LodgeNet Interactive Corporation (former ticker symbol: LNET) and a number of affiliated companies voluntarily filed pre-packaged chapter 11 bankruptcy cases on Sunday in New York City. The companies, which are “the leading provider of interactive media and connectivity services to the hospitality and healthcare industries in the United States” according to court filings, are proposing a plan of reorganization pursuant to which “a group of investors led by Col-L Acquisition, LLC, a subsidiary of Colony Capital, LLC, will invest at least $60 million in exchange for 100% of the common stock of reorganized LodgeNet Interactive.” The proposed reorganization plan also includes the following key terms:
- an amendment to the terms of LodgeNet’s Prepetition Credit Agreement to, among other things, extend the maturity date, adjust the interest rate, modify certain financial covenants, and potentially bifurcate the loan into a first lien and a second lien piece;
- entry into a new agreement with DIRECTV pursuant to which DIRECTV will assume the cost of installation of systems in hotels and healthcare facilities;
- payment in full of all allowed trade and other general unsecured creditors in cash on or shortly after the effective date of the Plan; and
- cancellation of all existing equity in LodgeNet Interactive.
The only creditors entitled to vote on the Plan are LodgeNet’s lenders under the Prepetition Credit Agreement. Accoridng to court filings, over 56% of the prepetition lenders and over 73% of the total amount of debt under the Prepetition Credit Agreement have voted to accept the Plan as of today. Also as of today, no prepetition lenders have voted against the Plan. The voting deadline is February 4, 2013.
LodgeNet’s professional representatives in the bankruptcy cases are:
- Weil, Gotshal & Manges LLP as counsel
- Miller Buckfire & Co., LLC as financial advisor and investment banker
- FTI Consulting, Inc. as financial advisor
- Moorgate Partners as investment banker
- Leonard, Street and Deinard as general corporate counsel
Links to free copies of key court filings are included below. Copies of all of the bankruptcy court filings in the case can be found by clicking here. Here are quotes from the same court filings summarizing some of the key information contained therein:
Equity. LodgeNet Interactive became a publicly traded company in 1993. LodgeNet Interactive’s common stock, which was traded under the symbol “LNET”, was delisted from the NASDAQ on January 14, 2013. The common stock is currently traded on the OTC Bulletin Board. As of December 31, 2012, there were approximately 27,943,018 shares of common stock outstanding and 50,516 shares outstanding of LodgeNet Interactive’s 10% Series B Cumulative Convertible Perpetual Preferred Stock. LodgeNet Interactive directly or indirectly owns 100% of the equity of each of the other Debtors.
Indebtedness. LodgeNet Interactive is the obligor under a Credit Agreement, dated as of April 4, 2007 (as may be amended, supplemented, restated or otherwise modified prior to the Petition Date, the “Prepetition Credit Agreement”), among LodgeNet Interactive, Gleacher Products Corp., as administrative agent (the “Administrative Agent”), and the lenders that are parties thereto from time to time (the “Prepetition Lenders”). The Prepetition Credit Agreement originally provided LodgeNet Interactive with up to $625,000,000 in aggregate principal amount of term loans (including a $400,000,000 initial term loan and a $225,000,000 delayed draw term loan) and $50,000,000 in aggregate maximum principal amount of revolving commitments, with a sublimit for letters of credit of $15,000,000. In March 2011, the Prepetition Credit Agreement was amended and the aggregate maximum principal amount of revolving commitments available thereunder was reduced to $25,000,000 with the sublimit for letters of credit reduced to $7,500,000. As of December 31, 2012, the approximate outstanding principal, interest (accruing at the default rate) and fees owing under the Prepetition Credit Agreement was $332,628,759 under the term loan (net of the portion owned by On Command Video Corporation, one of the Debtors in these cases), and $21,492,008 in borrowings under the revolver, with an additional $350,000 of issued and outstanding letters of credit. These amounts exclude the $20,624,513 amount outstanding under the Prepetition Credit Agreement held by On Command Video Corporation, which will be waived and disallowed under the Plan.
