunc relief sought herein is consistent with the prevailing practice in this district and is supported by the Local Rules of this Court.
Aldersgate has been performing financial advisory services for the benefit of the Debtors' estates on a continuous basis since the Petition Date. The failure to authorize Aldersgate's retention nunc pro tunc would create an unjustifiable gap in the authorization of services, potentially depriving Aldersgate of compensation for valuable services already rendered to the estates. The Debtors submit that retroactive approval of Aldersgate's engagement is in the best interests of the Debtors' estates and their creditors.
C. Reasonableness of Compensation
The proposed compensation structure — consisting of a Monthly Advisory Fee of $175,000 and a Completion Fee of $3,500,000, plus reasonable expense reimbursement — is customary for financial advisory and investment banking engagements in Chapter 11 cases of similar size and complexity. The compensation structure reflects the scope and complexity of the services to be provided, the significant resources that Aldersgate has dedicated and will continue to dedicate to the engagement, and the alignment of Aldersgate's economic interests with the successful conclusion of the Debtors' restructuring.
All fees and expenses payable to Aldersgate will be subject to the Court's review and approval under section 330 of the Bankruptcy Code, which requires that compensation be "reasonable" in light of the nature, the extent, and the value of the services provided. The Debtors submit that the proposed fees are reasonable and appropriate in view of the complexity of the matters involved, the quality and experience of Aldersgate's professionals, the results to be obtained, and the prevailing market rates for comparable financial advisory engagements in Chapter 11 cases.
IX. NOTICE
Notice of this Application has been provided to the following parties or their counsel:
(a) The Office of the United States Trustee for the Northern District of Ohio, Howard M. Metzenbaum U.S. Courthouse, 201 Superior Avenue, Suite 441, Cleveland, Ohio 44114;
(b) Ridgeline National Bank, N.A., as administrative agent and collateral agent under the First Lien Credit Agreement and as DIP agent;
(c) Hargrove, Mitchell & Saunders LLP, as counsel to the Ad Hoc Group of First Lien Lenders;
(d) Pemberton & Locke LLP, as counsel to the Ad Hoc Group of Second Lien Noteholders;
(e) Continental Fiduciary Trust Company, as indenture trustee under the Second Lien Indenture; and
(f) All parties that have filed requests for notice pursuant to Bankruptcy Rule 2002.
The Debtors submit that the foregoing notice is sufficient under the circumstances and that no further or additional notice of this Application is required.
X. PRAYER FOR RELIEF
WHEREFORE, the Debtors respectfully request that this Court enter an order, substantially in the form of the Proposed Order attached hereto as Exhibit B:
(a) Authorizing the retention and employment of Aldersgate Advisory Group LLC as financial advisor and investment banker to the Debtors, nunc pro tunc to the Petition Date of June 20, 2022, pursuant to section 327(a) of the Bankruptcy Code;
(b) Approving the terms of Aldersgate's engagement, including the Monthly Advisory Fee of $175,000 per month, the Restructuring Completion Fee of $3,500,000, the reimbursement of reasonable and necessary out-of-pocket expenses, and the indemnification provisions, all subject to the filing and approval of fee applications pursuant to sections 330 and 331 of the Bankruptcy Code; and
(c) Granting such other and further relief as this Court deems just and proper.
Dated: July 22, 2022 Cleveland, Ohio
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Colette Whitman (Ohio Bar No. 0081247) Nathaniel Bower (Ohio Bar No. 0077391) Gabrielle Moss (pro hac vice pending) Amy Chesterton (pro hac vice pending) 30 Rockefeller Plaza New York, New York 10112 Telephone: (212) 474-1000 Facsimile: (212) 474-2000
— and —
127 Public Square, Suite 4100 Cleveland, Ohio 44114 Telephone: (216) 479-8500 Facsimile: (216) 479-8780
Counsel to the Debtors and Debtors in Possession
— and —
KELLNER & HARTWICK LLP Bruce Tatelman (Ohio Bar No. 0063518) 600 Superior Avenue East, Suite 1800 Cleveland, Ohio 44114 Telephone: (216) 861-7500 Facsimile: (216) 861-7510
Local Co-Counsel to the Debtors and Debtors in Possession
EXHIBIT A
DECLARATION OF PRIYA NARAYANAN IN SUPPORT OF APPLICATION TO RETAIN ALDERSGATE ADVISORY GROUP LLC AS FINANCIAL ADVISOR AND INVESTMENT BANKER TO THE DEBTORS
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION
DECLARATION OF PRIYA NARAYANAN IN SUPPORT OF APPLICATION TO RETAIN ALDERSGATE ADVISORY GROUP LLC AS FINANCIAL ADVISOR AND INVESTMENT BANKER TO THE DEBTORS
I, Priya Narayanan, pursuant to 28 U.S.C. § 1746, hereby declare under penalty of perjury as follows:
