SiO2

Apr 26, 2023

Submit April 25, 2023 – Following a full-throated April 21st objection from the Debtors’ Official Committee of Unsecured Creditors (the “Committee”) [Docket No. 158] and the Debtors' April 24th response [in the form of revised proposed bidding procedures, Docket No, 185], the Court hearing the SiO2 Medical Products cases has issued a considerably revised bidding procedures order which in terms and presentation (the Debtors going so far as to provide the Court with a blackline of their revised order against one proposed by the Committee) will likely be viewed as a considerable win for the Committee and a setback for the Debtors and their prepetition/DIP lender Oaktree. The Committee also filed an equally strident objection to the Debtors' debtor-in-possession ("DIP") financing which apparently has now also been resolved to the satisfaction of the Committee with the Debtors' providing as to the status of their DIP motionin the agenda for their April 26th hearing "The Debtors have filed a revised form of consensual order under certification of counsel. Unless the Court directs otherwise, no hearing is necessary." More on this when we see the revised DIP order. Amongst significant changes in respect of bidding procedures: A significant prolongation of the auction/sale timetable (although not by the month requested by the Committee, see below) The ability of bidders to bid for all or part of the Debtors' assets…and not just reorganized equity The removal of Oaktree's $349.0mn cash floor (enough to satisfy Oaktree's prepetition and DIP loans) as to bids; this also addresses the Committee's concerns that Oaktree's "purported [and currently being investigated] make-whole claim of approximately $43.5 million" (which is included in Oaktree's tally of prepetition debt) serves to chill bidding Removal of Oaktree as a "Consultation Party" in respect of bids above $349.0mn (and addition of Committee to list of Consultation Parties) Approved Key Dates Bid Deadline: June 12, 2023 (was May 29) Deadline to notify all Qualified Bidders of the highest or otherwise best Qualified Bid: June 14, 2023 (was June 2) Auction (if required): June 15, 2023 (was June 5) Deadline for objections: June 16, 2023 (was June 6) Confirmation Hearing: June 22, 2023 (was June 15) Effective Date Deadline: Deleted (was June 27th) Key Revised Language On possibility to acquire all, or part of, the Debtors' assets: "A party may participate in the bidding process by submitting a bid for (a) the New Common Stock, (b) all or substantially all of, or a subset of the Debtors’ assets (including, for the avoidance of doubt, any causes of action belonging to the Debtors, rights under leases or other contracts, and intellectual property rights or other intangible assets other than claims and causes of action under chapter 5 of the Bankruptcy Code except such claims and causes of action against vendors) (the “Assets”), or (c) one or more, or any combination of, Assets as that party may desire. On removal of $349.0mn cash floor: The specific reference to $349.0mn of cash is now dropped in the bidding procedures with the qualified bids now required to include a cash element that covers "Allowed DIP Claims" and "Allowed First Lien Term Loan Claims." Additionally, the Debtors take a step back from that bright line test for a qualified bid by noting: "The Debtors will consider, and parties are encouraged to submit, any and all bids for some or all of the Debtors’ Assets (in any combination), whether or not such bid satisfies the Bid Requirements." Committee Objection to Bidding Procedures In challenging the Debtors' proposed sale process, the Committee notes that: "certain important matters remain unresolved. More specifically, as currently structured, the proposed Bidding Procedures appear destined to result in the Debtors’ largest stakeholder—Oaktree Capital Management L.P. and its affiliates (collectively, ‘Oaktree’), which is a prepetition equity holder, the prepetition first-lien lender, the postpetition DIP lender, and the proposed Plan sponsor—acquiring the Debtors’ business in a transaction that is slated to provide zero value to unsecured creditors. Simply put, if Oaktree wants to use this Court to run an expedited foreclosure process, then it needs to pay for the costs of that proceeding — including providing some prospect of a real recovery to unsecured creditors. Unless and until those defects are remedied, the Court should deny approval of the Motion." Drilling down (see also further below), the Committee wants the Court to (i) extend the sale timetable for a month, (ii) allow bids to be structured as offers for the Debtors' assets (not just equity as currently envisaged), (iii) carve conflicted Oaktree out from