To secure the obligations under the Prepetition Credit Agreement, the Debtors entered into the Guarantee and Collateral Agreement, dated as of April 4, 2007, among the Debtors (other than LodgeNet Interactive, each of the Debtors, in its capacity as guarantor under the Guarantee and Collateral Agreement, a “Guarantor”) and the Administrative Agent (the “Guarantee and Collateral Agreement”). Under the Guarantee and Collateral Agreement, (a) each of the other Debtors other than LodgeNet Interactive guaranteed the obligations of LodgeNet Interactive under the Prepetition Credit Agreement, and (b) each of the Debtors granted to the lenders a security interest in substantially all of their assets, including all (i) accounts, (ii) chattel paper, (iii) contracts, (iv) deposit accounts, (v) documents, (vi) equipment, (vii) general intangibles, (viii) instruments, (ix) intellectual property, (x) inventory, (xi) investment property, (xii) letter of credit rights, (xiii) vehicles, (xiv) commercial tort claims, (xv) goods and other property, (xvi) books and records and (xvii) proceeds and products of any of the foregoing. LNET Canada is not a Guarantor.
In addition to the foregoing, the Debtors estimate that as of December 31, 2012, they had approximately $60 million in outstanding accounts payable.
Recent Financial Information
As of September 30, 2012, the Debtors’ unaudited consolidated financial statements reflected assets totaling approximately $292 million and liabilities totaling approximately $449 million. The Debtors’ total revenues for the three-month period ended on September 30, 2012 amounted to approximately $91 million, a 15% decrease over total revenues for the same period in 2011.
Reasons for Bankruptcy Filing
Declining Room Base and Revenues Per Room. The Debtors have suffered declining revenues over the last several years. The Debtors’ financial difficulties primarily result from downward trends in the number of hotel rooms in which the Debtors’ systems are available and the revenue generated per room. The Debtors’ room base has declined from a peak of 2 million in 2009 to 1.5 million as of today. Further, the average monthly revenue per room has declined from $24.53 in 2007 to $20.71 today. There are a variety of macro-economic and industry specific reasons for these declines.
Declines in revenue are attributable to multiple causes, including declining room base, source and cost of alternative source of programming and content, reduced demand for full-length theatrical programming by business travelers with increasingly reduced in-room “free-time,” higher quality mobile devices, reductions to discretionary spending by travelers due to an uncertain economic environment, and inadequate capital to hasten the pace in upgrading existing rooms to HD, which is necessary to meet consumer expectations for an “at home” HD experience.
In particular, the Debtors’ business has been negatively impacted by the mobile device revolution. In the past few years, there has been a dramatic increase in the number of hotel guests traveling with laptop computers, tablets, and other mobile devices. The ability of guests to view programming on their individual devices on Netflix, Hulu, Amazon and other streaming websites, at lower prices than the Debtors’ on-demand services, has decreased the purchase rate per room. The Debtors believe that guests will usually gravitate to the largest and best screen available for their media content, and therefore, with the upgrades to the HD platform and the Debtors’ other programming options, they can reverse the trend of decreasing revenue per room.
Financial Covenants. The Debtors’ revenues have also been adversely affected by the Debtors’ decreased liquidity over the past year. Due to their liquidity position, the Debtors have been unable to make the capital investments in their equipment, roll-out new services and products, and complete all requested hotel upgrades necessary to grow the business. The liquidity position was caused by declining revenues, as well as significant prepayments to the Debtors’ lenders under the Prepetition Credit Agreement.
The Prepetition Credit Agreement includes certain financial covenants, the violation of which constitute events of default. One of the financial covenants required the Debtors to maintain a Consolidated Leverage Ratio of no more than 4.00:1.00 for the four fiscal quarters ending September 30, 2012 and 3.75:1.00 for the four fiscal quarters ending December 31, 2012. The Consolidated Leverage Ratio calculates the consolidated total debt
divided by the consolidated EBITDA for the applicable period. As the Debtors’ revenues have declined, it has been more difficult for the Debtors to satisfy the covenant. To comply with the financial covenant and avoid an event of default under the Prepetition Credit Agreement, the Debtors made prepayments to the Prepetition Lenders, which reduced the total debt. The Debtors made prepayments to the Prepetition Lenders in the aggregate amount of approximately $200 million from 2008 through 2010 (net of amounts attributable to the portion of the Prepetition Credit Agreement debt owned by On Command Video), approximately $1.9 million (net) in 2011, and approximately $30 million (net) in 2012. These prepayments impaired the Debtors’ ability to make essential capital expenditures to enhance their business.
