Philadelphia Energy’s Bright Future Goes Up in a Massive Fireball as It Files for Bankruptcy. Again.

Philadelphia Energy Solutions has filed for bankruptcy protection a month after an explosion permanently shut down the East Coast’s oldest and largest refinery. The chaos began on June 21 at 4 a.m. when a butane tank exploded, destroying an alkylation unit using hydrofluoric acid to process refined petroleum. If you’re not sure exactly what that means… it’s bad. The explosion sent fireballs into the air that you could see miles away. And it took two days to completely extinguish the massive fire that resulted. 

The company shut down the refinery less than a week later and announced—by email, and with only 5 days notice—that it would lay off 1,000 employees. Refinery workers were not pleased, responding with a lawsuit arguing that Philadelphia Energy Solutions failed to comply with the WARN Act’s requirement that a company with 100 or more workers give 60 days’ notice when expecting massive job loss. (Fair enough. But the WARN has exceptions for layoffs due to “unforeseeable business circumstances.” Is anyone arguing that Philadelphia Energy Solutions planned the explosion in advance?)

PES Seeks to Reorganize and Rebuild with $100 Million in New Funding

Philadelphia Energy Solutions owns and operates the Point Breeze and Girard Point oil refineries located on an integrated, 1,300-acre refining complex in Philadelphia. The with a combined capacity of 335,000 barrels per day. The company is seeking $100 million in new funding to support existing operations, undertake the work necessary to ensure the refinery complex is safely positioned for rebuilding, and restart and complete its reorganization process.

We will continue our ongoing cooperation with the federal, state and city governmental agencies investigating the June 21 accident and thank them and our employees for their diligent efforts at this difficult time. The success of our plan is critical to energy supply and security for the region, the Commonwealth of Pennsylvania and the City of Philadelphia

Mark Smith, Chief Executive Officer

The 2018 Bankruptcy and Restructuring

Notably, this is the company’s second bankruptcy in under two years. It blamed that first filing largely on the costs of complying with the US Renewable Fuel Standard, which requires refiners to either blend biofuels like ethanol into fuel or purchase credits from competitors who do. Philadelphia Energy Solutions does not have blending capabilities, so it pays for credits. (The withdrawal of over $590 million in dividend-style payments from the company may not have done anything to help the situation.)

During the first bankruptcy case, the EPA waived half of PES’s $350 million in liabilities related to biofuels credits. Philadelphia Energy Solutions then restructured over $635 million of funded debt while securing access to $260 million in new financing and a new $900 million intermediation facility.

Today marks the successful completion of a process that preserves the jobs of 1,100 hard-working Pennsylvanians and ensures the critical flow of energy to the Northeast U.S. . . . . PES has a bright future ahead as the longest continuously operating refinery on the East Coast. We will invest in the refinery, building on the more than $900 million that has been invested in the complex since PES was formed in 2012 to implement world-class refining capabilities.

Greg Gatta, Chief Executive Officer

Lingering Financial Woes

However, Philadelphia Energy Solutions was reportedly facing another financial crisis just months after emerging from that earlier bankruptcy. In February of 2019, Reuters reported that after exiting from bankruptcy in August of 2018, the company saw its cash balance fall to $87.7 million at the end of 2018, down from $148 million three months earlier.

According to Reuters, the company’s weak cash position forced the refiner to significantly scale back a planned $90 million maintenance project planned for last January. Refiners, of course, perform maintenance to keep units operating reliably and safely.

The refinery explosion occurred less than 6 months later.

Mette K.

Restaurants Unlimited on the Bankruptcy Auction Block

Seattle-based Restaurants Unlimited, Inc., operator of 35 restaurants across six states, has filed for Chapter 11 bankruptcy protection in Delaware along with three affiliates. The Bankruptcy Court has scheduled a “first-day” hearing to take place today, July 9th, at 3:00 p.m. The hearing agenda is available here.

Update: The committee formation meeting has been set for July 23rd at 10:00 a.m. at 405 King Street, 2nd Floor Wilmington, Delaware. It promises to be a lovely, muggy, summer day with highs in the 90s and a chance of thunderstorms. I apologize. Seek out air conditioning.

