Case MFW Doc 12 Filed 02/26/18 Page 1 of 162 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case MFW Doc 12 Filed 02/26/18 Page 1 of 162 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: FALLBROOK TECHNOLOGIES INC., et al. 1 Debtors. Chapter 11 Case No ( ) (Joint Administration Requested) DEBTORS MOTION FOR INTERIM AND FINAL ORDERS (I) AUTHORIZING THE DEBTORS TO (A) OBTAIN POSTPETITION FINANCING ON AN INTERIM BASIS AND (B) UTILIZE CASH COLLATERAL OF PRE-PETITION SECURED PARTIES ON AN INTERIM BASIS, (II) GRANTING ADEQUATE PROTECTION, (III) MODIFYING THE AUTOMATIC STAY, (IV) GRANTING RELATED RELIEF, PURSUANT TO 11 U.S.C. SECTIONS 105, 361, 362, 363(c), (d) AND (e), 364(c), (d) AND (e) AND 507(b), AND (V) SCHEDULING A FINAL HEARING AUTHORIZING FINANCING ON A FINAL BASIS PURSUANT TO BANKRUPTCY RULE 4001(b) AND (c) Fallbrook Technologies Inc. ( FTI or the DIP Borrower ) and its affiliated debtors and debtors in possession (collectively, the Debtors ) in these chapter 11 cases, hereby submits this motion (this Motion ) for an interim order ( Interim Order ), substantially in the form attached hereto as Exhibit A, and a final order (the Final Order and together, the Orders ) and respectfully represent as follows: 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number are: Fallbrook Technologies Inc. (7116); Fallbrook Technologies International Co. (7837); Hodyon, Inc. (1078); and Hodyon Finance, Inc. (5973). The Debtors principal offices are located at 505 Cypress Creek Road, Suite L, Cedar Park, Texas

2 Case MFW Doc 12 Filed 02/26/18 Page 2 of 162 Relief Requested 2 1. Pursuant to sections 105, 361, 362, 363, 364 and 507 of title 11 of the United States Code (the Bankruptcy Code ), Rules 2002, 4001, 6003, 6004, and 9014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), and rule of the Local Rules of Bankruptcy Practice and Procedure for the United States Bankruptcy Court for the District of Delaware (the Local Rules ), the Debtors request entry of the Orders containing the following relief: a. authorization for the DIP Borrower and the other Debtors, as guarantors, to obtain a post-petition senior secured debtor-in-possession term loan facility in an aggregate principal amount of up to $8,000,000 not to exceed $4,000,000 on an interim basis and $4,000,000 on a final basis (the DIP Facility ), pursuant to that certain Debtor-In-Possession Credit Agreement (as amended, restated, amended and restated, supplemented, or otherwise modified from time to time in accordance with the terms thereof, the DIP Credit Agreement, a substantially final form of which is attached hereto as Exhibit B), among DIP Borrower, Kayne Credit Opportunities Fund (QP), LP, ( Kayne ) as DIP agent (in such capacity, the DIP Agent ), and the lenders named therein from time to time (the DIP Lenders 3 and together with the DIP Agent, the DIP Parties ) and incur the Obligations as defined in the DIP Credit Agreement (the DIP Obligations ) and borrow up to the maximum amounts thereunder; b. authorization for the Debtors to execute, acknowledge, enter into and deliver the DIP Credit Agreement, together with all related documentation (collectively, the DIP Documents ), and to perform their respective obligations thereunder and such other further acts as may be necessary or appropriate in connection therewith; c. authorization for the Debtors to continue to use cash and/or cash collateral (as such term is defined in section 363(a) of the Bankruptcy Code, Cash Collateral ), and all other Prepetition Collateral (as defined below); d. authorization for the Debtors to grant security interests, liens and superpriority claims, including superpriority administrative claims pursuant to section 364(c)(1) 2 3 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the DIP Credit Agreement. Pursuant to the Restructuring Term Sheet attached to the Restructuring Support Agreement attached as Exhibit B to the First Day Declaration (defined below), certain Plan Support Parties (as defined in the Restructuring Term Sheet) may become DIP Lenders upon satisfaction of the DIP Participation Condition (as defined in the Restructuring Term Sheet). 2

3 Case MFW Doc 12 Filed 02/26/18 Page 3 of 162 of the Bankruptcy Code and liens pursuant to sections 364(c)(2), 364(c)(3) and 364(d)(1) of the Bankruptcy Code for the benefit of the DIP Parties; and e. authorization for the Debtors to provide adequate protection to: (i) the purchasers (the Existing Noteholders ) of FTI s 12.00% Senior Secured Notes due 2019 (the Existing Notes ) issued pursuant to a Securities Purchase Agreement, dated January 29, 2015 (as amended by that certain First Amendment to Securities Purchase Agreement dated as of August 1, 2016 and by that certain Waiver and Second Amendment to Securities Purchase Agreement dated as of May 10, 2017, the Existing Notes Purchase Agreement and, together with related loan documents, the Existing Notes Documents ), among FTI, as issuer, Fallbrook Technologies International Co. ( FTI International, and together with FTI, the Prepetition Notes Parties ), as guarantor, Kayne as collateral agent (in such capacity, the Existing Notes Collateral Agent, and together with the Existing Noteholders, the Existing Notes Secured Parties ) and the purchasers of the Notes party thereto from time to time; and (ii) the purchasers (the Bridge Noteholders ) of FTI s Senior Secured Bridge Notes due March 2, 2018 (the Bridge Notes ) issued pursuant to a Bridge Note Purchase Agreement, dated May 10, 2017 (the Bridge Note Purchase Agreement ) among FTI, as issuer, FTI International, as guarantor, and the purchasers of the Bridge Notes party thereto from time to time (together with Allison Transmission, Inc., in its capacity as agent for the Bridge Noteholders (in such capacity, the Bridge Notes Agent ), the Bridge Notes Secured Parties, and the Existing Notes Secured Parties and the Bridge Notes Secured Parties being collectively referred to as the Prepetition Secured Parties ); f. modification of the automatic stay imposed under section 362 of the Bankruptcy Code to the extent necessary to implement and effectuate the terms and provisions of the DIP Documents and the Orders; g. authorization for the DIP Parties to exercise remedies under the DIP Documents upon the occurrence and during the continuance of an Event of Default (as defined in the DIP Credit Agreement); h. the scheduling of a final hearing (the Final Hearing ) on the Motion for a date that is before the 30th day after the Petition Date (as defined below) to consider entry of a Final Order authorizing the borrowings under the DIP Facility on a final basis and approval of notice procedures with respect thereto. Preliminary Statement 2. As more fully set forth in the Declaration of Roy Messing in Support of Chapter 11 Petitions and First Day Motions (the First Day Declaration ), the Debtors have negotiated a consensual chapter 11 balance sheet restructuring with the Existing Noteholders and 3