the the list of "Consultation Parties" and (iv) remove an existing (arguably bid-chilling) requirement that third party bids "satisfy Oaktree’s prepetition term loans including a purported make-whole claim of approximately $43.5 million (or approximately 19.4% of the principal amount) in full in cash" [at least until the committee completes its investigation into Oaktree's make whole claim]. The objection [Docket No. 158] provides, “By the Bidding Procedures Motion, the Debtors seek authority to conduct a marketing process and, potentially, auction for the Debtors’ reorganized equity. Following the Committee’s formation and engagement of advisors a week ago, the Committee’s professionals have engaged in productive discussions with the Debtors’ professionals regarding various issues related to the proposed marketing process. Those discussions have resulted in agreement on certain issues. However, certain important matters remain unresolved. More specifically, as currently structured, the proposed Bidding Procedures appear destined to result in the Debtors’ largest stakeholder—Oaktree Capital Management L.P. and its affiliates (collectively, ‘Oaktree’), which is a prepetition equity holder, the prepetition first-lien lender, the postpetition DIP lender, and the proposed Plan sponsor—acquiring the Debtors’ business in a transaction that is slated to provide zero value to unsecured creditors. Simply put, if Oaktree wants to use this Court to run an expedited foreclosure process, then it needs to pay for the costs of that proceeding — including providing some prospect of a real recovery to unsecured creditors. Unless and until those defects are remedied, the Court should deny approval of the Motion. With that context in mind, the Court should deny the Motion for four principal reasons. As a general matter, proposed bidding procedures in chapter 11 cases must establish a framework for competitive bidding in order to ensure maximization of value. The procedures governing a sale process should be designed to foster the competitive process, and bankruptcy courts should ‘not allow anything to chill an active marketing and auction process.’ Here, the proposed timeline requires binding bids by May 29, 2023, which is 61 days after the Petition Date and just over one month from the date of the hearing to approve the Motion. To justify this abbreviated marketing period, the Debtors tout their ‘robust’ prepetition marketing process. The record tells a different story, which is that the Debtors began to market their assets for a de minimis period of time prepetition. More troubling, the proposed transaction contemplates the acquisition by an insider (which is always a matter that requires a more searching analysis from the Court) in a transaction that provides zero value to unsecured creditors. To level the playing field, the Court should condition approval of the Motion on a limited, one-month extension of the marketing process. The Bidding Procedures require bidders to invest in the reorganized equity rather than some or all of the assets. The requirement to acquire the reorganized equity rather than assets (such as the Debtors’ state of the art facility in Alabama and the Debtors’ extensive patent portfolio) could significantly limit the number of Bids and discourage potential bidders that may otherwise be interested in some of all of the Debtors assets. To ensure a value-maximizing sale process—whether a Bid takes the form of an equity or asset transaction—the Court should require the Debtors to consider Bids for reorganized equity or the Debtors’ assets. The proposed Bidding Procedures designate Oaktree as a Consultation Party entitled to review all Bids as well as receive other information regarding the sale process that no other potentially interested party may receive. The fact that Oaktree may receive the inside scoop on potential bids and other key developments is particularly suspect in light of the many hats that Oaktree wears in these cases, including prepetition equity holder, prepetition lender, DIP lender, and proposed plan sponsor. Courts in this jurisdiction have held that when a lender is a bidder, it can no longer be a consultation party. Oaktree and the Debtors have it backwards. Oaktree cannot make its best and final offer, in this case, its credit bid, and remain a Consultation Party. The Bidding Procedures provide that any potential Qualified Bid must satisfy Oaktree’s prepetition term loans including a purported make-whole claim of approximately $43.5 million (or approximately 19.4% of the principal amount) in full in cash. The Committee is actively investigating Oaktree’s make-whole, which may arguably constitute unmatured interest that other courts—including in this