Company Background

Restaurants Unlimited, an eatery chain owned by private-equity firm Sun Capital Partners, Inc, offers both fine dining and polished casual dining in “iconic” locations under the following local brands: 

  • Clinkerdagger
  • Cutters Crabhouse
  • Fondi Pizzeria
  • Henry’s Tavern
  • Kincaid’s
  • Maggie Bluffs
  • Manzana
  • Newport Seafood Grill
  • Palisade
  • Palomino
  • Portland City Grill
  • Portland Seafood Company
  • Scott’s Bar & Grill
  • Simon & Seafort’s
  • Skate’s on the Bay
  • Stanford’s
  • Stanley & Seafort

What Went Wrong?

The filing is the most recent in a spate of restaurant bankruptcies as consumers take advantage of falling grocery prices while restaurants grapple with increasing operating costs and market saturation. In particular, Restaurants Unlimited attributes its filing to steep minimum wage hikes across the Pacific coast—with additional hikes projected for 2020—and the national trend away from casual dining. The company’s unsuccessful, $10 million expansion into two new locations exacerbated these problems. The resulting liquidity crisis saw the company falling behind on rent obligations and vendor payments, defaulting on $40 million in secured debt, and shuttering six locations.

Other recent restaurant filings include Real-Mex, Pappa Ginos, Bertucci, Rock & Brews, Palm Restaurants, Garces Restaurant Group, Joe’s Tavern Brick House, and Taco Bueno.

On the Auction Block

Restaurants Unlimited commenced its bankruptcy case to sell its business through an auction process. The company’s prepetition lenders, Drawbridge Special Opportunities Fund and NXT Capital, and their agent, Fortress Credit Co., are providing $10 million in post-petition financing to support these efforts. In fact, the company first engaged an investment banker to locate to a buyer or secure new financing in 2016. Those efforts failed, and in spring 2019, Restaurants Unlimited hired Configure Partners to run a bankruptcy sale process. Will it have any better luck this time? Although the company does not have a purchase offer in hand, it reportedly has received some initial indications of interest and is “optimistic.”

Financing: At a Price

While post-petition financing will provide the company with much needed liquidity, it comes at a steep price. The financing comes in the form of a senior secured, super-priority, multi-draw term loan with $3.25 to be drawn on an interim basis before final court approval. While there is no roll-up of prepetition debt, the facility includes a 5% closing fee, a 2% commitment fee, and various other fees, as well as a proposed lien on avoidance actions (which would otherwise be available to pay unsecured creditors) and waiver of the debtor’s surcharge rights and the “equities of the case” exception under Bankruptcy Code section 552(b).

The financing is subject to the following proposed milestones, all of which are designed to culminate in a sale by the end of September–despite the fact that the company has not yet located a buyer.

  • July 10: Entry of interim DIP order
  • Aug. 20: Obtain stalking horse bid
  • Aug. 21: Entry of bid procedures order
  • Sept. 13: Bid deadline
  • Sept. 17: Auction
  • Sept. 20: Entry of sale order
  • Sept. 26: Sale consummation

The lien challenge deadline is the earlier of 60 days after selection of counsel to a creditor’s committee or75 days after the petition date. The investigation budget is $25,000.

Critical Vendors

Meanwhile, Restaurants Unlimited is seeking authority to pay up to $3.5 million in “critical vendor” claims consisting of amounts owed to logistics providers, PACA/PASA claimants and an estimated $1.3 million in 503(b)(9) claimants. An initial $500,000 could be paid if approved on an interim basis. Restaurants Unlimited estimates that it owes roughly $8 million to trade vendors, landlords and other unsecured creditors. Of that amount, approximately $4.1 million is owed to its 10 largest unsecured creditors:

Sysco$1.830,000
Pacific Seafood Co.$930,000
Charlies Produce Company$471,000
Microsoft Leasing$180,000
Aramark$160,000
Newport Meat$120,000
LA Specialty Produce Co. d/b/a SF Specialty$120,000
Retail Properties of America$104,000
Baseball Club of Seattle, d/b/a Seattle Mariners$100,000
Attilio Merlino & Assoc., Inc., d/b/a/ Merlino Foods$100,000

Additional Information

Additional information is available free of charge here.

Mette K.

Kitten Heels are Dead. Long Live Kitten Heels.

The retailpocolypose is continuing at full speed, impacting retailers both here in the US and across the pond. Clothing retailer LK Bennett Ltd. is the latest High Street casualty, closing five stores and going into administration in the UK. It is joined by its New York-based subsidiary, L.K. Bennett U.S.A., which has filed for chapter 11 protection in the Delaware Bankruptcy Court.

