Case Doc 21 Filed 10/04/18 Page 1 of 8 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

Transcription

1 Case Doc 21 Filed 10/04/18 Page 1 of 8 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) In re: ) Chapter 11 ) ATD CORPORATION, et al., 1 ) Case No ( ) ) Debtors. ) (Joint Administration Requested) ) DECLARATION OF JAMES A. MESTERHARM IN SUPPORT OF DEBTORS MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (I) AUTHORIZING THE DEBTORS TO (A) OBTAIN POSTPETITION FINANCING AND (B) UTILIZE CASH COLLATERAL, (II) GRANTING LIENS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE CLAIMS, (III) GRANTING ADEQUATE PROTECTION, (IV) MODIFYING THE AUTOMATIC STAY, (V) SCHEDULING A FINAL HEARING, AND (VI) GRANTING RELATED RELIEF I, James A. Mesterharm, hereby declare under penalty of perjury: 1. I submit this declaration in support of the Debtors Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to (A) Obtain Postpetition Financing and (B) Utilize Cash Collateral, (II) Granting Liens and Superpriority Administrative Expense Claims, (III) Granting Adequate Protection, (IV) Modifying the Automatic Stay, (V) Scheduling a Final Hearing, and (VI) Granting Related Relief (the DIP Motion ), 2 seeking authority for the debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, the Debtors ) to obtain $1,230,000,000 in debtor in possession financing, consisting of: (a) senior secured superpriority revolving credit ( ABL ) loan provided by the ABL DIP Lenders, under which 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, where applicable, include: ATD Corporation (3683); Accelerate Holdings Corp. (0528); American Tire Distributors Holdings, Inc. (6143); American Tire Distributors, Inc. (4594); Rubbr Automotive Services, LLC (3334); The Hercules Tire & Rubber Company (3365); Terry s Tire Town Holdings, Inc. (7464); Tire Pros Francorp (1361); and Hercules Asia Pacific, LLC (2499). The location of the Debtors service address in these chapter 11 cases is Herbert Wayne Court, Suite 150, Huntersville, North Carolina Capitalized terms used but not defined herein have the meanings given to such terms in the DIP Motion or the Interim DIP Order, as applicable.

2 Case Doc 21 Filed 10/04/18 Page 2 of 8 ABL DIP Loans may be advanced and made available to the Debtors in the maximum principal amount of up to $980,000,000 (including $180,000,000 available to certain non-debtor Canadian subsidiaries), and (b) senior secured superpriority first in, last out revolving credit ( FILO ) loan provided by the DIP FILO Lenders, under which DIP FILO Loans may be advanced and made available to the Debtors in the maximum principal amount of $250,000,000 in new money loans (together with the ABL, the DIP Facility ). 2. Except as otherwise indicated herein, all facts set forth in this declaration are based upon my personal knowledge, my discussions with the Debtors management team and advisors, including the AlixPartners team working under my supervision, my review of relevant documents and information concerning the Debtors operations, financial affairs, and restructuring initiatives, or my experience and knowledge. I am over the age of 18 and authorized to submit this declaration on behalf of the Debtors. If called upon to testify, I could and would testify competently to the facts set forth herein. Professional Background and Qualifications 3. I am a Managing Director at AlixPartners LLP ( AlixPartners ) and have served as restructuring advisor to the Debtors since July I have been a full-time restructuring advisor for over 24 years. I received a B.S. in Accounting and Management in 1990 from Purdue University and a Masters of Business Administration in Finance and Organizational Behavior in 1998 from Northwestern University s Kellogg School of Graduate Management, where I have been a guest lecturer on restructuring topics. I passed the Certified Public Accountant exam, am a certified turnaround professional, and am a Fellow of the American College of Bankruptcy. I have been employed by AlixPartners since September 1996, and have co-headed the Americas Restructuring Practice for the past six years. AlixPartners is a global independent restructuring consulting firm that has a wealth of 2

