On May 18, 2012, the Bankruptcy Court for the Northern District of Texas confirmed Reddy Ice’s chapter 11 plan, paving the way for the Company to exit bankruptcy. The Company announced that it would be prepared to exit bankruptcy in the next week or so. Reddy Ice filed for chapter 11 bankruptcy on April 12 with a prepackaged plan, announcing that it anticipated a quick trip through bankruptcy. The Company was correct.
Reddy Ice’s plan was largely accepted by creditors. More than 80% in amount and over 90% in number of the company’s first-lien and second-lien noteholders and 100% of the company’s senior discount noteholders voted in favor of the plan.
Pursuant to the plan, Reddy Ice’s debt will be reduced by approximately $145 million and cash interest expense will be reduced by approximately $20 million annually. Reddy Ice will also receive approximately $25 million in new capital infusions, including a $7.5 million preferred stock investment by Centerbridge Capital Partners II and a $17.5 million preferred stock rights offering to the holders of the Company’s second-lien secured notes, backstopped by Centerbridge.
Former equity will even receive a distribution under the plan–a rare occurrence. Under the absolute priority rule, found in section 1129(b) of the Code, unless creditors agree to a different treatment, former equity can only receive a distribution once all creditors claims are satisfied in full. In Reddy Ice’s case, prepetition stockholders will share $2.4 million in cash on a pro rata basis. Holders of at least 25,000 shares of common stock will have the option to receive new common stock in the reorganized company, instead of cash. And if Reddy Ice completes an acquisition of Arctic Glacier Income Fund, stockholders will share an additional $1.2 million in cash.
While the plan was largely accepted by creditors, Reddy Ice did face some resistance from former shareholders, who attempted to form an official committee with a strong voice in the case. The valuation of the Company became the focus at that point. The shareholder group’s advisor and valuation expert, Blackhill Partners, estimated Reddy Ice’s value in the range of $470-503 million, while Reddy Ice’s advisors, Jeffries, estimated the value in the $382-434 million range. Siding with the Company, the bankruptcy court denied the shareholder’s request to form a committee. If an equity committee had been formed, it likely would have fought hard for a higher return to shareholders under the chapter 11 plan. This could have stymied the path to confirmation of the plan.
Reddy Ice is a good example of the usefulness of prepackaged plans in avoiding substantial restructuring costs. The Company could be in and out of bankruptcy in less than 2 months.
These prepackaged plans are particularly useful when a debtor, like Reddy Ice, is simply looking to reorganize its capital structure; as opposed to reorganizing operations. In the former instance, the debtor is commonly able to negotiate with sophisticated investors, who can more readily determine a return on their investment through a recapitalization or other strategic options proposed by the debtor.
There should be no doubt that in Reddy Ice’s case, the Company was able to convince its lenders, prior to the bankruptcy being filed, that they could obtain a higher return through the prepackaged plan, which contemplated Reddy Ice’s acquisition of its main competitor, Arctic Glacier, once it cleaned up its balance sheet in the bankruptcy. Indeed, the shareholders advisor estimated that Reddy Ice’s value would increase to an amount between $753 to $851 million after the acquisition of Arctic. That is a remarkable difference from the pre-acquisition valuation of the Company.
- Reddy Ice Reports First Quarter 2012 Results (sacbee.com)