Company Background

Opening in London in 1990 to bring “a bit of Bond Street luxury to High Street,” LK Bennett quickly established itself as an upmarket retailer. And its founder, Ms Bennett, just as quickly established herself as “the Queen of the Kitten Heel.” Bennett’s “smart” dayware is a favorite of Princess Kate Middleton and other celebrities. And even Prime Minister Theresa May has been knows to step out in LK Bennett kitten heels.

Faltering Steps

Corporate missteps and a challenging retail environment have led to declining sales and, ultimately, bankruptcy.  Many of the elements of the LK Bennett story are all too familiar.

  • The UK clothing and footwear sector are suffering from price deflation, leaving LK Bennett priced beyond the reach of most shoppers.
  • Today’s retail environment is all about authenticity and distinctiveness; LK Bennett has failed to embrace a sense of uniqueness and creativity that would set it apart from more competitively priced competitors in a saturated market.
  • An excessive number of stores at above-market rates – exacerbated by decreasing foot traffic and overdependence on sales at brick & mortar locations – has left the company struggling with excessive lease costs.
  • LK Bennett has also failed to connect with its young consumers via social media and has been overtaken by younger, more-affordable and digitally-savvier brands. (Sorry, Prime Minister.)
  • Ownership changes have left strategies in flux without time to take root and come to fruition.

And by the way…. is an “affordable luxury brand” even a thing?  Are consumers who are willing to invest in a luxury pair of shoes more likely to go all in and aim for a recognized high-fashion shoe brand, such as Jimmy Choo? 

What Comes Next for LK Bennett?

Interested buyers have been actively pursuing the company, at least in the UK. Similarly to (much, much) edgier UK lingerie brand and retailer Agent Provocateur, LK Bennet’s counterpart bankruptcy filing for its US subsidiary has likewise been teed up to pursue a sale.

Case Information

L.K. Bennett U.S.A. is represented by DLA Piper as counsel and Ernst & Young as restructuring advisor. The case number is 19-10760. The case has been assigned to Judge Kevin Gross.

Mette H. Kurth

Z Gallerie Suffers Self-Inflicted Wounds, Files Chapter 22 Bankruptcy Case

Z Gallerie, LLC, a CA-based home furnishing and décor retailer with 76 stores nationwide, has filed for Chapter “22” protection in Delaware.

Committee Formation Meeting

The Committee formation meeting is set for Wednesday, March 20, 2019 at 10:00 a.m. at the Doubletree Hotel in Wilmington, DE. Be prepared for a high of 50, a low of 34, and scattered showers. (Not that the weather in LA will be much better…. a high of 66 and more showers).

How Did It Get Here?

Founded in 1979, Z Gallerie filed its first Chapter 11 case in 2009 in the aftermath of the Great Recession.  At that time the original founders, the Zieden siblings, reacquired the company.  In 2014, the Ziedens sold majority control of the company to its current owner, Brentwood Associates, in a $110 million leveraged buyout.  Subsequently, the company’s performance declined significantly, bringing it to where we are today.

Z Gallerie is one of several recent furniture retailers to seek bankruptcy protection, including retailer The Robert Allen Group and Heritage Home Group. But unlike other retailers, Z Gallerie did not fall victim to the “retailpocolypse” but to self-inflicted wounds. The good news? Management is confident that it has addressed its operational missteps and is well on the way to turning the company around. Among the issues?

  • A steep decline in revenues after the Brentwood acquisition.
  • Leverage and liquidity issues.
  • A failed expansion strategy.
  • Delay in launching an e-commerce platform.
  • The failed launch of a new distribution facility.
  • The loss of a major supplier.

In 2018, the company generated more than $200 million in sales.  But at the time of the filing, it had less than $2 million in cash on hand.  Running out of adequate cash to fund operations, Z Gallerie approached its prepetition lenders for additional liquidity but could not secure operating funds outside of a Chapter 11 process.


Imagining the future…. “Speed and cooperation” will determine whether Z Gallerie survives.

Where Is It Headed?