1. Background and Qualifications.
1. I am a Lead Managing Director and co-founder of Aldersgate Advisory Group LLC ("Aldersgate"), a Delaware limited liability company with its principal office located at 280 Park Avenue, 12th Floor, New York, New York 10017. I submit this Declaration in support of the Application of the Debtors (the "Application") for entry of an order authorizing the retention and employment of Aldersgate as financial advisor and investment banker to the above-captioned debtors and debtors in possession (collectively, the "Debtors"), nunc pro tunc to June 20, 2022 (the "Petition Date"). Except as otherwise indicated, the statements made herein are based on my personal knowledge, information provided by other Aldersgate professionals, and my review of relevant documents and records. If called upon to testify, I could and would testify competently to the matters set forth herein.
2. Aldersgate is a financial advisory and investment banking firm that specializes in providing restructuring, bankruptcy, and distressed situation advisory services to companies, their boards of directors, creditor committees, secured and unsecured creditors, equity sponsors, and other parties in interest. Since its founding, Aldersgate has been retained in numerous complex restructuring and Chapter 11 engagements, including matters involving companies in the manufacturing, industrial, chemicals, energy, and consumer products sectors. Aldersgate's professionals possess deep expertise in valuation, financial modeling, capital structure analysis, DIP financing, Section 363 sales, plan formulation and confirmation, and the provision of expert testimony in contested confirmation proceedings.
3. I have over 18 years of professional experience in restructuring, corporate finance, and investment banking. I have served as the lead managing director or senior advisor on numerous Chapter 11 engagements, advising debtors, official and ad hoc creditor committees, and other stakeholders in complex reorganization and liquidation proceedings. My prior experience includes service as a Managing Director in the restructuring advisory group of a major global investment bank, where I led engagements across the manufacturing, industrial, chemicals, and energy sectors. I hold a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania and a Master of Business Administration degree from the Columbia University Graduate School of Business. I am personally overseeing the Aldersgate team's work in connection with the Crestline engagement and serve as the primary client contact for the Debtors' management and counsel.
2. Nature of the Engagement.
4. Aldersgate was initially engaged on a prepetition basis by Crestline Packaging Solutions LLC ("Crestline") to advise the Debtors on restructuring alternatives following the breach of the maximum consolidated total net leverage ratio financial maintenance covenant under Section 7.11 of the First Lien Credit Agreement in the first quarter of 2022. Specifically, the Debtors retained Aldersgate pursuant to an engagement letter dated May 12, 2022 (the "Engagement Letter"), to serve as financial advisor and investment banker to the Debtors in connection with a potential restructuring transaction. A true and correct copy of the Engagement Letter is annexed hereto as Annex 1.
5. In the prepetition period, Aldersgate assisted the Debtors in analyzing their financial condition and evaluating various restructuring alternatives, including the potential for an out-of-court restructuring, a prearranged or prepackaged Chapter 11 filing, and other strategic options. Aldersgate also assisted the Debtors in preparing financial analyses to support the negotiation of the Forbearance Agreement with the consenting first lien lenders and in developing the financial framework for what ultimately became the Restructuring Support Agreement.
6. Following the filing of the Debtors' voluntary Chapter 11 petitions on June 20, 2022, Aldersgate has continued to provide financial advisory services to the Debtors on an uninterrupted basis in connection with the prosecution and confirmation of the Debtors' prepackaged plan of reorganization. The Debtors now seek Court authorization of Aldersgate's postpetition engagement, nunc pro tunc to the Petition Date.
