CASE PROFILE: Appvion aims to deleverage balance sheet in Chapter 11 armed with USD 325.2m DIP from first liens

 

Appvion Inc. has filed for Chapter 11 protection amidst a struggling paper industry and tightening liquidity constraints. The company plans to delever its balance sheet and is seeking approval of a partially rolled-up USD 325.2m debtor-in-possession (DIP) financing facility from first lien lenders.

 

Judge Kevin Carey of the US Bankruptcy Court for the District of Delaware has set a first-day hearing for Tuesday (3 October) at 11am ET. Appvion, which filed for Chapter 11 on Sunday (1 October), is looking to use USD 65m of its DIP on an interim basis.

 

 

CLICK HERE to view all Appvion Inc. Chapter 11 filings on Debtwire Dockets.

 

The company

 

The Appleton, Wisconsin-headquartered company manufactures specialty coated-paper products. Charles Boyd founded the company in May 1907 as The Appleton Coated Paper Company, Alan Holtz of AP Services, an AlixPartners affiliate, said in a first-day declaration. Holtz is Appvion’s proposed chief restructuring officer.

 

Through a series of mergers and acquisitions, the company began to develop and produce carbonless paper, acquired pulp and paper mills, and eventually became known by its current name on 9 May 2013, Holtz said.

 

On 9 November 2001, 90% of the company’s employees purchased Appvion from Arjo Wiggins Appleton plc through an employee stock ownership plan, according to court papers. The employees invested USD 107m in the plan and facilitated the transaction by purchasing all of the stock in Appvion’s parent company, Paperweight Development Corporation, which is also a debtor in the Chapter 11 case.

 

 

Appvion has two primary operating segments – a thermal paper segment and a carbonless paper segment. Thermal paper, which accounted for about 60% of net sales in 2016, serves four main markets, Holtz said. It is used to make “point-of-sale” products such as retail receipts and coupons; labels; tickets for airlines, transportation, events, and the lottery; and calculator and chart paper. Appvion is the largest manufacturer of direct thermal paper in North America, according to the first-day declaration.

 

Carbonless paper, which accounts for 40% of the company’s sales, is used to make forms like invoices and purchase orders.

 

The debtors own three manufacturing plants. A plant in Appleton produces thermal, carbonless and specialty papers and another in Pennsylvania produces similar products. Appvion also has a plant in Ohio that produces only thermal paper products. As of the petition date, the company had about 1,350 employees, 915 of which are covered by union contracts.

 

The debt

 

In its Chapter 11 petition, Appvion listed USD 714.8m in total debt and USD 413.4m in assets. Its secured debt stems from a USD 435m credit facility from June 2013 with Jefferies Finance, Fifth Third Bank and KeyBank National Association. The facility included a USD 335m first lien term loan and a USD 100m revolving credit facility. As of the petition date, the debtors owed USD 240.8m.

 

On 19 November 2013, Appvion issued USD 250m in 9% second lien senior secured notes due 2020. US Bank is trustee and collateral agent on the notes, which have USD 257.5m outstanding.

 

Appvion also has an accounts receivable securitization program from June 2014 with an initial commitment size of USD 30m, of which USD 24m was outstanding as of the petition date.

 

 

The company additionally owes USD 2.2m in pending workers’ compensation claims. The Pension Benefit Guaranty Corporation has an unliquidated claim.

 

 

The descent

 

Appvion filed for Chapter 11 protection in the face of negative industry trends, unsustainable balance sheet leverage, the inability to address upcoming maturities, and dwindling liquidity.

 

While Holtz said the thermal paper market is continuing to grow by developing new applications to use thermal technology, the market for carbonless paper is a different story. The carbonless paper market has been in decline since 1994 due to greater use of competing technologies, like digital laser, inkjet and thermal printers, along with electronic communications, he said. In contrast, the thermal market expanded between 2011 and 2016 at a 2% compound average growth rate, with annual rates ranging from increases of 1% to 3%, he added.

 

But as a whole, the North American paper industry really began to shrink in the mid-2000s, resulting in the closure of paper mills throughout the industry, court documents show. In particular, the coated paper industry faces a long-term decline as consumers’ dependency on digital technology has increased. As a result, Holtz said Appvion began to sell off certain business lines and implement savings projects to improve its financial performance.

 

In 2015, Appvion faced further challenges from a “soft” pricing environment in thermal paper point-of-sale products, like receipts and coupons, Holtz said. The next year, the company executed a business plan that resulted in a 20% adjusted EBITDA improvement.

 

Revenues from sales to customers in the US fell from USD 568.6m in 2014 to 526m in 2015. However, sales rose some to USD 529.7m in 2016. Revenues from sales to customers in foreign countries also dropped from USD 196.1m in 2014 to USD 174m in 2015. But unlike in US sales, there was no uptick and the numbers dropped further to USD 160.7m in 2016.

 

This past spring, Appvion began exploring a refinancing of its senior debt, with a focus on extending the maturity of existing debt and raising additional liquidity. On 5 April, the company engaged Guggenheim Securities as investment banker to address impending debt maturities and explore an out-of-court refinancing. Guggenheim contacted the company’s existing senior lenders, and had about 23 third parties sign non-disclosure agreements. Appvion ultimately received four new-money proposals, but a refinancing with appropriate terms wasn’t feasible due to the nature of the company’s debt, its financial condition and near-term liquidity demands, Holtz said.

 

In June, Debtwire reported that Appvion had retained DLA Piper as legal counsel. The second lien noteholders retained Houlihan Lokey and legal counsel Stroock. 

 

Appvion’s earnings outlook for 2Q17 dropped as a result of a tornado during the quarter that damaged a warehouse the paper manufacturer leases, as reported by Debtwire.

 

On 8 August, CEO Kevin Gilligan and new CFO Luke Kelly said during a 2Q17 earnings call that Appvion planned to institute a price increase for its thermal paper product segment in September to offset headwinds, including a weak dollar and increased competition in its carbonless paper segment. Kelly replaced former CFO Tom Ferree in June.

 

On 16 August, Appvion issued a 10-Q for the quarter ending on 2 July 2017, stating that it was evaluating whether “there is substantial doubt about its ability to continue as a going concern,” according to court papers.

 

Shortly thereafter, S&P issued a credit rating downgrade, taking Appvion’s rating from a “B-” to a “CCC.” The two announcements led vendors to request “disadvantageous” trade terms, further restricting liquidity, Holtz said. Additionally, the accounts receivable facility was about to expire in September. Holtz said the debtors ultimately determined it would be necessary to pursue a Chapter 11 case.

 

The DIP

 

Appvion’s first lien lenders are providing a USD 325.2m DIP, which rolls up USD 240.2m in prepetition debt and includes USD 85m in new money. The roll-up includes most of the USD 240.8m in outstanding debt stemming from Appvion’s senior credit facility.

 

 

Milestones in the DIP motion require the company to file a plan and disclosure statement within 120 days of the petition date, obtain disclosure statement approval within 180 days and plan approval within 240 days. The DIP also requires a plan effective date within 270 days of Appvion filing for bankruptcy.

 

 

The advisors

 

 

CLICK HERE to view the Chapter 11 petition.
CLICK HERE to view the first-day declaration.
CLICK HERE to view the DIP motion.
CLICK HERE to view the DIP credit agreement.

 

by Taylor Harrison and Joshua Friedman