There is a surge in bankruptcy cases across the globe as companies are fighting for their survival in a situation of economic turmoil owing to COVID-19. Companies are adopting the 363 Sale process to either liquidate the entire business or reorganize and make a fresh start post-bankruptcy. The portfolio managers and the credit research analysts are busy doing extensive credit analysisand distressed debt analysis to calculate the recovery valuation for the company in distress. In the liquidation process, one important yet ignored entity is the Stalking Horse Bidder. A stalking horse bidder, who is chosen by the company and approved by bankruptcy court sets the floor price for an auction of the debtor’s assets.
Surge in Bankruptcy Cases owing to COVID-19
Companies across the globe are fighting for their survival under uncertain circumstances owing to coronavirus pandemic. With every passing day companies are collapsing under the strain of shrinking revenues and rising debt. J.C. Penny, Neiman Marcus, Lord & Taylor, Whiting Petroleum in United States; Sail Outdoors and Aldo Group in Canada; GrupoFamsa and GrupoAeromexico in Brazil; Virgin Atlantic,Debenhams and Noble Corporation in United Kingdom are certain prominent companies across the globe that filed for Bankruptcy during the first half of 2020.According to credit insurance company Euler Hermes, by the end of 2021 the world would post double digit rise in insolvency cases. The biggest surge in bankruptcy cases is expected to occur in North America followed by Central and Eastern Europe.According to American Bankruptcy Institute,total commercial Chapter 11 filings during the first half of 2020 surged 26% to 3,604 from 2,855 in the same period in 2019.
Under the United States Bankruptcy Court, there are six different types of bankruptcies filed:
- Liquidation or straight bankruptcy (Chapter 7),
- Repayment plan (Chapter 13),
- Bankruptcy for large organizations (Chapter 11),
- Repayment plan for family farmers and fisherman (Chapter 12),
- International bankruptcy Issues (Chapter 15) and
- Repayment plan for Municipalities (Chapter 9).
Liquidating debtors may sell allthe assets outside the ordinary course of business under Section 363 of Bankruptcy court (“363 Sale”). Reorganizing debtors may sell a business segment or a portion of their assets to deleverage, reduce costs, streamline operations enabling them to have a fresh start post-bankruptcy (“Reorg”).
The assets may be sold free and clear of any liens, claims and obligations with a court order preventing any successor liability after the sale. This protection also includes the elimination of fraudulent transfer liability, a risk often faced by potential purchasers from financially troubled debtors prior to filing of bankruptcy.In the process to gain higher selling price for the debtor’s assets, any kind of unfairness to the potential purchaser may be overlooked as the bankruptcy court is primarily concerned with benefit of sale to the debtor and its creditors.
What is Stalking Horse Agreement?
A stalking horse bid/offer/agreement is an initial bid on the debtor’s assets prior to the formal auction. The stalking horse bidder is the initial bidder with whom the debtor negotiates a purchase agreement. The stalking horse bid has a precedence over the other bids providing the debtors an opportunity to reject lower bids for their assets. The highest initial bid becomes the floor price of the auction whereby the company can secure a minimum recovery for its creditors.
Procedure of Stalking Horse Agreement
- As the stalking horse agreement is generally negotiated pre-filing, facets of it may be challenged by the creditors’ committee, the U.S. Trustee and any other parties in interest of deal. In case the challenges are of merit, the bankruptcy court may disapprove the agreement as presented
- The purchase agreement includes certain incentives for the stalking horse bidder, such as expense reimbursement, break-up fees and bidding guidelines. Reimbursement is provided to the stalking horse bidder as a compensation for preparing the initial bid and the purchase agreement.Once the stalking horse agreement is approved by the bankruptcy court, it becomes binding on all parties and is further difficult to renegotiate.