3. Services Provided and to Be Provided.
7. Since the commencement of the engagement, Aldersgate has provided and will continue to provide the following services to the Debtors, as further described in Section V of the Application:
(a) Restructuring Advisory. Aldersgate has advised and will continue to advise the Debtors with respect to the evaluation of restructuring alternatives and strategies, including analysis of the Debtors' business operations, financial condition, and capital structure, and the identification of the restructuring path most likely to maximize value for all stakeholders.
(b) Financial Projections and Business Plan. Aldersgate has assisted and will continue to assist the Debtors in the development of detailed financial projections and a comprehensive business plan, including five-year projections of revenue, EBITDA, capital expenditures, working capital, and free cash flow, which form the basis for the valuation analysis, the feasibility analysis, and the financial information to be included in the Disclosure Statement.
(c) Liquidation Analysis. Aldersgate has prepared and will finalize a liquidation analysis estimating the recoveries that each class of creditors would receive in a hypothetical Chapter 7 liquidation of the Debtors' assets, for inclusion in the Disclosure Statement and in support of the "best interests of creditors" test under section 1129(a)(7) of the Bankruptcy Code.
(d) Valuation Analysis. Aldersgate has prepared and will finalize a comprehensive valuation analysis of the reorganized Debtors. The primary valuation methodology employed is a discounted cash flow ("DCF") analysis, which projects the Debtors' unlevered free cash flows over a discrete projection period and discounts those cash flows to present value using an appropriate weighted average cost of capital. As a corroborative methodology, Aldersgate has also performed a comparable company trading multiples analysis, examining the enterprise value-to-EBITDA and enterprise value-to-revenue multiples of publicly traded companies in the specialty packaging and industrial containment sectors. Based on these analyses, Aldersgate has estimated a midpoint reorganized enterprise value of the Debtors of approximately $195.0 million, within an estimated range of $180.0 million to $210.0 million. The valuation analysis is central to the determination of the allocation of reorganized equity among creditor classes under the Plan.
(e) Feasibility Projections. Aldersgate has prepared and will finalize financial feasibility projections demonstrating the reorganized Debtors' ability to satisfy their obligations under the Plan, including debt service on the $12.5 million new first lien take-back term loan and working capital requirements. The feasibility projections reflect projected FY2023 EBITDA of approximately $36.5 million, representing a return toward the Debtors' historical margin profile as the effects of resin cost increases and supply chain disruptions abate. The implied total enterprise value-to-EBITDA multiple (based on the midpoint reorganized enterprise value) is approximately 5.3x.
(f) Restructuring Support Agreement and Plan Negotiation. Aldersgate has advised and will continue to advise the Debtors in connection with the negotiation of the RSA and the economic terms of the Plan, including the allocation of reorganized equity (92% to first lien lenders converting their claims and 8% to second lien noteholders) and the terms of the $12.5 million new first lien take-back term loan.
(g) DIP Financing. Aldersgate has assisted and will continue to assist the Debtors in connection with the DIP financing process, including the negotiation and structuring of the $30.0 million superpriority revolving DIP credit facility with Ridgeline National Bank, N.A. and the preparation of the financial analyses necessary to support the DIP financing motion.
(h) Negotiation Support. Aldersgate has assisted and will continue to assist the Debtors in their negotiations with the Ad Hoc Group of First Lien Lenders (represented by Hargrove, Mitchell & Saunders LLP, Victoria Kline and Thomas Frey) and the Ad Hoc Group of Second Lien Noteholders (represented by Pemberton & Locke LLP, Raymond Delvecchio and Nia Patterson), including with respect to plan recovery allocations, treatment of claims, new money contributions, governance terms, and related matters.
(i) Expert Testimony. Aldersgate will provide expert testimony, through me or another qualified Aldersgate professional, in connection with the Disclosure Statement hearing and the Plan Confirmation Hearing, including testimony regarding the liquidation analysis, the valuation analysis, the financial feasibility projections, and such other financial matters as may be necessary to support the approval of the Disclosure Statement and the confirmation of the Plan.
