Distressed Debt Investing: 2016

Last year, Reorg Research launched Reorg First Day which is definitively the best way for investors, advisers or lawyers to stay on top of new bankruptcy filings across the United States. The product gives a detailed overview of the first day pleadings on all cases with more than $10M in liabilities. This is invaluable information for distressed funds looking for off the run cases, private equity funds looking for 363 sales or sales of entire businesses / divisions or lawyers and looking for engagements across the creditor stack.

Below is Reorg First Day's coverage today of the Gawker Media bankruptcy filing, which we are providing to the broader community due to the intense public interest in the case (This is Part II of a two part series). To learn more about Reorg First Day or to request a free trial, click HERE or email firstday [at] reorg-research.com.

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Gawker Media, LLC
Gawker Case Summary: Part II: Gawker to Sell Assets ‘Quickly’; TRO Granted on Gawker’s Request to Enjoin Enforcement of Hogan Judgment Against Denton

Relevant Documents:

First Day Declaration
DIP Financing Motion
Bid Procedures Motion

As discussed in Part I, Gawker Media, the online media company embroiled in a long-running legal battle with Terry Gene Bollea, also known as Hulk Hogan, filed chapter 11 on Friday after the Florida court overseeing Bollea’s sex tape lawsuit ruled that it would allow the plaintiffs to begin executing the $140.1 million judgment, $130 million of which is attributable to Gawker, by securing liens on the debtors’ property. The lawsuit stems from Gawker’s publication of a voyeuristic home video recorded by Hogan’s erstwhile best friend, former Sirius/XM shock jock Bubba the Love Sponge. The video depicted a romantic encounter between Hogan and the Love Sponge’s wife. In this piece, we will address Gawker’s request for first day relief.

Gawker intends to sell the company “quickly” through a 363 process, having entered into an asset purchase agreement with stalking horse bidder ZDGM, which is an affiliate of Ziff Davis, a subsidiary of j2 Global (Nasdaq: JCOM). ZDGM’s bid is for $90 million plus the assumption of certain liabilities, but excluding the Bollea judgment. According to several news outlets including Reuters, during Bollea’s trial, the jury was told in late March that Gawker Media was valued at $83 million.

Gawker also requests $22 million in DIP financing from Cerberus Business Finance, consisting of a $17 million term loan and a $5 million revolving credit facility. The DIP would be used to roll up all of the company’s outstanding obligations under its prepetition first lien credit agreement.

The company’s prepetition capital structure includes:

Secured debt:
- First lien term loan: Silicon Valley Bank: $6.2 million, plus $5.3 million for a posted but undrawn letter of credit
- Second lien term loan: US VC Partners: $15 million
  - Credit agreement provides for a 25%, or $3.75 million make whole
Intercompany debt: $13 million owed to Kinja and $250,000 owed to GMGI
Unsecured debt:
- Litigation claims: more than $250 million
Equity: GMGI is privately held, with Denton as the largest shareholder. A list of GMGI’s equityholders is HERE.

Also discussed in Part I, Gawker filed an adversary proceeding requesting injunctive relief to enjoin various litigations against the company’s founder, CEO and president, Nick Denton and Gawker’s former editor-in-chief, A.J. Daulerio (the author of the Bollea story), including a request that Bollea be temporarily restrained and enjoined from enforcing the judgment as against Denton and Daulerio. The jury awarded $140.1 million, with Denton and Daulerio each jointly and severally liable on $115 million of the judgment, and an additional $10 million and $100,000 of punitive damages assessed against Denton and Daulerio, respectively. The bond to stay execution of the judgments pending appeal is $50 million for each of the Bollea litigation defendants. In addition to refusing to reduce the cash bond and denying Gawker’s request to post stock or alternative collateral in place of the bonds, the Florida court made the judgments available for execution as of Friday. The bankruptcy court entered a temporary restraining order and scheduled a conference on the adversary proceeding before Judge Bernstein on Wednesday, June 15, at 11 a.m. EDT. At the June 15 conference, the court will address scheduling matters in connection with the motion, including scheduling an evidentiary hearing.

Gawker Media’s parent, Gawker Media Group, Inc., and subsidiary, Kinja Kft., based in Budapest, Hungary, filed petitions on Sunday night. Kinja owns the proprietary publishing and discussions platform and intellectual property used by Gawker Media’s brands and websites. Gawker Media has an exclusive license of these assets as well as intercompany arrangements with Kinja to enable the affiliates to maximize use of their complementary assets and employees.