3 Case Doc 21 Filed 10/04/18 Page 3 of 8 experience in providing restructuring advisory services, and has assisted, advised, and provided strategic advice to debtors, creditors, bondholders, investors, and other entities in numerous chapter 11 cases of similar size and complexity to these chapter 11 cases. Since its inception in 1981, AlixPartners, its predecessor entities, and its affiliate, AP Services, LLC, have provided restructuring or crisis management services in numerous large cases. Some notable, publiclydisclosed restructuring assignments that I have personally led include Pacific Drilling, S.A., The Gymboree Corporation, Linn Energy, Inc., Paragon Offshore PLC, Walter Energy, Inc., Nautilus Holdings Ltd., Eastman Kodak Company, General Growth Properties, Hilex-Poly, Silicon Graphics Inc., Parmalat USA, Safety-Kleen Corporation, and Zenith Electronics Corporation. 5. I am generally familiar with the Debtors day-to-day operations, business and financial affairs, and books and records. I am also familiar with the Debtors supply chain and the status of the Debtors relationships with various vendors, suppliers, and service-providers. 6. Specifically, in my role as financial advisor to the Debtors, AlixPartners, among other advisory services: (a) assisted the Debtors with its cash management and cash forecasting efforts; (b) assisted the Debtors with their contingency planning efforts in preparing for a potential chapter 11 filing; (c) assisted the Debtors in negotiating the Interim Order; and (d) assisted the Debtors with constituency due diligence efforts. 7. I am not being specifically compensated for this testimony other than though payments received by AlixPartners as a professional retained by the Debtors. The Debtors Capital Structure and DIP Facilities 8. As of the Petition Date, the Debtors have approximately $2,570,000,000 in total funded debt obligations. This consists of approximately $639,000,000 under the Prepetition U.S. ABL Revolving Loans, $57,000,000 outstanding under the Prepetition U.S. FILO Loans, $695,000,000 in aggregate principal amount outstanding under the Prepetition Term Loans, and 3

4 Case Doc 21 Filed 10/04/18 Page 4 of 8 $1,050,000,000 in Senior Subordinated Notes. A Capitalization Table depicting the Debtors prepetition capital structure as of the Petition Date is attached hereto as Exhibit A. 9. The DIP Facility consists of: (a) senior secured superpriority revolving credit ABL facility, with a maximum principal availability of up to $800,000,000 (the ABL DIP Loan ), an amendment and restatement of approximately $180,000,000 of Prepetition Canadian ABL Revolving Loans and FILO Loans and (b) the senior secured superpriority first in, last out revolving credit FILO facility with a maximum principal availability of $250,000,000 (the DIP FILO Loan ). Upon entry of the Interim DIP Order, $639,000,000 in outstanding obligations owed to the Prepetition U.S. ABL Lenders under the Prepetition U.S. ABL Loans will be rolled-up into the DIP Facility and $57,000,000 of U.S. FILO Loans will be paid down, at which time $190,000,000 of new liquidity will become available to the Debtors under the DIP FILO Loan. This facility is designed to provide the Debtors with an immediate infusion of liquidity to fund inventory purchases and satisfy other administrative obligations of these chapter 11 cases through an initial approximately $190,000,000 draw on the DIP Facility on or after the date of the Court s entry of the Interim Order approving the DIP Facility, while seamlessly continuing to fund the Debtors working capital needs through the use of the DIP Facility. The Immediate Need for Access to the DIP Facility 10. ATD is the largest replacement tire distributor in North America based on dollar amount of wholesale sales and number of warehouses. As a leader in the replacement tire industry, its digitally-enabled distribution network drives same-day delivery to more than 80,000 customers throughout North America, thus allowing ATD to provide such customers with the tread and resources needed for the road that lies ahead. This requires ATD to maintain a comprehensive portfolio of tires, tire supplies and tools, and wheels and accessories, among other things. 4