The Plan and Sale Process

Z Gallerie has secured $28 million in DIP financing commitments, conditioned on the company moving rapidly through the bankruptcy process.  To that end, Z Gallerie has already filed a “toggle plan” providing for either the marketing and sale of the company or a debt for equity swap “on terms to be determined.” The proposed timeframe is roughly as follows:

  • March 25: File disclosure statement.
  • April 12: Enter final DIP financing order, bid procedures order
  • April 19: Term sheets due from potential buyers.
  • May 7: If indications of interest are insufficient to pay off lenders, provide evidence of exit financing or execute a business plan that significantly reduces debt by aggressively shuttering stores.
  • May 7: Order approving disclosure statement.
  • May 16: Bid deadline.
  • May 20: Auction for substantially all assets.
  • May 29: Finalize asset purchase agreement.
  • June 17: Enter order confirming plan or approving sale.

The plan, however, is essentially a placeholder with significant gaps to be filled in. For example, treatment of critical trade claims and general unsecured claims is “to come.”

Store Closings

Meanwhile, the company is seeking to close up to 17 stores and requesting approval of streamlined procedures to conduct store closing sales.  It anticipates 59 go-forward locations (55 stores, two outlets, and two distribution centers).

The First Day Hearing

Z Gallerie’s financing, and other first-day relief, was approved at the first day hearing held today, Tuesday, March 12, at 3:30 p.m.

Mette K.

Avadel Pharma on the Bankruptcy Auction Block

Avadel Specialty Pharmaceuticals is one of three pharmaceutical companies to file for bankruptcy this week. The trio of healthcare companies included two pharmaceuticals companies – Novum Pharma and Avadel, both of which filed in pursuit of a sale process – and San Juan-based healthcare consulting firm, Navegar Network Alliance. Avadel’s filing comes as part of a broader restructuring of its publicly-traded, Dublin-based parent, which is currently undergoing an out-of-court restructuring to “right-size” its own headcount, reduce expenses, and improve profitability.

Avadel provides innovative medicines for chronic urological disorders. It has one commercial product, Noctiva™ , a prescription nasal spray used to prevent the kidneys from overproducing urine at night. Avadel claims this it is the first FDA-approved treatment proven to help adults with nocturia due to nocturnal polyuria. Here’s to a good night’s sleep!

A Quick Sale Process!

On Monday, Avadel filed a motion to approve procedures to sell its assets, allowing bids for any combination of assets (including just for its new drug application for Noctiva and its inventory or for only its Noctiva inventory).

Avadel hasn’t yet found a “stalking horse” buyer to make a first bid. But if it finds one, it may request approval of a breakup fee and bid protections. Bids, it proposes, will require a 10% deposit while overbids at auction must be at least $50,000. The sale process is likely to move forward at a rapid clip, with the following proposed deadlines:

  • Bid Procedures Hearing: March 13
  • Bid deadline: March 15
  • Selection of Qualified Bidders: March 18
  • Auction: March 19
  • Sale hearing: March 21

The company is working with Cassel Salpeter & Co. as investment banker.

How Did Avadel Get Here?

The company entered into an exclusive license and assignment agreement with Serenity Pharmaceuticals in September 2017. The agreement gave Avadel exclusive rights to develop, market and sell Noctiva in the U.S. and Canada. In exchange, Serenity walked away with two one-time payments totaling $70 million and royalties from product sales.

Despite significant time and investment, Avadel says that Noctiva has
underperformed since its launch due to resistance from healthcare professionals and concerns regarding potential risks for serious side effects. Due to these complications, among others, $80 million in additional investments since September 2017 have yielded less than $3 million in sales. Revised sales projections, it says, are “substantially below” the projections made in connection with its entry into the license and assignment agreement with Serenity.

Beginning in November of 2018, the company tried (and failed) to find a co-promotor for Noctiva, contacting 20 pharmaceutical companies and strategic buyers. It then tried to find a sublicensee, “discreetly” contacting potential parties. But none had completed diligence or discussed deal terms before the bankruptcy filing.

What Comes Next?

Avadel manages Noctiva’s production and distribution through third-party manufacturing, distribution, and supply agreements with such as its agreement with Renaissance Lakewood (f/k/a DPT Lakewood). Under Lakewood agreement, the company must purchase a minimum of 400,000 units of product each year regardless of need. If it falls short, Avadel has to make up the difference to Renaissance. Not expecting buyers to be interested in the contract, Avadel has filed a motion to reject it.

After the sale, Avadel intends to liquidate any remaining assets and wind down its remaining operations.

Mette K.