The case representatives are as follows:

DIP Financing

Gawker requests $22 million in DIP financing, consisting of a $17 million term loan and a $5 million revolving credit facility, with Cerberus Business Finance as agent, and Cerberus or one or more of its affiliates as lenders. The debtors request $14 million on an interim basis, including $12.3 million to repay all outstanding obligations under the prepetition first lien credit agreement and cash collateralize outstanding letters of credit in an amount equal to 105% of the letter of credit.

The financing bears interest of LIBOR + 8% (with a 1% LIBOR floor) or the “Reference Rate” plus 7% (subject to a 3% floor). During an event of default, 2% would be added. In addition, the DIP loan is being issued with a 4% original issue discount. The loan also includes a 2% commitment fee and a 0.75% unused line fee.

The loan matures on the earliest of 12 months after entry of the interim order, substantial consummation of a plan of reorganization and the sale of substantially all of the debtors’ assets.

The debtors’ 13-week cash flow can be found HERE.

The DIP would prime the liens of the second lien facility, with the second lien lender’s consent. By virtue of the $90 million stalking horse bid, the debtors say that the first lien lenders’ claims are “significantly” oversecured.

Adequate protection for the second lien lenders includes replacement liens and superpriority administrative expense claims (to attach to avoidance actions subject to the final order).

The loan is subject to the following milestones:

First day orders: entered by June 16
Final DIP order: entered within 30 days of interim DIP order

The DIP agent would have the right to credit bid.

Changes of control include if GMGI no longer has beneficial ownership of 100% of the voting power of the equity interests in the debtors.

The lien challenge period for the official unsecured creditors committee or any other party in interest would be 60 days from entry of the final DIP order.

The post-default carve out for professionals’ fees (excluding success or transaction fees) is $500,000.

The debtors also filed the declaration of William Holden in support of the DIP financing.

Sale Process

The debtors’ prepetition marketing process began with the retention of Houlihan Lokey on May 16. After targeting six potential stalking horse bidders and receiving two term sheets, Gawker entered into an asset purchase agreement with stalking horse bidder ZDGM, an affiliate of Ziff Davis, for a purchase price of $90 million plus the assumption of certain liabilities (excluding liabilities relating to the Bollea litigation), subject to certain adjustments. The debtors say that press reports on a potential sale have “generated additional inbound interest from strategic parties.”

The asset purchase agreement, which the debtors seek to assume, allows the buyer to terminate the agreement if the following deadlines are not met:

Bid procedures/APA assumption order: entered within 21 days of petition date
Sale order: entered within 60 days of petition date, and becomes final within 75 days of petition date

Gawker or the buyer may terminate the APA if the closing has not occurred within 120 days of the date of the agreement.

The debtors propose a breakup fee of $2.475 million (2.75% of the purchase price) and an expense reimbursement up to $1.25 million. In addition, if the APA is terminated by the stalking horse buyer under certain circumstances, then the buyer would be entitled to $13.5 million in liquidated damages.

Bids must include a 10% deposit. Initial overbids must exceed the stalking horse bid, the breakup fee, the expense reimbursement, plus $1 million. Subsequent overbids are $1 million.

The debtors entered into a consulting agreement with Denton, dated June 10, pursuant to which Denton would serve as consultant and advisor for 24 months after the closing date, for a monthly fee of $16,666. In addition, the APA also includes what the debtors describe as a “limited no shop” provision.

The stalking horse agreement provides for the purchase of all avoidance actions.

The debtors propose the following sale timeline:

June 27 at 4 p.m. EDT: Bid procedures objection deadline
July 5 at 10 a.m. EDT: Bid procedures hearing
July 11: File and serve cure notice
July 25 at 4 p.m. EDT: Preliminary bid deadline
July 27 at 5 p.m. EDT: Bid deadline
July 28: Deadline to designate qualified bidders
July 29 at 10 a.m. EDT: Auction
Aug. 3 at 10 a.m. EDT: Sale hearing

A hearing on the bid procedures motion is scheduled for July 5, at 10 a.m. EDT, with objections due by June 27, at 4 p.m. EDT. A sale hearing has been scheduled for Aug. 3, at 10 a.m. EDT, with objections due by July 25, at 4 p.m. EDT.

