[Editor’s note: This article updates a breaking news story published earlier, providing further details on the issues discussed at today’s hearing.]
Town Sports International Inc’s (TSI) bankruptcy judge today ordered an ad hoc group of prepetition term loan lenders to transfer credit bidding authority to Peak Credit LLC to ensure the closing of a sale of the gym operator’s assets, through which the lenders and Peak would take joint ownership of the reorganized TSI.
The ad hoc group had asked the judge to block the sale, arguing that Peak—a new party to the transaction after TSI debtor-in-possession (DIP) lender Tacit Capital encountered difficulty securing funding—failed to meet its obligations under the court order that approved an asset purchase agreement (APA) for the transaction.
Judge Christopher Sontchi of the US Bankruptcy Court for the District of Delaware made his ruling during a hearing this morning in TSI’s Chapter 11 case, finding against the ad hoc term lender group’s request for an injunction that would have blocked TSI’s already approved asset sale from closing. The ad hoc lender group and Tacit provided TSI with USD 32m in DIP financing, and joined forces on a stalking horse bid for TSI’s assets that ultimately carried the day in the gym operator’s sale process.
The stalking horse bid had several components: the prepetition term loan lenders agreed to credit bid up to USD 80m of their debt holdings, while the transaction would also provide TSI with USD 3.71m in cash for a wind-down budget, USD 1m in cash for recoveries to TSI’s unsecured creditors and the assumption of certain other liabilities.
Following Judge Sontchi’s approval of the sale early in November, however, Tacit appears to have ceded its role as buyer to Peak, an affiliate of Lepercq de Neuflize & Co, and 507 Capital. The ad hoc term lender group argued in a 27 November bankruptcy court filing that Peak has not lived up to the terms of the APA for the sale of TSI’s assets. Specifically, the term lender group said Peak had not posted enough capital to fund the continued operations of the business after the sale closes, nor has Peak offered consideration to the prepetition lenders in exchange for their commitment to credit bid USD 80m.
Due to those alleged shortfalls, the term loan ad hoc group argued that it could withhold the credit bid because Peak has not committed to providing the kind of post-closing capital that the lender group signed up for when they agreed to join in the stalking horse bid.
Lined up against the ad hoc lender group’s position were both TSI and its unsecured creditors committee (UCC). Lawyers for the company and UCC told Judge Sontchi during today’s hearing that the ad hoc lender group could work out its dispute with Peak at some point after the sale closes, but that the issues should not prevent the sale from closing. Arguing for TSI, Nicole Greenblatt of Kirkland & Ellis said that she believed all of the steps preceding the credit bid portion of the transaction had already taken place as described in the APA and Judge Sontchi’s order approving the sale.
The judge sided with TSI and the UCC. He acknowledged a dispute among the term loan ad hoc group and Peak about how much capital the buyer would have following the closing of the sale, and said he understood why the lender group would be disappointed to have such “thin” capitalization in what is already a challenging business environment for gym operators.
But Judge Sontchi also said he believed that dispute was not a reason to “pull the rug out from under” TSI when its sale transaction was on the verge of closing. With that reasoning, the judge ordered the credit bid portion of the transaction to move ahead.
“To allow the term lenders not to credit bid at this point in the case would be extremely detrimental,” Judge Sontchi said. ““The buyer has the authority to credit bid; we can go to closing and the buyer can credit bid the debt.”
The shakeup regarding TSI’s sale marks the latest turn in a Chapter 11 case that, during its early days, featured a competition among prospective providers of debtor-in-possession (DIP) financing.
As the company’s bankruptcy began on 14 September, both Kennedy Lewis Investment Management and Tacit Capital appeared to be in the running to provide a DIP. The proposal from Kennedy Lewis, the second largest shareholder of TSI’s parent company and a significant holder of the gym operator’s debt, contemplated a USD 80m financing facility. Meanwhile, Tacit’s initial offer involved a USD 17.5m DIP tied to a credit bid of another USD 47.5m that the reorganized TSI could tap after emerging from Chapter 11.
At the company’s first-day hearing, however, TSI’s lawyers said they had opted to act on the Tacit proposal, effectively ending the DIP rivalry. The DIP facility was later expanded—Judge Sontchi on 16 October granted final approval of a USD 32m DIP from Tacit and the ad hoc group of prepetition term loan lenders. But following the DIP’s approval, Tacit failed to come up with the financing for its contribution and began seeking out additional investors, as Debtwire reported.
Town Sports filed for Chapter 11 protection in September after the coronavirus pandemic brought on the forced temporary closures of its 186 fitness centers.