District—have disallowed in bankruptcy cases. Pending the Court’s determination whether Oaktree’s make-whole claim constitutes an allowed claim, the requirement to satisfy any such purported claim in full in cash will chill bidding by imposing an additional $43 million cost to a potential acquisition. To ensure that potentially interested parties are not dissuaded from bidding due to the requirement to satisfy the make-whole in full in cash, the Court should require the Debtors to consider potential Bids that do not satisfy the purported make-whole claim in full in cash. Furthermore, the Committee urges the Debtors to state in any process letters or similar communications to potentially interested parties that the Debtors will seriously consider potential Bids that do not satisfy any purported make-whole claim in full in cash.” Background Bidding Procedures and Marketing Process [NB: Now Heavily Revised by Bidding Procedures Order] The motion [Docket No. 17] reads: “The Debtors commenced these chapter 11 cases with a single objective: reorganizing the Debtors’ business as quickly as possible in a manner that maximizes value for all of the Debtors’ stakeholders. To that end, as described more fully in the First Day Declaration, the Debtors entered into the Restructuring Support Agreement and negotiated the Plan, contemplating that the Initial Plan Sponsors—affiliates of Oaktree Capital Management, L.P.— would equitize some or all of the Allowed First Lien Term Loan Claims and Allowed DIP Claims of the DIP Lenders (in each case, in their discretion) in exchange for 100% of the equity of the reorganized Debtors (the ‘New Common Stock’, and such transaction, the ‘Equitization Restructuring’) through the Plan. The Equitization Restructuring serves as a baseline restructuring proposal. The Plan contemplates, however, that the Debtors will continue their prepetition marketing and bidding process….These Bidding Procedures authorize the Debtors to consummate an alternative sale Transaction in the event that the Debtors receive an offer that, in their reasonable business judgment, and subject to and consistent with the terms of the Restructuring Support Agreement, represents a higher or otherwise better bid compared to the value provided by the Equitization Restructuring.’ The Debtors have already started the marketing process to create as competitive an auction as possible. As further described in the First Day Declaration, in the months leading up to the Petition Date, the Debtors with the assistance of their investment banker, Lazard Frères & Co. LLC (‘Lazard’) pursued all incremental financing options to address their acute liquidity issues and extend their runway. Having received no actionable proposals, in early 2023, the Debtors expanded their efforts and initiated a marketing process (the ‘Marketing Process’) to find potential strategic or financial purchasers of the Debtors’ businesses as a going concern. The Debtors, with the assistance of Lazard, have invested substantial time and effort in the Marketing Process: as of the date hereof, the Debtors have approached several prospective purchasers ranging from sponsors with a related portfolio company and/or that specialize in complex situations. Many of these prospective purchasers have been sent confidentiality agreements and, though some ultimately declined to proceed, discussions are ongoing with several prospective purchasers. The Debtors intend to continue market testing the Equitization Restructuring to maximize value for all stakeholders. To the extent that the Marketing Process results in viable competing bids, the Debtors will hold an auction (the ‘Auction’) pursuant to the Bidding Procedures to maximize the value of their estates. Should the Debtors ultimately select a bid as the winning bid (any such bid, the ‘Winning Bid, and any such bidder, the ‘Winning Bidder’), the Winning Bidder will become the Plan Sponsor. Any value in the Winning Bid above the value provided through the Equitization Restructuring (the ‘Additional Value’) will be distributed as set forth in the Plan. In the event that such a bid does not materialize, the Debtors will consummate the Equitization Restructuring subject to the terms of the RSA. Completing the Marketing Process on a postpetition basis will ensure the Debtors’ ability to fulfill their fiduciary duties, as it will serve as a market check on the value of the proposed recoveries to holders of Claims and Interests under the Equitization Restructuring.” General Background Under the RSA and the Debtors' Pre-arranged Plan of Reorganization: Certain affiliates, managed funds, or accounts of Oaktree Capital Management, L.P. (such funds, the “DIP Lenders”) will commit to fund the DIP Facility in the