Red Lobster Management LLC (RL Management) and its affiliated debtors filed their Chapter 11 plan and disclosure statement late on Friday, 19 July. The plan is based on a restructuring support agreement (RSA) that the debtors entered into with certain prepetition term loan lenders and provides for either a sale of substantially all of the debtors’ assets under section 363 of the Bankruptcy Code or a sale of all or substantially of the assets of RL Management and Red Lobster International Holdings LLC and the equity interests in the other reorganized debtors through the plan pursuant to section 1129 of the Bankruptcy Code.

According to the disclosure statement, regardless of whether the debtors ultimately consummate a section 363 asset sale or a reorganized equity sale, projected recoveries to general unsecured creditors are currently unknown, largely because they depend on litigation recoveries, as further discussed below.

At the outset of the case, the official committee of unsecured creditors (UCC) and the debtors reached a global resolution concerning the Chapter 11 cases pursuant to which the lenders agreed, in their capacity as stalking horse purchaser, to provide funding and other consideration for a Chapter 11 plan that creates a trust for the benefit of general unsecured creditors. However, the debtors have stated that they have a significant number of above-market leases that they plan to reject, and we would expect that landlords may object to the assumption or rejection of their leases in connection with the plan transactions.

The debtors have funded their cases with USD 275m in debtor-in-possession (DIP) financing provided by certain prepetition term loan lenders that are parties to the RSA. Fortress Credit Corp is the agent on the DIP facility, which includes a USD 100m new money component and a roll-up of USD 175m of prepetition term loans. Fortress is also the agent on the prepetition term loan facility.

Plan transactions

The asset or equity sale and the GUC Trust are the two foundations underlying Red Lobster’s Chapter 11 plan. With respect to the former, as Debtwire reported, on 14 June, Red Lobster received bankruptcy court approval of its proposed bid procedures, which provide for an auction to take place tomorrow (23 July). Pursuant to the milestones set forth in the RSA, an order approving the sale must be entered by 29 July and the sale must be consummated by 2 August. The DIP lenders reserved the right to credit bid their debt in connection with any sale transaction and have formed “RL Purchaser,” a Delaware LLC that serves as the stalking horse bidder.

As for the GUC Trust, its assets will include claims and causes of action against equity holders and former officers and directors (Equityholder Litigation Claims) and 40% of the proceeds of those actions, if any. The trust assets also will include the “GUC Fund,” which consists of the “Plan Funding Amount” less the amounts needed to pay in full all priority and administrative expense claims (other than DIP facility claims and professional fee claims) to the extent that they are not assumed as part of the sale transaction. The Plan Funding Amount will be the sum of (i) USD 2.5m, (ii) any unused amounts set aside in the professional fee reserve for the payment of the fees and expenses of UCC professionals, and (iii) any unused amounts in the professional fee reserve allocated to payment of the fees and expenses of the debtors’  professionals, which amount is capped at USD 250,000, less the amounts set aside to wind down the debtors’ estates. Specifically, USD 800,000 will be set aside to cover wind down expenses if a section 363 asset sale is completed, and USD 500,000 will be set aside to wind down the estates if a reorganized equity sale is consummated.

With respect to the Equityholder Litigation Claims, as Debtwire’s legal analyst team discussed more thoroughly, Red Lobster blamed its Chapter 11 filing on several “failed or ill-advised strategic initiatives,” including the restaurant’s “Ultimate Endless Shrimp” promotion. The seafood chain attributed many of these initiatives to former CEO Paul Kenny who, according to current CEO Jonathan Tibus, was appointed at the direction of equity sponsor and trade partner Thai Union. Specifically, the debtor might have claims that Kenny breached his duty of loyalty by making certain business moves for the benefit of Thai Union that were to the detriment of Red Lobster, among other causes of action.

The UCC will select a trustee to pursue the litigation claims and otherwise administer the GUC Trust (GUC Trustee) and identify the GUC Trustee, which also must be reasonably acceptable to Fortress, in a plan supplement.

Recoveries

Under the plan, the sale proceeds will first be used to repay the DIP lenders and holders of other priority claims and prepetition term loan claims. If the debtors consummate a sale transaction in accordance with the stalking horse agreement, DIP lenders’ claims will be deemed paid in full by completion of the stalking horse bid. If a section 363 asset sale occurs and the stalking horse lender is not the successful bidder at auction, the DIP lenders will be paid in full, in cash, from the proceeds of that sale. In the event of a sale of the equity of the reorganized debtors, DIP lenders’ claims will be satisfied through the transfer of specified assets, assumption and assignment of specified contracts and leases, assumption of specified liabilities, issuance of equity in the reorganized debtors, and the issuance of takeback term loans in an unspecified amount.

Recoveries to holders of prepetition term loans vary depending on whether the debtors consummate a reorganized equity sale or an asset sale under section 363 of the Bankruptcy Code. Under both scenarios, prepetition term loan lenders will receive their pro rata share of (i) 60% of the proceeds of the Equityholder Litigation Claims and (ii) the net cash proceeds of the sale transaction minus (a) amounts reserved to wind down the estate and pay professionals retained by the debtors and the UCC, and (b) the Plan Funding Amount. If the debtors consummate a section 363 asset sale, prepetition term loan lenders will also receive proceeds from the sale of any wind-down reversionary assets, ie – any wind-down assets that remain after the plan administrator has implemented and completed the wind down.

General unsecured creditors will recover from the GUC Trust assets, which as discussed above will include, inter alia, the remaining 40% of the proceeds of Equityholder Litigation Claims, if any. Shareholders, on the other hand, will be wiped out.

Other plan provisions

The plan provides non-debtor releases to the UCC and its members acting in their capacity as such and to Fortress as the prepetition term loan and DIP loan agent. The ultimate purchaser of either the debtors’ assets or the reorganized debtors’ equity will also receive a non-debtor release, along with the GUC Trustee. While the debtors’ current officers and management will receive releases under the plan, neither Thai Union nor Paul Kenny will receive such releases.

Red Lobster is one of several companies in the restaurant/bar sector to seek relief under Chapter 11 since 2023. According to Debtwire‘s Restructuring Database, as set forth in the table below, none of those companies entered Chapter 11 with a pre-arranged or pre-packaged plan, and the majority of them entered in free-fall, with the others having begun negotiating a sale process before the bankruptcy filing. Notably, Delaware and the Middle District of Florida have been the most popular venue for these Chapter 11 debtors.

According to a notice filed by the debtors today (22 July), Judge Grace E. Robson of the US Bankruptcy Court for the Middle District of Florida will hold a preliminary hearing on 26 July to consider conditional approval of the disclosure statement on an expedited basis.

Prior to joining Debtwire, Sara was a law clerk to two judges in the United States Bankruptcy Court, S.D.N.Y. and practiced in the Financial Restructuring Group at Clifford Chance, where she represented financial institutions (as secured and unsecured creditors, defendants in adversary proceedings, and participants in DIP financings) in high-profile restructurings. She also represented foreign representatives in Chapter 15 cross-border cases.

Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.