5 Case Doc 21 Filed 10/04/18 Page 5 of I am familiar with the ABL and FILO portions of the DIP Facility, the material terms thereto, as well as the Debtors liquidity needs. Interim approval of the DIP Facility will permit the Debtors to access their ABL loans in the ordinary course and new money term loans, both of which are essential to ensure Debtors have sufficient funds to operate and maximize the value of their estates. Based on my experience in the restructuring industry generally and, over the last several months with the Debtors in particular, I believe that approval of the use of cash collateral during the interim period will be critical to the Debtors ability to continue operating and to restructure successfully. Without it, the Debtors would have to liquidate in short order, to the detriment of the estates. However, as explained below, the cash collateral alone is not sufficient to meet the Debtors immediate and ongoing post-petition liquidity needs. 12. The Debtors enter these chapter 11 cases with approximately $28 million in cash on hand and $10 million in available liquidity under the U.S. ABL, which is insufficient to continue to operate and pay debts as they come due. The Debtors liquidity is limited due to several factors, including industry trends, the loss of two crucial vendors, tightening trade credit from tire suppliers and other vendors, and an unsustainable debt structure. The costs associated with administering these chapter 11 cases will also impose demands on the Debtors liquidity. 13. AlixPartners advised and assisted the Debtors in evaluating the amount of funding that the Debtors will require in these chapter 11 cases. The amount was derived from a cashflow projection that AlixPartners and the Debtors management team developed from an analysis of the Debtors receipts and disbursements (the Budget, attached hereto as Exhibit B). Based on my experience in numerous bankruptcy cases, my familiarity with the Debtors, and extensive discussions with the Debtors management team and advisors, including a team from 5

6 Case Doc 21 Filed 10/04/18 Page 6 of 8 AlixPartners acting under my supervision, I believe the the Budget presents a reasonable estimate of the Debtors cash sources and needs during these chapter 11 cases. 14. Given these estimates, the DIP Facility would provide the Debtors sufficient liquidity to stabilize their operations and fund the administration of these chapter 11 cases, as the Debtors implement the restructuring contemplated by the Restructuring Support Agreement. 15. Specifically, the DIP Facility will allow the Debtors to: (a) acquire timely the inventory that is essential to the Debtors continuation as a going concern; (b) provide the liquidity necessary to continue favorable trade terms with vendors and to reassure other stakeholders; (c) fund approximately $33,000,000 of payroll obligations coming due in the first month of the chapter 11 cases; and (d) fund the administrative cost of these chapter 11 cases. The DIP Facility would also provide a reasonable liquidity buffer to the Debtors in the event they underperform their projections, or in case the restructuring takes longer than anticipated. 16. The initial funding provided by the DIP Facility will allow the Debtors to sustain the fundamental nature of their distribution business by purchasing fresh inventory without interruption. This increased liquidity will also send positive signals to the Debtors stakeholders, including vendors, customers, and employees, that the Debtors business is on the path to improved sustainable results, encouraging them to work cooperatively with the Debtors through the restructuring. 17. By contrast, without the funding provided by the DIP Facility during the interim period, the Debtors access to cash needed to operate the business would evaporate and trade creditors would likely cease extending credit, creating a vicious cycle. Accordingly, absent immediate access to the DIP Facility, the Debtors would be unable to pay down the ABL FILO 6

7 Case Doc 21 Filed 10/04/18 Page 7 of 8 and fund critical vendor payments, which are essential to the viability of the Debtors business. This cycle would result in a value-destructive liquidation. 18. Based on the results of the marketing process described in greater detail in the Keil Declaration, I believe that the DIP Facility presents the best available financing option to preserve the Debtors business due to its ease of implementation, relatively low execution risk, and certainty of availability. As stated in the Keil Declaration, although the Debtors were able to solicit alternative proposals on workable terms, the DIP Facility represents the most advantageous option because it avoids higher transaction costs associated with bringing a new lender into the existing capital structure, and provides the Debtors with a viable chapter 11 exit as contemplated by the RSA. In addition, maintaining the ability to continue as a going concern is of immense benefit to the Debtors estates and will maximize value for the benefit of all of their stakeholders. 19. I believe, the terms of the DIP Facility are fair and the DIP Facility is in the best interest of the Debtors. Before reaching an agreement on the DIP Facility, the DIP Lenders engaged in arms length, good faith negotiations with the Debtors in which they made concessions that have helped to position the Debtors for a successful and organized reorganization. Conclusion 20. Taking account of these circumstances, I believe the terms of the DIP Facility are reasonable, appropriate, and necessary. Obtaining this financing, in my view, is the best path available to a going-concern reorganization of the Debtors estates, which will maximize value for the benefit of their creditors, and will also inure to the benefit of the Debtors employees, vendors, and other stakeholders who will benefit through the Debtors continued operation. 7