4 Case MFW Doc 12 Filed 02/26/18 Page 4 of 162 certain of their unsecured creditors. The Debtors have exhausted the bridge financing they obtained in 2017, and are in immediate need of additional financing to continue their operations and protect the value of their estates for the benefit of all parties in interest while they implement the consensual restructuring solution with their creditors. 3. The Debtors, therefore, seek approval of debtor-in-possession ( DIP ) financing to provide for their immediate cash needs while they continue operations in the ordinary course of business and carry out the balance sheet restructuring of their business as more fully described in the First Day Declaration. To preserve estate value, the Debtors secured a DIP credit facility from the Existing Noteholders in the aggregate principal amount of $8,000,000. FTI is the borrower under the DIP Facility, and each of the other Debtors (collectively, the Guarantors ) guarantees the DIP Facility. The Debtors expect that the DIP Facility will provide them with the liquidity they need to operate in chapter 11 and fund a valuemaximizing restructuring process that will benefit the Debtors creditors. 4. The DIP Facility is generally secured by a first priority lien on all assets and interests in assets and proceeds now owned or hereafter acquired by the Debtors, except to the extent that any law, agreement, or other authority prohibits or limits the Debtors from pledging its assets or interests. In particular, FTI is only permitted to pledge its economic interest, and not any governance or control rights appurtenant thereto, in non-debtor Fallbrook Intellectual Property Company LLC ( FIPC ) pursuant to the terms of FIPC s limited liability company agreement (the FIPC LLC Agreement ) and certain Global Closing agreements between FTI and Dana Limited, and FTI and Allison Transmission, Inc. (together, the Global Closing Agreements ). Although the liens securing the DIP Facility prime the liens securing 4

5 Case MFW Doc 12 Filed 02/26/18 Page 5 of 162 the Existing Notes and the Bridge Notes, the priming is consensual, as more fully explained below. 5. The DIP Facility is a senior-secured new money term loan facility that provides the Debtors with critical funding, in the aggregate principal amount of $8,000,000, to fund their operations in accordance with, and subject to, a budget approved by the DIP Lenders (the Budget ). Subject to certain conditions precedent set forth in the DIP Credit Agreement, the Debtors may borrow up to $4,000,000 on an interim basis under the DIP Facility following the entry of the Interim Order and up to $4,000,000 under the DIP Facility on a final basis following entry of a Final Order. Consistent with the terms of their Intercreditor Agreement (defined herein), the Existing Noteholders and Bridge Noteholders will receive adequate protection in the form of post-petition replacement liens and acknowledgement that the liens securing the Existing Notes and Bridge Notes are valid, perfected, and non-avoidable obligations. In addition, the interest on the Existing Notes will continue to accrue at the contractual default rate of interest (but shall not be required to be paid currently) in accordance with the terms of the Existing Notes Purchase Agreement during the pendency of these chapter 11 cases, and the Existing Noteholders will receive payment of professional and other fees as well as superpriority administrative expense claims. 6. The DIP Facility and related Orders provide the lenders thereunder with a number of rights, which were required by the DIP Lenders as a condition to providing the DIP Facility. As described in the Declaration of Roy Messing in Support of the Debtors Motion for Interim and Final Orders (I) Authorizing the Debtors to (A) Obtain Postpetition Financing on an Interim Basis and (B) Utilize Cash Collateral of Pre-Petition Secured Parties on an Interim Basis, (II) Granting Adequate Protection, (III) Modifying the Automatic Stay, (IV) Granting 5

6 Case MFW Doc 12 Filed 02/26/18 Page 6 of 162 Related Relief, Pursuant to 11 U.S.C. Sections 105, 361, 362, 363(c), (d) and (e), 364(c), (d) and (e) and 507(b), and (V) Scheduling a Final Hearing Authorizing Financing on a Final Basis attached hereto as Exhibit C, (the Messing Decl. ), the Debtors are unable to borrow on more favorable terms. Despite efforts to find an additional capital provider, there is insufficient interest in the marketplace for providing DIP financing to the Debtors. See Messing Decl The Debtors seek authorization to enter into the DIP Facility in order to enable them to continue operating in the ordinary course while they seek to confirm the proposed restructuring set forth in greater detail in the restructuring support agreement attached as Exhibit B to the First Day Declaration. Access to borrowings under the DIP Facility is critical to funding the Debtors immediate operational needs and these chapter 11 cases so that the value of the Debtors businesses can be preserved for the benefit of all stakeholders. If the Debtors are unable to gain immediate access to the DIP Facility, the Debtors will not have sufficient liquidity to maintain their operations as a going concern. Background 8. On the date hereof (the Petition Date ), each of the Debtors filed with the Court a voluntary petition for relief under the Bankruptcy Code. The Debtors continue to operate their business and manage their properties as debtors in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in these chapter 11 cases. As of the date hereof, no creditors committee has been appointed. Contemporaneously herewith, the Debtors filed a motion requesting joint administration of these chapter 11 cases pursuant to Rule 1015(b) of the Bankruptcy Rules. 6

