In re Stearns Holdings, LLC

• Decision Date: 13 November 2019
• Docket Number: Case No. 19-12226 (SCC)
• Citation: 607 B.R. 781
• Parties: IN RE STEARNS HOLDINGS, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

607 B.R. 781

IN RE STEARNS HOLDINGS, LLC, et al., Debtors.¹

Case No. 19-12226 (SCC)

United States Bankruptcy Court, S.D. New York.

Signed November 13, 2019

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Attorneys for Debtors and Debtors-in-Possession, Four Times Square, New York, New York 10036-6522, By: Jay M. Goffman, Esq., Mark A. McDermott, Esq., Shana A. Elberg, Esq., Evan A. Hill, Esq., Edward P. Mahaney-Walter, Esq.

WILLIAM K. HARRINGTON, United States Trustee for Region 2, U.S. Department of Justice, Office of the United States Trustee, 201 Varick Street, Room 1006, New York, New York 10014, By: Brian Masumoto, Esq.

HOGAN LOVELLS US LLP, Attorneys for Pacific Investment Management Company LLC, 1999 Avenue of the Stars, Suite 1400, Los Angeles, California 90067, By: Bennett L. Spiegel, Esq., David P. Simonds, Esq., – and – 390 Madison Avenue, New York, New York 10017, By: Michael C. Hefter, Esq., M. Hampton Foushee, Esq.

REED SMITH LLP, Attorneys for the Indenture Trustee, 1201 North Market Street, Suite 1500, Wilmington, Delaware 19801, By: Kurt F. Gwynne, Esq., Jason D. Angelo, Esq.

MODIFIED BENCH DECISION CONFIRMING THE AMENDED JOINT CHAPTER 11 PLAN OF REORGANIZATION OF STEARNS HOLDINGS, LLC, ET AL.

SHELLEY C. CHAPMAN, UNITED STATES BANKRUPTCY JUDGE

Before the Court is confirmation of the Amended Joint Chapter 11 Plan of Reorganization of Stearns Holdings, LLC, et al. , dated as of September 19, 2019 [Dkt. No. 353] (the "Amended Plan"), pursuant to section 1129 of title 11 of the United States Code (the "Bankruptcy Code").²

Background

The Court assumes familiarity with the background and history of the Stearns chapter 11 proceedings but will provide a high-level summary of the most recent events leading to this confirmation hearing today.

After unsuccessful prepetition negotiations with their secured noteholders, Stearns Holdings, LLC, and certain of its affiliates (collectively, the "Debtors") filed these chapter 11 cases on July 9, 2019 (the "Petition Date"). At that time, the Debtors stated their intention to preserve their businesses as a going concern, thereby preserving the jobs of over 2,700 employees and maximizing value for all of their stakeholders. (See Declaration of Stephen Smith in Support of Chapter 11 Petitions and First Day Pleadings [Dkt. No. 3].) Blackstone Capital Partners VI NQ/NF L.P. and Blackstone Family Investment Partnership VI-NQ-ESC L.P. (together, "Blackstone") hold approximately 70% of the equity interests in the Debtors. Concurrently with the filing of their chapter 11 cases, the Debtors filed a plan and disclosure statement pursuant to which Blackstone agreed to serve as plan sponsor and to inject an amount equal to $60 million of cash into the Debtors. The Debtors set up a market test process whereby other interested parties could bid on the opportunity to serve as plan sponsor in place of Blackstone, which plan sponsor selection process was approved by this Court by order dated July 24, 2019 [Dkt. No. 151]. The chapter 11 plan filed by the Debtors on August 8, 2019 [Dkt. No. 219] (the "Original Plan"), together with the accompanying disclosure statement, provided information to the Debtors' stakeholders with respect to their potential recoveries in these cases were such plan to be consummated pursuant to the stalking-horse plan sponsor proposal.

Simultaneously with their marketing process, in accordance with their fiduciary duties to maximize value for their stakeholders, the Debtors also continued to actively pursue other alternatives. Significantly, the Debtors continued to engage in rigorous arms'-length negotiations regarding the terms of a consensual restructuring with majority holders of the 9.375% senior secured notes due 2020 issued by Debtor Stearns Holdings, LLC (the "Notes"). As of the Petition Date, the outstanding balance of the Notes was approximately $183 million. Certain holders of Notes for which Pacific Investment Management Company LLC ("PIMCO") serves as investment manager or adviser (the "PIMCO Noteholders") collectively own approximately 67% of the outstanding principal balance of the Notes.