(j) Other Services. Aldersgate will provide such other financial advisory and investment banking services as may be requested by the Debtors and their counsel from time to time during the pendency of these Chapter 11 cases, consistent with the scope of the Engagement Letter.
4. Compensation Terms.
8. The material compensation terms of Aldersgate's engagement are as follows:
(a) Monthly Advisory Fee. Aldersgate receives a Monthly Advisory Fee of $175,000 per month, payable on the first business day of each calendar month during the pendency of the engagement.
(b) Restructuring Completion Fee. Upon the occurrence of a Restructuring Transaction (including, without limitation, the confirmation and effectiveness of a plan of reorganization under the Bankruptcy Code), Aldersgate will earn a Completion Fee of $3,500,000, payable upon the Effective Date of the Plan. Monthly Advisory Fees previously paid will not be credited against the Completion Fee.
(c) Estimated Total Compensation. Based on an estimated engagement period of approximately three months (June through September 2022), total estimated fees for Aldersgate's engagement are approximately $4,025,000 (consisting of $3,500,000 in Completion Fee and approximately $525,000 in Monthly Advisory Fees).
(d) Expense Reimbursement. Aldersgate is entitled to reimbursement of all reasonable and necessary out-of-pocket expenses incurred in connection with the engagement.
(e) Indemnification. The Engagement Letter provides for customary indemnification of Aldersgate, its affiliates, and their respective officers, directors, members, managers, employees, agents, representatives, and controlling persons against certain losses, claims, damages, liabilities, and expenses arising out of or in connection with the engagement, except to the extent resulting from Aldersgate's bad faith, gross negligence, or willful misconduct, as determined by a court of competent jurisdiction in a final, non-appealable judgment.
(f) Court Approval. All compensation payable and expenses reimbursable to Aldersgate shall be subject to the approval of the Court pursuant to sections 330 and 331 of the Bankruptcy Code and any applicable orders of the Court governing fee applications.
5. Disinterestedness and Connections Disclosure.
9. In accordance with section 327(a) of the Bankruptcy Code and Bankruptcy Rule 2014(a), Aldersgate has conducted a thorough and diligent review of its files, records, and databases to identify any connections between Aldersgate or its professionals, on the one hand, and the Debtors, their creditors, other parties in interest, and their respective counsel, on the other hand. The parties searched in connection with this review include, without limitation, the following:
(a) Crestline Packaging Solutions LLC and CPS Holdings Inc. (the Debtors);
(b) Thornfield Capital Partners LP (equity sponsor), and its principals Julian Ashford and Rebecca Strand;
(c) Ridgeline National Bank, N.A. (administrative agent, collateral agent, and DIP agent);
(d) Blackmoor Capital Management LLC (Arthur Ng), Greystone Fixed Income Partners LP (Sandra Ibanez), and Wexford Opportunity Fund III LP (Derek Loomis), as members of the Ad Hoc Group of First Lien Lenders;
(e) Fenwick Structured Credit Fund II LP (Liam Driscoll) and Millhaven Capital Advisors LLC (Karen Ostrowski), as members of the Ad Hoc Group of Second Lien Noteholders;
(f) Continental Fiduciary Trust Company, as indenture trustee for the Second Lien Notes;
(g) Marcus J. Reinholdt (CEO), Dana Kowalski (CFO), and Preston Yee (General Counsel) of the Debtors;
(h) Calderwood & Harkness LLP (Colette Whitman, Nathaniel Bower, Gabrielle Moss, Amy Chesterton), as counsel to the Debtors;
(i) Kellner & Hartwick LLP (Bruce Tatelman), as local co-counsel to the Debtors;
(j) Dralvecen Reyes Linley CPAs LLP & Associates LLP (Catherine Holtz), as tax and accounting advisor to the Debtors;
(k) Pinnacle Claims Administration LLC, as claims and noticing agent;
(l) Hargrove, Mitchell & Saunders LLP (Victoria Kline, Thomas Frey), as counsel to the Ad Hoc Group of First Lien Lenders;
(m) Pemberton & Locke LLP (Raymond Delvecchio, Nia Patterson), as counsel to the Ad Hoc Group of Second Lien Noteholders;
(n) Apex Indemnity Insurance Company, as directors' and officers' insurance carrier;
(o) Northstar Polymers Inc., Meridian Industrial Leasing Corp., and Benchmark Real Estate Holdings LLC, as critical vendors and contract counterparties; and
(p) The United States Trustee for Region 9.