8 Case Doc 21 Filed 10/04/18 Page 8 of 8 Pursuant to 28 U.S.C. 1746, I declare under penalty of perjury that the foregoing statements are true and correct. Dated: October 4, 2018 Wilmington, Delaware By: Name: Title: James A. Mesterharm Managing Director AlixPartners, LLP Juma. shelf

9 Case Doc 21-1 Filed 10/04/18 Page 1 of 2 Exhibit A

10 Case Doc 21-1 Filed 10/04/18 Page 2 of 2 Funded Debt Maturity Secured Debt Outstanding Principal Amount as of 10/3/18 U.S. ABL Revolver April 2020 $639 million U.S. FILO April 2020 $57 million Canadian ABL Revolver April 2020 $113 million Canadian FILO April 2020 $14 million Term Loan September 2021 $695 million Total Secured Debt $1,518 million Senior Subordinated Noted Unsecured Debt March 2022 Total Funded Debt $1,050 million $2,568 million Mesterham DIP Declaration Ex A.docx

11 Case Doc 21-2 Filed 10/04/18 Page 1 of 2 Exhibit B

12 Case Doc 21-2 Filed 10/04/18 Page 2 of 2 American Tire Distributors DIP Budget ($ in '000s) Forecast Week Week Beg (Mon) 10/8/ /15/ /22/ /29/ /5/ /12/ /19/ /26/ /3/ /10/ /17/ /24/ /31/2018 Week End (Fri) 10/12/ /19/ /26/ /2/ /9/ /16/ /23/ /30/ /7/ /14/ /21/ /28/2018 1/4/2019 Receipts $ 74,526 $ 83,935 $ 69,387 $ 48,261 $ 80,343 $ 90,486 $ 74,803 $ 46,490 $ 47,207 $ 75,023 $ 68,183 $ 48,331 $ 44,718 Operating Disbursements Tire Vendor Payments $ (75,806) $ (106,648) $ (31,776) $ (19,927) $ (31,217) $ (19,729) $ (93,315) $ (21,675) $ (28,480) $ (22,765) $ (58,544) $ (33,418) $ (34,267) Payroll/Benefits (13,650) (550) (12,976) (6,094) (12,849) (902) (10,932) (2,336) (11,834) (3,255) (10,700) (1,023) (13,517) Occupancy & Vehicles (2,799) (4,623) (10,498) (2,262) (1,030) (507) (2,641) (10,689) (516) (915) (3,433) (9,551) (457) Non-Payroll G&A (2,941) (1,639) (1,282) (1,760) (2,072) (900) (403) (1,156) (1,736) (1,439) (1,305) (1,308) (1,561) Taxes (346) (390) (322) (202) (337) (379) (314) (205) (208) (331) (301) (213) (197) Total Operating Disbursements $ (95,542) $ (113,850) $ (56,854) $ (30,245) $ (47,505) $ (22,417) $ (107,604) $ (36,060) $ (42,773) $ (28,705) $ (74,282) $ (45,513) $ (50,000) Net Cash Flow for Operating Activities $ (21,015) $ (29,915) $ 12,533 $ 18,016 $ 32,838 $ 68,069 $ (32,801) $ 10,430 $ 4,434 $ 46,318 $ (6,099) $ 2,818 $ (5,281) Capital Expenditures $ (2,112) $ (2,112) $ (2,112) $ (1,188) $ (1,188) $ (1,188) $ (1,188) $ (901) $ (901) $ (901) $ (901) $ (901) $ (856) Debt Service (20,500) - - (8,032) (1,200) (8,075) (7,964) Professional Fees (1) (4,950) - (6,750) (6,950) - Emergence Costs Asset Sales , Other Non-Operating (966) (906) (872) (727) (834) (731) (952) (385) (480) (462) (550) (456) (1,211) Net Cash Flow