The ongoing negotiations between the Debtors and the PIMCO Noteholders culminated in a global settlement (the "Global Settlement") between the Debtors, PIMCO, and Blackstone as to the terms of a consensual restructuring that was memorialized in a Restructuring Support Agreement (the "RSA") between and among the (i) Debtors, (ii) Blackstone, (iii) the PIMCO Noteholders, and (iv) certain holders of Notes managed by Manulife Investment Management and Putnam Investment Management, LLC (together with the PIMCO Noteholders, the "Consenting Noteholders"), dated as of September 5, 2019. The parties to the RSA collectively committed to support and execute an amended plan of reorganization consistent with the term sheet attached to the RSA, which resulted in the Amended Plan. The Debtors filed a motion with this Court for authorization to enter into the RSA as a sound exercise of their business judgment pursuant to section 363(b)(1) of the Bankruptcy Code [Dkt. No. 317]. No objections to the motion were filed, and the motion was approved by order dated September 26, 2019 [Dkt. No. 350] (the "RSA Order").

The Amended Plan

The Amended Plan,³ filed on September 19, 2019 [Dkt. No. 338], the solicitation version of which was filed on September 26, 2019 [Dkt. No. 353], provides greater distributions to virtually all of the Debtors' creditors than they would otherwise have received under the Original Plan. Under the Original Plan, holders of allowed Go-Forward Trade Claims (as defined in the Original Plan) would have received distributions equal to 95% of their allowed Go-Forward Trade Claims, while holders of allowed General Unsecured Claims would not have received any distributions at all on account of their allowed claims. Under the Amended Plan, the recovery to holders of allowed unsecured claims in Class 4 has increased from 95% to 100% and the recovery to holders of allowed unsecured claims in Class 5 has increased from 0% to 100%. Stated differently, under the Amended Plan, all unsecured creditors are receiving payment in full, in cash. The 100% recovery to Claims in Class 5 is the result of Blackstone's agreement under the RSA and the Amended Plan to fund all Effective Date payments for Class 5 Claims as part of the New Money Investment comprised of (a) $65 million in cash and (b) cash in an amount sufficient to fund all payments to Claims in Class 5 to be made on the Effective Date, which Blackstone is providing as plan sponsor.

In exchange for the New Money Investment and other consideration (and not on account of existing interests), Blackstone will be issued the Reorganized Stearns Holdings Interests and all Existing Stearns Holdings Interests will be cancelled.

The Amended Plan also provides for a comprehensive restructuring of significant indebtedness by eliminating the Notes. Under the Amended Plan, holders of the Notes will receive total consideration of (i) $65 million in cash funded by the increased New Money Investment; (ii) warrants to purchase non-voting Class B units in the Reorganized Debtors worth 15% of the aggregate value appreciation of the Reorganized Debtors above the New Money Investment in accordance with the RSA; and (iii) 5% senior unsecured notes due 2024 issued by the Reorganized Debtors on the Effective Date in the aggregate principal amount of (x) $15 million, less (y) 90% of payments to be made on the Effective Date from the New Money Investment to holders of General Unsecured Claims (with such payments to be deemed capped at $12.5 million for purposes of calculating the reduction of the principal amount of such notes) on account of their Notes Claims. Under the Original Plan, were it to be consummated pursuant to the stalking-horse plan sponsor proposal, holders of Notes Claims would only have received their pro rata share of $60 million in cash, which was the amount to be contributed by the plan sponsor.

The Amended Plan summarizes the terms of the Global Settlement as follows:

The Plan includes and effectuates a good faith compromise of Claims and Causes of Action, as set forth in the RSA (the "Global Settlement"). In particular, the Plan Sponsor has agreed to, among other things, (a) provide the New Money Investment in exchange for 100% of the Reorganized Stearns Holdings Interests; and (b) release each Noteholder from any Claims and Causes of Actions pursuant to Section 9.3 of the Plan, except for any Noteholder that (i) opts out of the releases contained in Section 9.3 by checking the box on its timely submitted applicable Ballot or (ii) votes to reject the Plan. The Consenting Noteholders, in turn, have agreed to, with respect to the Plan and subject to the terms and conditions of the RSA, (a) waive their ability to make an election pursuant to section 1111(b) of the Bankruptcy Code ; (b) provide a release of Claims and Causes of Action pursuant to Section 9.3 of the Plan; (c) waive any portion of a Notes Secured Claim that is unsecured, if any, pursuant to section 506(a) of the Bankruptcy Code ; (d) waive their right to object, encourage another Entity to object, or support another Entity's objection to the Plan; (e) not propose, file, support, or vote for any restructuring, workout, asset sale, or plan other than this Plan; (f) not take any action that is materially inconsistent with the RSA; (g) vote all their Claims or Interests, as applicable, to accept the Plan, on a timely submitted and duly-executed ballot consenting to any releases under the Plan; and (h) not withdraw, amend, or revoke their tender, consent, or vote with respect to the Plan. The Global Settlement will fully and finally satisfy all Claims held by the Consenting Noteholders....

Amended Plan, § 5.16.

Finally, the Amended Plan provides for the implementation of a Cash Flow Exit Facility and Exit Repo Facilities for the Debtors. The Cash Flow Exit Facility will satisfy the...