10. Based on the foregoing review, Aldersgate discloses the following connections with parties in interest:
(a) In 2019, Aldersgate provided financial advisory services to an affiliate of Blackmoor Capital Management LLC in connection with an unrelated distressed debt portfolio matter that did not involve the Debtors, any Debtor affiliate, or any of the debt instruments at issue in these Chapter 11 cases. That engagement was completed in 2020, and Aldersgate has no ongoing relationship with Blackmoor or its affiliates in connection with that matter.
(b) A junior professional at Aldersgate previously worked at Ridgeline National Bank, N.A. in the bank's corporate banking division prior to joining Aldersgate. That individual has no involvement in the Crestline engagement and has had no contact with Ridgeline in connection with these Chapter 11 cases.
11. Other than the connections disclosed above, Aldersgate is not aware of any connections between Aldersgate, its professionals, or its affiliates and any of the parties listed above that would be required to be disclosed under Bankruptcy Rule 2014(a).
12. I have reviewed the requirements of sections 327(a) and 101(14) of the Bankruptcy Code. Based on my review and the investigation described above, it is my belief that:
(a) Aldersgate does not hold or represent any interest adverse to the Debtors or their estates within the meaning of section 327(a) of the Bankruptcy Code;
(b) Aldersgate is a "disinterested person" as that term is defined in section 101(14) of the Bankruptcy Code; and
(c) The connections disclosed above do not constitute interests adverse to the estates or disqualifying relationships under section 327(a).
13. In the event that Aldersgate discovers any additional material connections with parties in interest during the course of this engagement, Aldersgate will promptly disclose such connections to the Debtors and the Court by way of a supplemental declaration filed with the Court.
6. Conclusion.
14. Based on the foregoing, I respectfully request that this Court grant the Debtors' Application and authorize the retention and employment of Aldersgate Advisory Group LLC as financial advisor and investment banker to the Debtors, nunc pro tunc to the Petition Date of June 20, 2022, on the terms described in the Application and this Declaration.
I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information, and belief.
Executed on July 22, 2022 New York, New York
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Priya Narayanan Lead Managing Director Aldersgate Advisory Group LLC 280 Park Avenue, 12th Floor New York, New York 10017
EXHIBIT B
PROPOSED ORDER
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION
ORDER AUTHORIZING THE RETENTION AND EMPLOYMENT OF ALDERSGATE ADVISORY GROUP LLC AS FINANCIAL ADVISOR AND INVESTMENT BANKER TO THE DEBTORS, NUNC PRO TUNC TO JUNE 20, 2022
Upon the Application of the Debtors for Entry of an Order Authorizing the Retention and Employment of Aldersgate Advisory Group LLC as Financial Advisor and Investment Banker to the Debtors, Nunc Pro Tunc to the Petition Date (Dkt. No. _) (the "Application"); and the Court having reviewed the Application and the Declaration of Priya Narayanan in support thereof (the "Narayanan Declaration"); and the Court having considered the record in these Chapter 11 cases and any objections filed in connection with the Application; and it appearing that due and proper notice of the Application has been given to all parties entitled thereto and that no further or other notice need be given; and the Court having found that the relief requested in the Application is in the best interests of the Debtors, their estates, and their creditors; and the Court having determined that Aldersgate Advisory Group LLC ("Aldersgate") is a "disinterested person" as defined in section 101(14) of the Bankruptcy Code and does not hold or represent an interest adverse to the Debtors' estates; and after due deliberation, and good and sufficient cause appearing therefor, it is hereby
ORDERED, ADJUDGED, AND DECREED that:
1. The Application is GRANTED as set forth herein.