After Non-Operating Activities $ (44,594) $ (32,934) $ 9,549 $ 8,069 $ 29,616 $ 61,201 $ (34,941) $ 2,394 $ (5,022) $ 44,954 $ 5,591 $ (5,489) $ (15,312) Cash Balance Rollforward Beginning Cash Balance (Book) $ 15,000 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 Net Cash Flow (44,594) (32,934) 9,549 8,069 29,616 61,201 (34,941) 2,394 (5,022) 44,954 5,591 (5,489) (15,312) DIP Term Loan Drawdown/(Paydown) , Drawdown/(Paydown) 33,819 32,934 (9,549) (8,069) (89,616) (61,201) 34,941 (2,394) 5,022 (44,954) (5,591) 5,489 15,312 Ending Cash Balance (Book) $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 $ 4,225 ABL Revolver Beginning Balance $ 467,348 $ 501,167 $ 534,101 $ 524,552 $ 516,483 $ 426,866 $ 365,665 $ 400,606 $ 398,213 $ 403,235 $ 358,280 $ 352,689 $ 358,178 Drawdown/(Paydown) 33,819 32,934 (9,549) (8,069) (89,616) (61,201) 34,941 (2,394) 5,022 (44,954) (5,591) 5,489 15,312 Change in FILO Loan Balance Ending Balance (Before FILO Loans) $ 501,167 $ 534,101 $ 524,552 $ 516,483 $ 426,866 $ 365,665 $ 400,606 $ 398,213 $ 403,235 $ 358,280 $ 352,689 $ 358,178 $ 373,490 FILO Loans Ending Balance $ 501,167 $ 534,101 $ 524,552 $ 516,483 $ 426,866 $ 365,665 $ 400,606 $ 398,213 $ 403,235 $ 358,280 $ 352,689 $ 358,178 $ 373,490 Total Borrowing Base $ 721,249 $ 711,033 $ 693,973 $ 690,745 $ 691,871 $ 682,899 $ 668,637 $ 656,629 $ 654,751 $ 663,859 $ 653,567 $ 645,408 $ 643,824 Oustanding Balance (ex. FILO Loans) (501,167) (534,101) (524,552) (516,483) (426,866) (365,665) (400,606) (398,213) (403,235) (358,280) (352,689) (358,178) (373,490) Less: Outstanding LCs (71,491) (71,491) (71,491) (71,491) (71,491) (71,491) (71,491) (71,491) (71,491) (71,491) (71,491) (71,491) (71,491) Less: DIP Agreement Reserves (29,650) (29,650) (29,650) (29,650) (29,650) (29,650) (29,650) (29,650) (29,650) (29,650) (29,650) (29,650) (29,650) Remaining Availability $ 118,941 $ 75,791 $ 68,280 $ 73,121 $ 163,863 $ 216,093 $ 166,889 $ 157,275 $ 150,375 $ 204,437 $ 199,737 $ 186,089 $ 169,192 DIP Term Loan Beginning Balance $ 190,000 $ 190,000 $ 190,000 $ 190,000 $ 190,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 Drawdown/(Paydown) , Ending Balance $ 190,000 $ 190,000 $ 190,000 $ 190,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 Total Facility $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 Remaining Availability $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ - $ - $ - $ - $ - $ - $ - $ - $ - Total Cash + Availability $ 183,165 $ 140,016 $ 132,505 $ 137,346 $ 168,088 $ 220,317 $ 171,113 $ 161,500 $ 154,600 $ 208,662 $ 203,962 $ 190,313 $ 173,417 Notes (1) Includes fees for restructuring advisors