7 Case MFW Doc 12 Filed 02/26/18 Page 7 of Additional factual background relating to the Debtors business, capital structure, and the commencement of these chapter 11 cases is set forth in the First Day Declaration. Facts Specific to the Relief Requested 10. As described in the First Day Declaration, the Debtors reached the conclusion to file these chapter 11 cases only after exhausting all other available courses of action, including a comprehensive marketing process for the Debtors assets, refinancing the Existing Notes and Bridge Notes, and negotiations with the Existing Noteholders regarding the terms of a restructuring. The DIP Facility permits the Debtors to fund the administration of these chapter 11 cases within the timeframes and on the terms set forth in the DIP Documents. A. The Debtors Prepetition Indebtedness 11. As of the Petition Date, the Debtors have prepetition funded secured indebtedness in a principal amount of over $58 million. 12. The Existing Notes: On January 29, 2015, FTI, as issuer, entered into the Existing Notes Purchase Agreement with certain of the Existing Noteholders for the initial issuance of the Existing Notes in the aggregate principal amount of $25 million. On May 1, 2015 FTI issued $10 million in additional notes to the Existing Noteholders. 13. The Existing Notes are secured by a first-priority security interest in substantially all the assets of Debtors FTI and FTI International (the Pledgors ), including accounts, accounts receivable, inventory and related general intangibles, and proceeds of the foregoing, but subject to certain exclusions (the Prepetition Collateral ). The following property is excluded from the Prepetition Collateral: (i) amounts properly deposited in certain excluded accounts; (ii) equity interests in certain Excluded Subsidiaries other than FIPC; (iii) voting equity interests in certain first-tier foreign subsidiaries in excess of 65% of such 7

8 Case MFW Doc 12 Filed 02/26/18 Page 8 of 162 voting equity interests; and (iv) only to the extent not permitted by the FIPC LLC Agreement or the Global Closing Agreements, FTI s limited liability company interests in FIPC. The Existing Notes are guaranteed by Debtor FTI International 14. FTI initially had a limited option under the Existing Notes Purchase Agreement to make paid-in-kind interest payments on the Existing Notes, to be capitalized and added to the principal amount of the Existing Notes, provided that FTI also issued additional warrants to the Existing Noteholders to purchase certain amounts of the company s stock in the event it made such an election. On May 10, 2017, the Existing Notes Purchase Agreement was amended to, among other things, allow FTI to make paid-in-kind interest payments (without the issuance of additional warrants) from April 1, 2017 until the full and final repayment in cash of the principal amount of the Existing Notes. 15. The outstanding principal amount of the Existing Notes has increased by approximately $14.6 million as a result of the accrual of paid-in-kind interest and amendment fees since May 10, Accordingly, as of the Petition Date the outstanding principal amount of the Existing Notes is not less than $49.6 million. In addition, FTI has issued outstanding warrants to the Existing Noteholders to purchase shares of FTI s common stock. The Existing Notes matured on January 31, The Bridge Notes: On May 10, 2017, FTI, as issuer, entered into the Bridge Note Purchase Agreement for the issuance of $8 million in Bridge Notes. FTI issued an additional $137,508 in Bridge Notes on May 26, 2017, to certain officers of FTI. The Bridge Notes are secured by a first-priority security interest in the Prepetition Collateral, pari passu with the Existing Notes. The Bridge Notes are guaranteed by Debtor FTI International. 8

9 Case MFW Doc 12 Filed 02/26/18 Page 9 of Interest on the Bridge Notes is paid-in-kind. The outstanding principal amount of the Bridge Notes has increased by approximately $667,901 as a result of the accrual of paid-in-kind interest. Accordingly, as of the Petition Date, the outstanding principal amount of the Bridge Notes is not less than $8.8 million. The Bridge Notes were scheduled to mature on March 2, Convertible Notes: On July , FTI, as issuer, entered into a Note Purchase Agreement for the issuance and sale of $8,595,000 of senior subordinated convertible notes due July 2019 (the Convertible Notes, and the holders thereof, the Convertible Noteholders ). On August 3, 2016, FTI entered into a Note Purchase Agreement for the issuance and sale of $3,400,000 of additional Convertible Notes. The Convertible Notes are general unsecured obligations of the Debtors. 19. Interest on the Convertible Notes ceased accruing on May 10, As of the Petition Date, the outstanding balance of the Convertible Notes is approximately $15.3 million. The Convertible Notes were scheduled to mature on July 7, Intercreditor Agreement: The Intercreditor and Subordination Agreement dated May 10, 2017 (the Intercreditor Agreement ), attached hereto as Exhibit D, sets forth the terms of the relationship between the Existing Noteholders and the Bridge Noteholders, including with respect to the Prepetition Collateral. The Intercreditor Agreement provides, among other things, that all proceeds of any sale or other disposition of the Prepetition Collateral shall be held by the Existing Notes Collateral Agent and distributed to the Existing Noteholders and, pro rata therewith, distributed to the Bridge Notes Agent for the benefit of the Bridge Noteholders, until all such debt is paid in full. 9