Adversary Proceeding for Preliminary Injunction

Gawker has filed a motion to preliminarily enjoin the actions as against Denton and the individual defendants that are current or former employees of the debtors pending termination of the automatic stay to stay the actions as against these parties. In addition, Gawkerrequests that the Bollea lawsuit be enjoined against Denton and Daulerio, Gawker’s former editor-in-chief.

Gawker also filed a memo of law in support of the motion for a preliminary injunction and for a TRO, the declaration of CRO William Holden and the declaration of Michael Winograd, counsel with Ropes & Gray.

The debtors explain that the Florida state court entered a judgment that provides, “let execution issue forthwith.” (emphasis in original). Gawker seeks the injunctive relief to avoid enforcement of any judgment against Denton and Daulerio, because it says that would trigger “crippling” indemnification obligations for the debtors, as Denton is fully indemnified by the debtors in connection with the litigation judgments. Gawker also says that at least one of the other individual defendants, Ms. Darbyshire, has similar contractual indemnity rights, and that the remaining individual defendants, plus Darbyshire and Denton, are subject to a company practice and policy of indemnification. Further, according to the filings, execution of the judgment against Denton would drive him to file for personal bankruptcy.

The debtors say that in the “unlikely event” that Denton would not file for personal bankruptcy failing granting of the requested injunctive relief, that his assets “undoubtedly would be seized immediately” to satisfy the Bollea judgment. Gawker continues that because Denton’s assets are substantially comprised of his stock in Gawker Media Group, Inc., Gawker Media’s parent, “Bollea would become a substantial owner of GMGI, thereby defeating the Debtor’s chance at a successful reorganization.” This would be an “especially inequitable result”, Gawker asserts, because the Bollea litigation is subject to an appeal and Bollea only holds a contingent, unliquidated litigation claim. Further, the debtors add, “the driving force behind the Bollea Litigation is Peter Thiel, a billionaire investor, who holds a personal vendetta against the Company and has publicly admitted that he funded the Bollea Litigation, and other lawsuits against Gawker to (as the New York Times reports) ‘try to put the media company out of business.’”

Critical Vendor Motion

The debtor seeks approval to pay up to $365,000 to critical vendors on a final basis, with $95,000 sought on an interim basis, and up to $20,000 in foreign critical vendor claims. The names of the vendors are not disclosed in the filings but consist of companies that provide advertising operations, IT and hosting, editorial services, specialized campaign services and general and administrative services.

Other Motions

In addition to the motions described above, Gawker Media also filed various standard first day motions, including the following:

Motion for Joint Administration
- The cases will be jointly administered under case No. 16-11700 (SMB).
Motion to Pay Employee Wages and Benefits
- Gawker has approximately 102 full-time and part-time employees, Kinja has 25 employees that provide technology and programming, editorial and administrative services, and parent, GMGI, does not have any employees. The debtors also employ approximately 160 independent contractors and one temporary employee.
- All of Gawker’s full-time and regular part-time non-executive editorial employees, representing 102 workers, are members of the Writers Guild of America, East and party to a collective bargaining agreement withGawker. The debtors have approximately $136,239 in severance obligations outstanding as of the petition date.
- Gawker requests approval to pay up $1.7 million in prepetition employee obligations on a final basis, with $881,000 on an interim basis.
Motion to Use Cash Management System
- The company has bank accounts with Silicon Valley Bank and K&H Bank in Hungary. There is approximately $2.97 million in an operating account at Silicon Valley Bank.
- Gawker intends to make up to $150,000 in monthly postpetition intercompany transfers to Kinja. However, Gawker does not intend to make payments during these cases with respect to $10.9 million in accounts payable due from Gawker to Kinja on account of a master license agreement and services agreement, on account of $13 million in issued promissory notes between Gawker and Kinja, or on account of a $250,000 promissory note with GMGI.
- The debtors also seek to pay approximately $100,000 owed with respect to an American Express credit card account.
Motion to Maintain Insurance Programs
Motion to Pay Taxes and Fees
- The debtors seek approval to pay up to $45,000 in property taxes and $67,300 in various Hungarian taxes on a final basis, with $45,000 and $20,000 sought, respectively, on an interim basis.
Motion to Provide Utilities with Adequate Assurance
Motion to Extend Time to File Schedules to July 14
Motion to Establish Case Management Procedures