- Thefollowing is bidding process:
Advantages forthe Stalking Horse Bidder:
- The stalking horse bidder receives additional time to prepare the purchase agreement, complete due diligence and acquire financing to close the deal
- Unlike the potential bidders, the stalking horse bidder may engage in negotiation and discussion with respect to purchase agreement several months prior to the opening of the bidding process
- Pre-approved bid protections limit the risk of time and monetary investment made by the stalking horse bidder in case it is not the highest bidder in the auction
- The bid protections need to be factored into the value of competing bids which reduces the value of competing bids thereby giving the stalking horse bidder an advantage in the auction process
Disadvantages forthe Stalking Horse Bidder:
- The stalking horse bidder takes on the risk of offering too much, as the bid sets the floor price for the debtor’s assets and hence such bidder takes the risk that assets are less worthy than the purchase price or the value of business deteriorates during the process. If there are no qualifying bidders, the stalking horse bidder may wonder if it overbid for the assets
- If the stalking horse bid gets outbid in the auction, he/she would only receive a break-up fee and expense reimbursement, if approved by the court
- The stalking horse bidis open for a longer duration as compared to the other bidders; hence itmay involve opportunity cost for the stalking horse bidder.
Debtors to protect Stalking Horse Bidder’s interest:
The negotiations between the debtor and stalking horse must strike an acceptable balance, else the bankruptcy court may not approve the stalking horse’s proposed terms. It is then possible that another potential purchaser may take advantage of the diligence done by the stalking horse bidder and offer a higher bid prior to receiving the court approval. To protect the stalking horse, it is necessary that debtor obtains the court approval before the purchase agreement with the stalking horse is announced publicly.
Recent bankruptcies filed with the Stalking Horse Agreement:
| Sr. | Debtor | Bankruptcy
Filing Date |
Stalking Horse
Bidder |
Stalking Horse
Bid |
Court Rule / Current Status |
| 1 | Impresa Holdings Acquisition Corp | Sep 24, 2020 | Twin Haven Capital Partners
(Private equity firm; Westwood) |
$10 million
(does not include break-up fee, expense reimbursement, or other typical protection) |
Competitive Bid Deadline: Dec 18, 2020 |
| 2 | Garrett Motion Inc | Sep 20, 2020 | KPS Capital Partners | $ 2,100 million | Auction Date: Nov 24, 2020
Sale Hearing: Feb 17, 2020 |
| 3 | Global Eagle Entertainment Inc | Jul 22, 2020 | Major creditors led by Apollo Global Management Inc | $ 675 million | Assets sold to Stalking horse bidder. |
| 4 | GNC Holdings, Inc | Jun 23, 2020 | Harbin Pharmaceutical Group Holding Co., Ltd. (China) | $ 760 million | Assets sold to Stalking horse bidder. |
| 5 | Watertech Holdings, LLC | Feb 06, 2020 | WT Asset Acquisition Group, LLC | $ 250,000 (Cash & waiver of few claims)
Initial Bid: $ 125,000 (Cash & waiver of few claims) |
Assets sold to PureCycle, LLC (Winner Bid) |
Sources:
Author: Girish Bhise (Founder & CEO), ValueAdd Research and Analytics Solutions LLP
Author Bio :-
Girish Bhise is the Founder & CEO at ValueAdd Research and Analytics Solutions LLP (ValueAdd). Primarily responsible for business development, research delivery, client servicing, marketing, and organizational development. Girish has over 20 years of research experience across investment banking, equity and fixed income research, and business strategy research. Has serviced large global clients including JP Morgan, HSBC, Credit Suisse, and Oaktree Capital Management. Has extensive experience in successfully managing large-scale research right-shoring transitions across multiple regions. Prior to starting ValueAdd, he had worked in leadership roles with Moody’s Analytics, Capgemini Consulting, Sutherland Global, HSBC, JM Morgan Stanley, and CMIE. He is an MBA in Finance from the University of Pune, and Bachelor in Commerce from the University of Mumbai.
Regards
Girish