10 Case MFW Doc 12 Filed 02/26/18 Page 10 of The Intercreditor Agreement further governs the exercise of certain rights of the parties thereto in the event that the Debtors file chapter 11 cases. Specifically, it provides that if the Existing Noteholders provide the Debtors with DIP financing or if the Existing Noteholders consent to the use of the Prepetition Collateral (including Cash Collateral) by the Debtors, then, among other things, the Bridge Notes Agent (for itself and on behalf of the Bridge Noteholders) will (i) be deemed to have consented to such DIP financing or such use of collateral, (ii) neither object to, nor support any other person objecting to, such DIP financing or such use of collateral, and (iii) subordinate (and be deemed to have subordinated) its liens in respect of any Prepetition Collateral to, among other things, (x) any adequate protection provided to the Existing Notes Collateral Agent or the Existing Noteholders with respect to the Prepetition Collateral, including, without limitation, any adequate protection liens on the Prepetition Collateral granted to the Existing Notes Collateral Agent or the Existing Noteholders, (y) the liens securing such DIP financing, and (z) any carve-out for professional and United States Trustee fees. 22. The Intercreditor Agreement also provides, among other things, that (i) the Bridge Notes Agent (for itself and on behalf of the Bridge Noteholders) will neither object to, nor support any other person objecting to, any request by the Prepetition Secured Parties for adequate protection, and (ii) to the extent that adequate protection is granted in the forms of cash payments of interest and fees, costs and expenses, and additional collateral or replacement liens, then the Bridge Notes Agent (for itself and on behalf of the Bridge Noteholders) may seek adequate protection limited solely to replacement liens or liens on additional collateral on which the Prepetition Secured Parties obtain a lien. 10

11 Case MFW Doc 12 Filed 02/26/18 Page 11 of 162 B. The Debtors Efforts to Obtain DIP Financing 23. As set forth in greater detail in the Messing Declaration, in addition to seeking financing proposals from the Existing Noteholders, the Debtors financial advisor, Ankura Consulting Group, LLC, contacted a number of potential third-party lenders to determine whether they would be interested in providing the Debtors with DIP financing. See Messing Decl. 12. Despite these efforts, however, the Debtors were unable to obtain any proposals for DIP financing in the form of unsecured credit repayable as an administrative expense under section 503(b) of the Bankruptcy Code. Indeed, no third-party lenders indicated that they would be willing to provide, or even substantively engage in conversations relating to the possible provision of, postpetition financing to the Debtors. Id. Accordingly, the Debtors determined, in their sound business judgment, that the DIP Facility is the Debtors best option to finance these chapter 11 cases. Summary of DIP Credit Agreement and Local Rule Disclosure 24. Pursuant to Bankruptcy Rule 4001(b), (c) and (d), and in accordance with Local Rule , the following is a concise statement and summary of the proposed material terms of the DIP Facility, as specified in the DIP Documents and the Orders: 4 Material Term (Applicable Rule Requirement) Parties to DIP Credit Agreements Borrower: FTI DIP Facility Bankruptcy Rule 4001(c)(1)(B) Local Rule (a)(ii) Guarantors: FTI International, Hodyon, Inc., and Hodyon Finance, Inc. DIP Term Loan Lenders: The lenders specified on Schedule 4 This summary is qualified in its entirety by reference to the provisions of the DIP Credit Agreement. Each capitalized term used and not otherwise defined herein shall have the meaning assigned thereto in the DIP Credit Agreement. To the extent there exists any inconsistency between this summary and the provisions of the DIP Credit Agreement, the Interim Order or the Final Order, the provisions of the DIP Credit Agreement, the Interim Order and the Final Order, as applicable, shall control. The Debtors reserve the right to supplement the statements made pursuant to Bankruptcy Rule 4001 and Local Rule herein. 11

12 Case MFW Doc 12 Filed 02/26/18 Page 12 of 162 Material Term (Applicable Rule Requirement) I to the DIP Credit Agreement DIP Facility DIP Agent: Kayne Credit Opportunities Fund (QP), LP Commitment/Availability Bankruptcy Rule 4001(c)(1)(B) Local Rule (a)(ii) Use of Proceeds and Cash Collateral Bankruptcy Rule 4001(c)(1)(B) Bankruptcy Rule 4001(b)(1)(B)(ii) Local Rule (a)(ii) Interest Rate Bankruptcy Rule 4001(c)(1)(B) See DIP Credit Agreement, preamble and Schedule I, as applicable. $8,000,000 maximum aggregate principal amount, not to exceed $4,000,000 on an interim basis and $4,000,000 on a final basis. See DIP Credit Agreement, Introductory Statements, section 1.1 and Schedule I. The DIP Borrower shall use the proceeds of the DIP Loans and its cash and cash equivalents (a) to finance general working capital purposes of the Credit Parties in the ordinary course of business and (b) to pay fees, expenses, and costs incurred in connection with the DIP Credit Agreement or the Cases, as well as the payment of any adequate protection approved in the DIP Orders (as applicable) in each case only to the extent permitted by the then-applicable Budget (subject to variances permitted by the DIP Credit Agreement as discussed below). See Interim Order 14; DIP Credit Agreement, section % See DIP Credit Agreement, section 2.2. Local Rule (a)(ii) Maturity Date and Termination Bankruptcy Rule 4001(c)(1)(B) July 15, 2018 DIP Credit Agreement section 1.1. Bankruptcy Rule 4001(b)(1)(B) Local Rule (a)(ii) Events of Default Bankruptcy Rule 4001(b)(1)(B) Usual and customary events of default for financings of this type, including, without limitation: nonpayment of principal, interest and fees, covenant defaults, breaches of representations and warranties, a third party purchaser being selected as the winning bidder for the Debtors assets, certain bankruptcy-related defaults, and dismissal or conversion of the Bankruptcy Cases. 12

