In-Court Restructuring and Sale of a Stationary Gift & Retailer

CMA was retained in August 2020 as the exclusive financial advisor to MidCap Financial (“MidCap” or the “Lender”), the Senior Secured Lender, to assess the Company’s business performance, evaluate the Company’s current and forecasted liquidity position, size a potential capital need to adequately capitalize the business, and provide a strategic review of restructuring alternatives. CMA completed its assessment and provided the Senior Lenders with a range of potential funding needs required by the Company to meet its holiday working capital needs and support the business until the economy normalized. At this point, an out-of-court solution was the preferred strategy given the overall health of the store portfolio pre-COVID and the Company’s belief that they could continue to manage and negotiate the unpaid rents from the period when stores were closed or operating at reduced capacity during COVID.

After all parties were in agreement with Paper Source’s capital needs, the Company’s sponsor, mezzanine lender, and senior lender were unable to come to terms for a long-term new money solution. In order to provide short-term runway, MidCap provided a bridge loan to support the Company through the 2020 holiday season while the Company sought a permanent solution. As part of this process, the Company’s Investment Banker went to market to find 3rd parties that would be able to contribute to the Company’s capital needs. During this marketing process, pressure from landlords and vendors continued to mount as deferred rent payments ballooned and the vendor base continued to be stretched. Initial market feedback did not provide for a viable solution, and most 3rd party capital providers would require a Chapter 11 process in order to cleanse Paper Source of its under-performing locations and certain pre-petition liabilities.

With an unsuccessful out-of-court marketing process, and mounting pressure from landlords and vendors risking permanent value leakage, the Company and its Senior Lenders came to an agreement to file the Company for bankruptcy protection and pursue a sale of the Company via a Chapter 11, Section 363 sale. As the fulcrum security in a Chapter 11 filing, the Senior Lenders relied on CMA to:

• Assess the post-petition financing needs of the Company;
• Negotiate an asset purchase agreement (“APA”) to serve as the Stalking Horse Bid;
• Provide a valuation that would serve as the floor price for other potential 3rd party buyers to negotiate and counter against; and
• Review and provide final approval on all landlord deals negotiated by the Company and its advisors.

A major benefit of the bankruptcy filing was to renegotiate the Company’s 160+ retail store leases and to reduce the balance of unpaid pre-petition rent. In the event the Company and the landlords were unable to come to terms on a specific location, under the protection of the bankruptcy court, Paper Source had the option to exit the location prior to the expiration of the lease. The Company and CMA agreed at the time of the filing to reject 11 leases, while the remaining locations were reviewed on a store-by-store basis to evaluate whether a location would remain open post-reorganization. CMA’s role was to provide final approval of deals negotiated by the Company and its real estate advisor. In evaluating these deals, CMA considered historical performance, the store type, the demographic served, the expected go-forward performance and the deal the landlord was willing to make. As these deals were negotiated and approved, CMA re-forecasted the business based on the new lease deal as well as updated performance expectations of the business.

The Company’s investment banker ultimately contacted ~245 potential buyers, which included strategic buyers, financial buyers, and Special Purpose Acquisition Vehicles. Of this universe of potential buyers, the Company received 3 bids, all of which were higher than MidCap’s stalking horse bid, but none provided the Lender’s desired par recovery. Despite the initial bids received falling short of MidCap’s desired recovery, CMA succeeded in helping negotiate with the potential buyers to raise their purchase price to a level that provided a full recovery of the Lender’s total outstanding claim. To achieve this, CMA advised MidCap on what level of pro-forma leverage Paper Source could hold post-reorg and communicated these views to the buyers in order to determine an ideal consideration of cash and rollover debt.

• Full recovery of the Lender’s total post-petition DIP financing and pre-petition first lien debt via a Chapter 11, 363 sale process, assisted in negotiating and structuring the asset purchase agreement and exit financing credit agreement on behalf of the lenders in the sale to Elliot Management
• Advised MidCap in structuring their stalking horse credit bid based on a valuation that established a floor meant to motivate 3rd party bidders to place bids in excess of the stalking horse bid
• Guided the Company and its Advisors in developing a DIP Budget to minimize the cash commitment required by the Lenders while also ensuring minimum leakage from the estate due to insufficient liquidity.
• Oversaw landlord negotiations on the 160+ retail store footprint and provided final approval on all prospective landlord agreements
• Stress tested the Company’s projections and revised them to reflect more realistic growth expectations for the business, as well as layering in new lease terms that provide a more accurate view of go-forward EBITDA, key to determining Company value and the amount of debt the Company could support.