aggregate amount of $120 million on the terms set forth in the DIP Documents. The DIP Facility provides for $60 million in new money loans and a $60 million roll-up of Prepetition Term Loans held by the DIP Lenders. The Plan provides for the Initial Plan Sponsors to receive 100% of the New Common Stock issued as of the Plan Effective Date through an equitization of some or all of the Allowed DIP Claims and Allowed First Lien Term Loan Claims (with any portion of the Allowed DIP Claims and Allowed First Lien Term Loan Claims not so equitized rolled into the Exit Term Loan Facility) (the “Equitization Restructuring”). In the event of a Toggle Trigger, the Initial Plan Sponsors may elect, in consultation with the Debtors, to implement the Restructuring Transactions through a credit bid of some or all of the Allowed DIP Claims and Allowed First Lien Term Loan Claims to purchase all, substantially all, or one or more subsets of the assets of the Debtors through a sale pursuant to section 363 of the Bankruptcy Code on terms and conditions satisfactory to the Initial Plan Sponsors (the “Credit Bid Sale Restructuring”). In the event the Initial Plan Sponsors pursue a Credit Bid Sale Restructuring, the Initial Plan Sponsors and the Debtors shall determine an amount of cash to remain in the proposed Debtors’ estates, (or for the Initial Plan Sponsors to fund to the Debtors’ estates), at or prior to closing of the Credit Bid Sale Restructuring which will include (1) all Allowed Professional Fees (as defined in the DIP Order) incurred or payable prior to the closing of the Credit Bid Sale Restructuring, (2) a wind down budget consisting of (a) estimated professional fees to be incurred after the closing of the Credit Bid Sale Restructuring and (b) other agreed reasonable and ordinary expenses necessary to effectuate a wind down, and (3) all accrued and unpaid wages (and related employee claims), taxes, and other similar agreed reasonable and ordinary course of business costs and expenses incurred by the Debtors prior to the closing of Credit Bid Sale Restructuring in the chapter 11 cases that are not otherwise assumed as part of the Credit Bid Sale Restructuring. The Restructuring Support Agreement and the Plan will constitute a stalking horse bid in the Equitization Restructuring and the Restructuring Support Agreement will constitute a stalking horse bid in the Credit Bid Sale Restructuring described below, in each case subject to the terms therein, for purposes of the bidding procedures (the “Bidding Procedures”) substantially in the form attached to the Restructuring Support Agreement as Exhibit F and will be subject to higher or better bids pursuant to the Bidding Procedures. The DIP Lenders will receive, in consideration for their DIP claims, (i) where an Initial Plan Sponsor is the Plan Sponsor, on account of Allowed DIP Loans (which will include fees and interest) New Common Stock in accordance with the Stalking Horse Bid; or (ii) where any other party is the Plan Sponsor, payment in full, in Cash, on the Effective Date or such other terms agreed by the Required DIP Lenders. The First Lien Term Loan Lenders will receive either: (i) where an Initial Plan Sponsor is the Plan Sponsor, their pro rata share of New Common Stock and/or their pro rata share of the Exit Term Loan Facility, or such other treatment as agreed by such holders, (ii) where any party other than the Initial Plan Sponsors is the Plan Sponsor, payment in full, in cash on the Plan Effective Date or such other treatment as agreed to by such holders. The Second Lien Term Loan Lenders will receive their pro rata share of Additional Value (if any). General unsecured claims will receive their pro rata share of Additional Value (if any) after payment of Second Lien Term Loan Claims in full. Events Leading to the Chapter 11 Filing In a declaration in support of the Chapter 11 filing (the “Steffen Declaration”), Yves Steffen, the Debtors’ chief executive officer, detailed the events leading to SiO2’s Chapter 11 filing. The Steffen Declaration provides: “SiO2 is a material life sciences company that — after raising and investing over $800 million in facilities, equipment, and research and development over the last 10 years — is at the precipice of mass-commercialization of its breakthrough materials science technology that is poised to revolutionize the pharmaceutical industry…. Despite the Company’s breakthrough advances in technology, which are likely to lead to increased patient safety, it has yet to meet the anticipated commercialization timeline for its products. While management believes that many significant players are interested in investing new capital into the Company, the Company’s legacy capital structure, which includes 12 