The Debtors did not satisfy the Consolidated Leverage Ratio for the third quarter of 2012. In addition, the Debtors did not make scheduled interest and principal payments under the Prepetition Credit Agreement due to the Prepetition Lenders on December 31, 2012 in the approximate amount of $10 million. The Prepetition Lenders agreed to forbear from exercising remedies under the terms of the Prepetition Credit Agreement as a result of the breach of the Consolidated Leverage Ratio and the failure to make interest and principal payments until February 5, 2013.
The Debtors’ decreased liquidity also caused them to delay certain payments due to several of their vendors in 2012. Specifically, as of September 2012, the Debtors had large overdue amounts due to DIRECTV and HBO. To prevent certain vendors from terminating services that would have irreparably damaged the Debtors’ business, the Debtors entered into forbearance agreements with DIRECTV and HBO in September 2012, under which the Debtors agreed to comply with payment schedules for outstanding amounts. DIRECTV and HBO have further agreed to extend the payment schedules from time to time. Under the terms of the DIRECTV and HBO forbearance agreements, as amended, the Debtors have payments in the amount of $36 million due to DIRECTV and HBO, in the aggregate, on or before February 5, 2013. The Debtors do not have available funds to make these payments to DIRECTV and HBO.
Pre-Bankruptcy Key Employee Incentive Plan and Key Employee Retention Plan
In connection with the Debtors’ efforts to enter into a restructuring transaction, the board of directors of LodgeNet Interactive determined it was in the best interests of the Company to implement incentive and retention programs for those employees considered critical to maintaining operations unabated until a transaction could be consummated. As a result, on November 21, 2012, the compensation committee of the board of directors of LodgeNet Interactive approved a key employee incentive plan (a “KEIP”), which provides for payments to seven of LodgeNet Interactive’s senior executives, and a key employee retention plan a (“KERP”), which provides for payment to 44 additional employees.
Under the KERP, payments in the aggregate amount of approximately $1.4 million could be paid to 44 employees. The KERP amount represents approximately 20 – 25% of their respective salaries. Half of this amount was paid December 2012 and the other half is payable upon the earlier to occur of the closing of a restructuring transaction or July 31, 2013. To be entitled to receive the second payment and keep the first payment, each of these employees must remained employed by the Debtors, unless terminated without cause or the employee resigns for good reason, until the closing of a transaction or July 31, 2013.
Under the KEIP, it was originally estimated that payments in the aggregate amount of approximately $1.1 million would be paid to 7 employees. Similar to the KERP, the KEIP contemplates two payments – one paid in December 2012 and the other upon the earlier to occur of the closing of a restructuring transaction or July 31, 2013, so long as the employee remains employed by the Debtors, unless terminated without cause or the employee resigns for good reason. One-third of this amount (approximately $365,200) was paid in December 2012. The remaining payment is subject to the Debtors meeting their cumulative EBITDA targets per quarter and fluctuates by 2% for every 1% over or under the applicable EBITDA target. No second payment is made if the Debtors do not achieve at least 85% of the EBITDA target and the second payment is capped at 125% of the EBITDA target or $1,096,000.
While the KEIP originally included 7 employees, after successfully guiding the Debtors through a strategic review process culminating in entry into the Investment Agreement, Richard Battista resigned as President and Chief Executive Officer of LodgeNet Interactive, effective January 16, 2013. Following Mr. Battista’s resignation, Frank Elsenbast, Chief Financial Officer, and James Naro, General Counsel, were named to concurrently serve as
interim Co-Chief Executive Officers. While there was no adjustment to their salaries, in recognition of their increased duties, their payments under the KEIP were increased by $25,000 each. This adjustment is less than the amount originally estimated to be paid to Mr. Battista; thus, the potential payments under the KEIP will be less than the original estimates.
Links to Free Copies of Key Bankruptcy Court Filings
We’ve posted free copies of the following documents on our website for you to read and even download. Click the links to view the documents.
- Chapter 11 Bankruptcy Petition
- First Day Declaration of Co-Strategic Planning Officer
- Proposed Pre-Packaged Plan of Reorganization
- Disclosure Statement Accompanying the Proposed Plan of Reorganization