Inside the Arch Bankruptcy: Chapter 11 Filing and Decision to Pursue Asset Sale Followed Months of Negotiations with Lenders, According to Court Documents
December 2, 2009

by Penny Stacey

Arch Aluminum and Glass Co. filed for reorganization under Chapter 11 just last week-but the company's financial difficulties began as early as 2008, according to documents filed in the case. In the company's "Chapter 11 Case Management Summary," Arch notes that in late 2008, it began "to experience liquidity issues as a result of the unprecedented and depressed economic conditions throughout the country, particularly in the retail and commercial building materials industries." Arch's petition for reorganization under Chapter 11 was filed on Sunday, November 29, in the U.S. Bankruptcy Court for the Southern District of Florida. (CLICK HERE for related story.)

In May 2009, Arch notified one of its secure creditors, Churchill Financial, that it would fail to make a scheduled interest payment due on May 29-in the amount of $190,305.56-and that it would fail to make a second scheduled interest payment to the same lender for $184,166.67, due June 30, according to a declaration filed by Arch's chief restructuring officer, Vincent Colistra. As a result of the defaulted payments, Arch entered into a "Forebearance Agreement" with Churchill Financial, dated May 29, under which Churchill agreed to defer the late payments.

Around the same time, in June 2009, Arch management found that it was defaulting on various terms of a credit facility provided by its Senior Secured Revolving Credit Facility, which is led by PNC Bank and includes several lenders, including Comerica Bank, RBS Business Capital, Wachovia Bank, Bank of America, Fifth Third Bank and Sovereign Bank. The credit provided by the lenders included a $75 million senior secured revolving credit line; a $50 million senior secured term loan; a $10 million senior secured capital expenditure loan and a $13.6 million senior secured term loan, for a total credit availability of $148.6 million. The conditions of default arose from "the borrowers' failure to comply" with various provisions of the loans, according to Colistra's declaration.

Based on this, Arch management entered into a forbearance agreement with PNC (and the other banks included in the original loan), which required the company to meet several provisions, as follows:

• To provide a restructuring term sheet to the lenders on or before July 31;
• To cooperate with a consultant "engaged by the Secured Lenders" to review the cash flow projections and financial models to be provided to the lenders; and
• To enter into a second forbearance agreement with Churchill Financial.

This agreement was set to expire on August 15 and, on July 31, as required by the agreement, Arch provided its restructuring term sheet to the lenders, according to court documents.

Along with these steps, Colistra says Arch "undertook significant cost-cutting initiatives in an effort to improve its cash-position and maximize its ability to satisfy the requirements of the forbearance agreements and cure the Events of Default."
The initiatives included termination and wage cuts for a number of employees, renegotiation of certain property and vehicle leases and reductions in corporate selling, general and administrative expenses.

Once August 15 came, and the first forbearance agreement with the senior secured lenders expired, Arch entered into a second agreement with them, according to Colistra. This agreement required that the company retain the services of an independent restructuring officer "to direct the company in improving [its] operations and financial performance." At this point, Colistra began working with Arch and "engaged in an extensive review of the company's business and finances."

At the same time, Arch retained an investment banking firm, Piper Jaffray & Co. (PJC) to explore a potential "de-leveraging transaction."

In October, as the deadline for the expiration of the second forbearance agreement with the senior secured lenders approached, Colistra says he recommended that "a further forbearance agreement be entered into that would allow the company to continue operating while PJC endeavored to locate an investor that could provide a permanent solution to the company's financial distress."

As PJC continued to solicit interest from potential investors and purchasers, two more agreements were made with the senior lenders, the second of which was set to expire on November 20. The final agreement required that Arch provide to the lenders at least three firm offers to purchase substantially all of its assets, according to Colistra, and the company presented these on November 16. At this time, Arch management "had discussions with the senior lenders regarding the need for additional time to clarify and quantify the submitted offers on an 'apples-to-apples' basis."

"No Longer Able to Operate"

To provide Arch time to review the purchase offers further, at this time the senior lenders agree to provide a fifth forbearance agreement, with an expiration date of December 4; however, Arch's "revised projected cash flow indicated that [it] would no longer be able to operate until December 4, 2009, under the Senior Lenders' asset-based formula," Colistra writes.

"Based on such cash flows, on November 19, 2009, I, in conjunction and after consultation with the company's management, recommended to the Board of Directors, and the Board of Directors authorized, that each of the debtors [Arch and its subsidiaries] file petitions under Chapter 11 of the Bankruptcy Code in order to facilitate the sale of substantially all [their] assets to the stalking horse bidder, subject to higher and better offers … " continues Colistra.

Though Arch has since announced that the stalking horse bidder is an affiliate of a private equity firm based in Boulder, Colo., Grey Mountain Partners LLC, the company initially received 16 indications of interest, and had received five final bids as of November 17. The affiliate created by Grey Mountain Partners for the purchase has been named Arch Glass Acquisition Corp.

Arch filed a motion earlier today to complete the sale of its assets to the firm, "or the highest and best bidder, if applicable, at an auction." If the sale is completed to Arch Glass Acquisition, the company projects the value "to be generated from such sale to and in favor of [its] estates is approximately $62 million."

Maintaining the Day-to-Day Operations

A hearing was scheduled for 1:30 p.m. today in Florida to review several of the company's initial November 29 motions in the case, most of which were made in an effort to "enable [the company] to operate in Chapter 11 with a minimum of disruption and loss of productivity."

Among the motions under review today was one to for authorization to use cash collateral on an interim basis, which Colistra says provides Arch with the ability to "preserve the going concern value of the business with the use of Cash Collateral," along with providing the lenders protection as well.

The company also is seeking authorization of the payment of pre-petition wages, salaries, commissions and employee benefits, along with the approval to "continue the maintenance of employee practices and benefit plans and programs in the ordinary course and directing all banks to honor pre-petition checks for payment of pre-petition employee obligations." The company's aggregate bi-weekly gross payroll is approximately $3 million, including taxes and benefits, according to court documents.

Arch also is motioning for the assurance of orders allowing it to pay for future utility services, noting that bankruptcy code permits utility providers to terminate its services 30 days after a bankruptcy filing.

"Uninterrupted utility services are essential to ongoing operations and, therefore, to the success of these Chapter 11 cases," writes Colistra in support of the motion. "Should the Utility Providers refuse or discontinue service, even for a brief period, the debtors' business operations would be severely disrupted."

The company also seeks authorization to continue to maintain its corporate bank accounts and cash management systems, to provide status updates to vendors with pre-petition claims and authorization "to pay such expenses in the ordinary course of business."

The court documents note that Arch generated revenue of $361 million in 2008, with an EBITDA of more than $21 million. Year-to-date income for 2008 is currently at $189 million, according to the company's consolidated case management study.

At press time, no orders had been published addressing these motions.

Arch is represented by Genovese Joblove & Battista P.A. in Miami.

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