13 Case MFW Doc 12 Filed 02/26/18 Page 13 of 162 Material Term (Applicable Rule Requirement) DIP Facility See DIP Credit Agreement, section Fees Local Rule (a)(ii) Upfront Fee: The DIP Borrower shall pay (or cause to be paid) to the DIP Agent (for the account of the DIP Lenders) an Upfront Fee equal to 2% of the aggregate amount of the DIP Commitments (without giving effect to the making of any Loans). The Upfront Fee shall be fully earned upon entry of the Interim DIP Order, and shall be payable in full on the Effective Date by adding such amount to the outstanding principal balance of the Loans. Once paid, the Upfront Fee shall not be refundable under any circumstances and shall be paid free of any setoff. Exit Fee: The DIP Borrower shall pay (or cause to be paid) to the DIP Agent (for the account of the DIP Lenders) an Exit Fee in an aggregate amount equal to 2% of the aggregate amount of the DIP Commitments as in effect on the Effective Date without giving effect to the making of any Loans. The Exit Fee shall be fully earned on the date on which the Interim DIP Order shall have been entered, and shall be payable on the portion of Loans at any time paid, prepaid or repaid (including on the Termination Date), in each case, in an amount equal to 2.00% of the aggregate amount being paid, prepaid, or repaid on such date. For the avoidance of doubt, the total amount of the Exit Fee to be paid shall not exceed 2% of the aggregate amount of the DIP Commitments as in effect on the Effective Date (without giving effect to the making of any Loans). Once paid, the Exit Fee shall not be refundable under any circumstances and shall be paid free of any setoff. DIP Agent Fee: The DIP Borrower shall pay (or cause to be paid) to the DIP Agent a DIP Agent Fee equal to $25,000. The DIP Agent Fee shall be fully earned upon entry of the Interim DIP Order, and shall be payable in full in cash on the Effective Date from the proceeds of the Loans or DIP Borrower s cash on hand. Once paid, the DIP Agent Fee shall not be refundable under any circumstances and shall be paid free of any setoff. See DIP Credit Agreement, article 5. 13

14 Case MFW Doc 12 Filed 02/26/18 Page 14 of 162 Material Term (Applicable Rule Requirement) Budget Local Rule (a)(ii) Collateral Local Rule (a)(ii) Covenants Local Rule (a)(ii) DIP Facility The use of the proceeds of the DIP Facility shall be in compliance with the Budget, a copy of the form of which is attached the DIP Credit Agreement as Exhibit A, subject to the permitted variances. See DIP Credit Agreement, Exhibit A, sections 7.7 and 9.7. The DIP Agent and DIP Lenders shall be granted, pursuant to sections 361, 362, 364(c)(2), 364(c)(3) and 364(d)(1) of the Bankruptcy Code, continuing, valid, binding, enforceable, non-avoidable, and automatically perfected, post-petition security interests and liens (the DIP Liens ) on all tangible and intangible real and personal property of the Prepetition Notes Parties (including without limitation, all prepetition and post-petition property and assets of the Prepetition Notes Parties and all equity interests owned by such Prepetition Notes Parties), and all other property of the Prepetition Notes Parties of whatever kind, nature or description, whether acquired or created prepetition or post-petition (including without limitation the Debtors prepetition and postpetition commercial tort claims and the proceeds of claims and causes of action under sections 502(d), 544, 545, 547, 548, 549, 550 and 553 of the Bankruptcy Code ( Avoidance Actions )) to secure the DIP Obligations, in each case subject only to validly perfected and non-avoidable liens existing as of the Petition Date to which the liens securing the obligations under the Existing Notes Documents were subject (to the extent permitted by the express terms of the Existing Notes Documents); provided, that, for the avoidance of doubt, the DIP Liens shall prime and be senior to the lien of the Existing Notes Collateral Agent, for the benefit of the Existing Noteholders; and provided further, that, notwithstanding anything to the contrary herein, property, assets or equity interests owned by the Prepetition Notes Parties shall not be pledged in circumstances where any law, agreement, or other authority prohibits the Debtor from pledging such property, assets or equity interests; and provided further, that equity in any non-debtor subsidiary shall only be pledged to the same extent that it is pledged in the Existing Notes Purchase Agreement and Bridge Note Purchase Agreement. See DIP Credit Agreement section 1.1, Interim DIP Order 9. The DIP Credit Agreement requires compliance with financial, negative and affirmative covenants that are ordinary and customary in debtor-in-possession financings, including, without limitation, satisfaction of milestones related to the progress of the Debtors chapter 11 cases. 14

15 Case MFW Doc 12 Filed 02/26/18 Page 15 of 162 Material Term (Applicable Rule Requirement) DIP Facility In addition to customary requirements, notice and reporting requirements will include, without limitation, (i) monthly delivery of updated 13-week cash flow forecasts acceptable to the DIP Lenders, and (ii) weekly reporting of actual performance versus the Budget. In addition, the DIP Credit Agreement requires compliance with certain limitations on the Debtors variance from the Budget, which shall be tested each month. Priority and Security Bankruptcy Rule 4001(c)(1)(B)(i) Local Rule (a)(i)(G) Local Rule (a)(ii) Adequate Protection Bankruptcy Rule 4001(c)(1)(B)(ii) Local Rule (a)(i)(E) See DIP Credit Agreement, Articles 8 and 9. The entry of the Orders will create in favor of the DIP Agent, for the benefit of the DIP Parties, as security for the DIP Obligations: (i) a valid first priority and priming lien on DIP Collateral pursuant to Sections 364(c)(2) and (d) of the Bankruptcy Code; (ii) a valid junior lien on all tangible and intangible prepetition and postpetition property of the Debtors or their estates pursuant to Section 364(c)(3) of the Bankruptcy Code; and (iii) an allowed administrative expense having priority under Section 364(c)(1) of the Bankruptcy Code over all other administrative expenses (including, without limitation, such expenses specified in Sections 105, 326, 328, 330, 331, 503(b), 506(c), 507(a), 507(b), 726, 1113 and 1114 of the Bankruptcy Code). See DIP Credit Agreement, section 1.1; Interim Order 8, 9. The Existing Notes Collateral Agent, for the benefit of the Existing Noteholders, shall receive adequate protection, including through the provision of replacement liens that are junior to the DIP Liens, superpriority administrative expense claims (subject to the payment of the Carve-Out), accrual (but not current payment) of interest at the contractual default rate, and reasonable and documented fees and expenses, including attorneys fees. Additionally, the Bridge Notes Agent, on behalf of the Bridge Noteholders, will receive an acknowledgement that the liens securing the obligations under the Bridge Note Purchase Agreement are valid, perfected and non-avoidable obligations of the Debtors, and replacement liens on the Collateral that are junior to the DIP Liens. See Interim Order 13,