debt facilities, convertible debt, and nine types of preferred stock, each with various consent and other rights, has made raising capital extremely challenging, especially in the current market environment. The Company’s relatively limited current revenue — approximately $50 million in 2022 — cannot support its current operational overhead and debt load, which required $13 million in interest payments over the same period. The Company has spent much of the last year trying to raise capital despite these capital structure issues, but neither third-parties nor existing equity holders — those with the most to lose under the circumstances — have come to the table with new capital. Notably, the Company focused its efforts over the last few years on production of vials for the COVID-19 vaccine as part of Operation Warp Speed. The Company now has capacity to deliver on targets contemplated by earlier government grants, but those production levels are no longer needed. The Company will likely need to retool its equipment for future client demand. Now, with only approximately $4.1 million in cash on hand, including restricted amounts, the Company has filed these chapter 11 cases to address its capital structure and reorganize its operations, allowing a new owner to bring the products to market. Significantly, the Debtors filed these chapter 11 cases with a clear path to emergence. The Debtors and certain affiliates and funds of Oaktree Capital Management, L.P. (the 'Initial Plan Sponsors' or 'Oaktree'), which holds all of the Company’s first lien debt, have developed a comprehensive restructuring on an accelerated timeline (the 'Restructuring') memorialized in the restructuring support agreement attached hereto as Exhibit A (the 'Restructuring Support Agreement'). The Restructuring contemplates saving the SiO2 business — including nearly 250 jobs—through these chapter 11 cases. The Restructuring has three main components: First, Oaktree has agreed to provide a $120 million ($60 million new-money) superpriority debtor-in-possession financing facility (the 'DIP Facility,' and the claims created by the DIP Facility, the 'Allowed DIP Claims'), to fund these chapter 11 cases. Second, Oaktree committed to serve as the Initial Plan Sponsor and equitize its Allowed DIP Claims and Allowed First Lien Term Loan Claims into 100% ownership of Reorganized SiO2 through a chapter 11 plan, subject to the Company meeting certain milestones. Third, Oaktree agreed to subject its recovery under the Plan to an auction process pursuant to court-approved bidding procedures, whereby any party may submit a bid to acquire 100% of the New Common Stock of Reorganized SiO2 through the Plan. Oaktree has agreed that it will not participate in the auction process. The floor for bids is therefore approximately $349.1 million, which is the anticipated amount of Oaktree’s Allowed DIP and First Lien Term Loan Claims. Nonetheless, Oaktree has indicated that it may consent to a recovery different than what is currently contemplated under the Plan, and the Debtors therefore encourage all interested parties to engage in the process, even if they may have a lower preliminary bid. There is no break-up fee or expense reimbursement contemplated to be paid to Oaktree in its role. The Company’s proposed investment banker in these chapter 11 cases, Lazard Frères & Co. LLC ('Lazard'), has already started a robust marketing process for the sale of the Company.” Prepetition Indebtedness As of the Petition Date, the Debtors have an aggregate principal amount of approximately $430 million in funded debt obligations, consisting of (a) First Lien Term loans, (b) Second Lien Term Loans, (c) certain secured financing secured by certain specified assets, (d) Promissory Notes (as defined herein), and (e) Convertible Indebtedness. 27. SiO2 is a borrower under twelve debt facilities, each as more fully described below: Significant Shareholders About the Debtors According to the Debtors : “SiO2 Materials Science is a company with deep roots in chemistry and engineering. The company creates and manufactures engineered primary packaging container components for the Pharmaceutical and Biotechnology industry. These containers typically take the form of syringes, vials and cartridges. Our patented technology applies a unique glass-like barrier onto any plastic surface. Our products are engineered to combine the durability and dimensional precision of plastic with the physical and barrier properties of glass. In the Pharma Industry, SiO2 advanced technology solves more than 30 problems which have plagued the industry for more than 100 years – including some of the most challenging related to drug stability, drug efficacy and safety." Corporate Structure Chart