16 Case MFW Doc 12 Filed 02/26/18 Page 16 of 162 Material Term (Applicable Rule Requirement) Stipulations Bankruptcy Rule 4001(c)(1)(B)(iii) and (viii) Local rule (a)(i)(B) DIP Facility The Debtors make certain customary stipulations with respect to, among other things, the amounts outstanding in respect of the Existing Notes issued under the Existing Notes Purchase Agreement, the Bridge Notes issued under the Bridge Note Purchase Agreement, and the validity, perfection, enforceability and priority of liens and security interests securing same. See Interim Order 4. Waiver or Modification of the Automatic Stay Bankruptcy Rule 4001(c)(1)(B)(iv) Milestones Bankruptcy Rule 4001(c)(1)(B)(vi) The DIP Agent may exercise rights and remedies under the DIP Facility, including all rights and remedies against the DIP Collateral provided for in the applicable DIP Documents, applicable law and the DIP Orders, following an Event of Default, without seeking relief from the automatic stay, but the exercise of remedies is subject to the applicable terms of the DIP Orders, including giving the Debtors five (5) business days advance written notice (with a copy to counsel to the Debtors, counsel to the Committee, if any, and the U.S. Trustee). See DIP Credit Agreement, section 10.1; Interim Order 10. The DIP Facility includes the following milestones: (a) entry of the Final DIP Order by 35 days after the Petition Date; (b) filing a plan and disclosure statement by 22 days after the Petition Date; (c) obtaining approval of the disclosure statement by 64 days after the Petition Date; (d) obtaining confirmation of the plan by 106 days after the Petition Date; (e) the plan being substantially consummated by 121 days after the Petition Date; (f) the plan being substantially consummated by the earlier of July 15, 2018 and 15 days after entry of the Confirmation Order; and (g) if any of the foregoing milestones are not met (the earliest such date, the Sale Trigger Date ), then 16

17 Case MFW Doc 12 Filed 02/26/18 Page 17 of 162 Material Term (Applicable Rule Requirement) DIP Facility (i) executing a purchase agreement for the sale of substantially all of the Debtors assets within 12 days of the Sale Trigger Date; (ii) filing a motion seeking approval of the sale and bidding procedures within 14 days of the Sale Trigger Date; (iii) obtaining approval of bidding procedures within 25 days of the Sale Trigger Date; (iv) conducting an auction within 60 days of the Sale Trigger Date; (v) obtaining an order approving the sale within 65 days of the Sale Trigger Date; and (vi) closing the sale within 83 days of the Sale Trigger Date. Perfection of a Lien (Automatic Perfection) Bankruptcy Rule 4001(c)(1)(B)(vii) Release, Waiver or Limitation of any Estate Claim See DIP Credit Agreement, section 1.1, 10.1(t). The DIP Liens and Adequate Protection Liens (as defined in the Interim Order) shall not be subject to challenge and shall automatically attach and become valid, perfected, binding, enforceable, non-avoidable and effective by operation of law as of the Petition Date without further action. See Interim Order 9, 13, 15. N/A Bankruptcy Rule 4001(c)(1)(B)(viii) Indemnification Bankruptcy Rule 4001(c)(1)(B)(ix) 506(c) Bankruptcy Rule 4001(c)(1)(B)(x) Local Rules (a)(i)(C) Prepetition Notes Parties to provide indemnity to the DIP Parties for various liabilities, not including any indemnified liability that a court of competent jurisdiction determines to have resulted from bad faith, gross negligence, willful misconduct, or breach of the DIP Credit Agreement or any other DIP Document. See DIP Credit Agreement, section Upon entry of the Final Order, the Debtors waive and will be prohibited from asserting any surcharge claim under section 506(c) of the Bankruptcy Code. See Interim Order

18 Case MFW Doc 12 Filed 02/26/18 Page 18 of 162 Material Term (Applicable Rule Requirement) Avoidance Actions Bankruptcy Rule 4001(c)(1)(B)(xi) Local Rule (a)(i)(D) DIP Facility The obligations under the DIP Facility are secured by DIP Liens on, among other things, the proceeds of Avoidance Actions. See Interim Order 8, 9. Provisions that Deem Prepetition Secured Debt to be Postpetition Debt N/A Local Rule 4001(2)(a)(i)(E) Carve Out Local Rule (a)(i)(F) All liens of the DIP Agent, the DIP Lenders, the Existing Notes Collateral Agent, the Existing Noteholders, the Bridge Notes Agent and the Bridge Noteholders on the Collateral and all super-priority claims granted to any of the foregoing parties shall be subject to a Carve-Out (the Carve-Out ), which shall mean (i) the payment of allowed professional fees and disbursements incurred but not yet paid by the professionals retained by the Debtors by order of the Court (collectively, the Estate Professionals ), up to the amount provided for such professionals on a line item basis specified in the Budget (including any previously unused amounts) that were incurred prior to the occurrence of a Carve-Out Event (solely to the extent such fees and disbursements are allowed by the Court either before or after the Carve-Out Event), (ii) the payment of allowed professional fees and disbursements incurred after a Carve-Out Event by the Estate Professionals and any official statutory committee (subject to the amounts set forth in the Budget for professionals on a line item basis and in an aggregate amount under this clause (ii) not to exceed $100,000), (iii) all fees required to be paid to the Office of the United States Trustee pursuant to section 1930(a) of title 28 of the United States Code, and any interest on such fees payable pursuant to section 3717 of title 31 of the United States Code, (iv) all fees required to be paid to the Clerk of the Court, and (v) all reasonable and documented fees and expenses up to $10,000 incurred by a trustee under section 726(b) of the Bankruptcy Code; in each case subject to the rights of the DIP Agent to object to object to the allowance of any such fees and expenses. For the purposes hereof, a Carve-Out Event shall occur upon the occurrence and during the continuance of an Event of Default under the DIP Credit Agreement upon delivery of a written notice thereof by the DIP Agent to the Debtors (a Carve-Out Notice ); provided that, no Carve-Out Event shall be deemed to have occurred if any such Event of Default is subsequently waived by the DIP Lenders. Upon the 18

19 Case MFW Doc 12 Filed 02/26/18 Page 19 of 162 Material Term (Applicable Rule Requirement) Section 552(b) Local Rule (a)(i)(H) DIP Facility occurrence of a Carve-Out Event, the right of the Debtors to pay professional fees incurred without reduction of the Carve- Out in clause (ii) above shall terminate (unless otherwise agreed in writing by the DIP Agent in the event the underlying Event of Default or termination event is subsequently waived by the DIP Lenders). Upon occurrence of a Carve-Out Event, the Debtors shall provide immediate notice by facsimile and to the U.S. Trustee and to all Estate Professionals informing them that a Carve-Out Event has occurred and that the Debtors ability to pay professionals is subject to the Carve-Out. See Interim Order 8. Subject to entry of the Final Order, the equities of the case exception under section 552(b) of the Bankruptcy Code shall not apply to any Prepetition Secured Parties. See Interim Order 12. Local Rule Justifications 25. The terms of the DIP Facility and the Interim Order that require disclosure under Local Rule (a)(i) are justified under the circumstances because the Debtors are in immediate and critical need of the DIP Facility and have no other access to financing. The DIP Lenders would not agree to provide the DIP Facility, or allow use of the Cash Collateral, or the priming of their liens, without the inclusion of such terms. As discussed herein and in the Messing Declaration, the Debtors, despite their efforts to solicit proposals, were unable to obtain alternate financing, including on an unsecured basis or on a secured basis solely on unencumbered assets pursuant to section 364(c)(2) of the Bankruptcy Code. See Messing Decl. 12. Accordingly, the Debtors submit that the inclusion of the provisions requiring disclosure under Local Rule (a)(i) are appropriate under the facts and circumstances of these cases. 26. Stipulations: The proposed forms of Order provide for stipulated findings of fact that bind the estate and other parties in interest with respect to, among other 19

20 Case MFW Doc 12 Filed 02/26/18 Page 20 of 162 things, the validity, perfection and amount of the Prepetition Secured Parties prepetition liens. These stipulations only become binding on other parties in interest, including any creditors committee, on the later of seventy-five days from the entry of the Interim Order or sixty days after appointment of a creditors committee, providing any committee ample time to investigate such matters. Accordingly, Local Rule (a)(i)(B) is not implicated by the Interim Order. Jurisdiction 27. The Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and 1334 and the Amended Standing Order of Reference from the United States District Court for the District of Delaware dated as of February 29, Venue is proper pursuant to 28 U.S.C and This matter is a core proceeding pursuant to 28 U.S.C. 157(b). The statutory predicates for the relief requested herein are sections 105, 361, 362, 363, 364 and 507 of the Bankruptcy Code, Bankruptcy Rules 2002, 4001, 6003, 6004 and 9014 and Local Rule Basis for Relief A. Entry Into the Proposed DIP Credit Agreement Should Be Authorized Under the Bankruptcy Code 28. Absent the relief requested herein, the Debtors ability to operate their businesses in chapter 11 would be jeopardized. The Debtors will be forced to cease operations immediately if they are unable to procure the funds necessary to maintain their businesses through chapter 11, including, without limitation, to pay postpetition wages and salaries and payroll taxes. 1. Approval Under Section 364(c) of the Bankruptcy Code 29. The Debtors propose to obtain the DIP financing by providing to the DIP Lenders security interests and liens described above pursuant to section 364(c) of the Bankruptcy 20

21 Case MFW Doc 12 Filed 02/26/18 Page 21 of 162 Code. The statutory requirement for obtaining postpetition credit under section 364(c) is a finding, made after notice and hearing, that the Debtors are unable to obtain unsecured credit allowable under section 503(b)(1) of [the Bankruptcy Code]. 11 U.S.C. 364(c). Accordingly, section 364(c) financing is appropriate when the trustee or debtor in possession is unable to obtain unsecured credit allowable as an ordinary administrative claim. See In re L.A. Dodgers LLC, 457 B.R. 308, 312 (Bankr. D. Del. 2011) (denying motion for authorization to enter into postpetition credit facility where debtors could not demonstrate that they were unable to obtain unsecured credit allowable as an administrative expense). 30. Courts have articulated a three-part test to determine whether a debtor is entitled to financing under section 364(c) of the Bankruptcy Code. Specifically, courts look to whether: a) the debtor is unable to obtain unsecured credit under section 364(b), i.e., by allowing a lender only an administrative claim; b) the credit transaction is necessary to preserve the assets of the estate; and c) the terms of the transaction are fair, reasonable and adequate, given the circumstances of the debtor-borrower and the proposed lender. L.A. Dodgers, 457 B.R. at 312; see also In re Aqua Assocs., 123 B.R. 192, (Bankr. E.D. Pa. 1991). As is fully set forth below, the Debtors have satisfied each of these conditions. a) The Debtors Do Not Have an Alternative to the DIP Facility 31. As set forth above and in the Messing Declaration, and as the Debtors will show at the hearing to approve the Interim Order (the Interim Hearing ), financing in the amount needed in these cases is not obtainable on an unsecured basis. In addition, there are no other potential sources of secured postpetition financing for the Debtors, available on an expedited basis and on reasonable terms, because, among other reasons, third-party financiers would be required to prime Prepetition Secured Parties holding in excess of $58 million in debt. 21

22 Case MFW Doc 12 Filed 02/26/18 Page 22 of 162 Potential lenders approached by the Debtors and their advisors were not willing to engage in a non-consensual priming dispute with the Prepetition Secured Parties. See Messing Decl. 12. Accordingly, the Debtors were only able to obtain DIP financing from the Existing Noteholders. 32. In these circumstances, [t]he statute imposes no duty to seek credit from every possible lender before concluding that such credit is unavailable. In re Snowshoe Co., 789 F.2d 1085, 1088 (4th Cir. 1986); see In re Phoenix Steel Corp., 39 B.R. 218, 222 (D. Del. 1984) (The Debtor satisfied its burden to show an inability to obtain credit on other terms through its time and effort spent trying to obtain credit on alternative terms and conditions). A debtor need only demonstrate by a good faith effort that credit was not available without the protections afforded to potential lenders by sections 364(c) and 364(d) of the Bankruptcy Code. Snowshoe, 789 F.2d at Moreover, where there are few lenders likely to be able and willing to extend the necessary credit to a debtor, it would be unrealistic and unnecessary to require [the debtor] to conduct... an exhaustive search for financing. In re Sky Valley, Inc., 100 B.R. 107, 113 (Bankr. N.D. Ga. 1988), aff d, 99 B.R. 117 (N.D. Ga. 1989). The evidence introduced at the Interim Hearing will satisfy the requirement of section 364(c) of the Bankruptcy Code that alternative credit was not available on an unsecured basis allowable as an administrative claim under section 503(b)(1) of the Bankruptcy Code. b) The DIP Facility is Necessary to Preserve the Assets of the Debtors Estates 33. The Debtors need immediate access to financing in order to meet the day-to-day costs associated with operating the Debtors businesses, including funding for employee wages and other necessary operational costs. In the absence of immediate liquidity, the Debtors would not have sufficient funds to continue operating, which would have a material 22

23 Case MFW Doc 12 Filed 02/26/18 Page 23 of 162 adverse impact on the preservation of the value of the Debtors estates and the Debtors ability to implement the restructuring of its business. See Messing Decl. 9. c) The Terms of the DIP Credit Agreement Are Fair, Reasonable, and Appropriate 34. As described herein, the only viable source of financing for these cases are the Debtors existing lenders because they hold liens supporting over $58 million of existing debt and credit is not available to the Debtors on a subordinated or unsecured basis. Accordingly, the Debtors negotiated, at arm s-length, the best DIP financing terms they could obtain from their existing lenders. As set forth in the Messing Declaration, the Debtors believe that the terms arrived at are reasonable and appropriate in light of the Debtors current circumstances and financial needs. See Messing Decl In the Debtors business judgment, the DIP Facility provides the Debtors with the best option to obtain much-needed liquidity during these chapter 11 cases, and the terms and conditions of the DIP Credit Agreement are fair and reasonable, as more fully explained throughout this Motion in relation to the key features of the DIP Facility. 35. The interest rate of the DIP Facility is 12%, which is reasonable in light of the fact that the Debtors were paying 14% non-default and 16% default PIK interest under the Existing Notes prior to the Petition Date. See Messing Decl In addition, given the Debtors limited options for financing as well as the Debtors critical need for financing, the Upfront Fee, Exit Fee, and Agent Fee are reasonable under the circumstances of these cases. They are also within the range of typical debtor-inpossession facilities in the marketplace for businesses that are similar to the Debtors in size and financial profile. See Messing Decl

24 Case MFW Doc 12 Filed 02/26/18 Page 24 of Section 364(d): Priming Liens and Request for Adequate Protection 37. Section 364(d)(1) of the Bankruptcy Code, which governs the incurrence of post-petition debt secured by senior or priming liens, provides that the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if: (i) the trustee is unable to obtain credit otherwise; and (ii) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted. 38. As set forth above, the Debtors are unable to obtain credit on more favorable terms, including with respect to the priming liens provided under the DIP Facility. The determination of adequate protection is made on a case-by-case basis. Resolution Trust Corp. v. Swedeland Dev. Group (In re Swedeland Dev. Group), 16 F.3d 552, 564 (3d Cir. 1994). Whether protection is adequate depends directly on how effectively it compensates the secured creditor for loss of value caused by the superpriority given to the post-petition loan. Id. (quoting In re Am. Mariner Indus., Inc., 734 F.2d 426, 432 (9th Cir. 1984)). 39. First and foremost, the priming of liens under the DIP Facility is fully consensual. Consistent with the Intercreditor Agreement, the Bridge Noteholders and Convertible Noteholders are deemed to have consented to the terms of the DIP Facility, including the priming liens provided thereunder. See Ex. D (Intercreditor Agreement) 5.1. Moreover, the parties providing the DIP Facility are primarily priming themselves, as the lenders providing the DIP Facility are also the Existing Noteholders whose debt comprises 85% of FTI s outstanding secured obligations. 40. In addition, in accordance with section 364 of the Bankruptcy Code, and consistent with the purposes underlying the provision of adequate protection, the proposed Interim Order provides that adequate protection will be provided to the Prepetition Secured 24