The Timeshare Beat
June 4, 2001
On April 20, 2001, pursuant to the order of the Bankruptcy Court for the District of Maryland (Baltimore), Sunterra
Corporation entered into a debtor-in-possession financing agreement with Greenwich Capital Markets, Inc., providing
for both revolving loan availability and for term loans for various purposes. By doing so, Sunterra essentially
exchanged one debtor-in-possession for another.
Once the largest timeshare company in the world, Sunterra announced on May 31, 2000 that it and certain of its subsidiaries had filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, an action that allowed the company to continue to operate while reorganizing its structure. The bankruptcy followed an in-depth audit at the end of 1999, when Sunterra revealed that it would have to write off $43 million in delinquent accounts it had been carrying on its books.
The company, which had been flying high with 89 resorts and huge reported profits, turned out not to be making money at all. In its last reported quarter, ended March 31, 2000, the company lost $15.6 million, compared with a reported profit of $10 million in the same period the previous year.
Sunterra's stock was delisted last summer by the New York Stock Exchange and is now trading listlessly on the so-called "Pink Sheets" under the new symbol STERQ. It fled into bankruptcy carrying $850 million in debt and $1 billion in assets.
Under new CEO Greg Rayburn, on loan from corporate turnaround firm Jay Alix & Associates, the company has been making slow but steady progress in its reorganization efforts. Rayburn hopes to file his plan for reorganization in October, preferably with the support of both the secured and unsecured creditors. The two groups account for $250 million and $600 million in debt, respectively.
As part of its original Chapter 11 filing, Sunterra announced that it had executed a financing commitment letter with Ableco Finance LLC, an affiliate of Cerberus Capital Management LP and Gabriel Capital Group, for ``debtor-in-possession' (``DIP') financing, which immediately provided to Sunterra an interim facility of up to $25 million. Subject to satisfactory completion of other conditions, including further due diligence by the lender and court approval, Ableco also agreed to expand the facility to $53 million.
Ableco is an affiliate of Cerberus Capital, a New York hedge fund with a reported $6 billion in equity. The company has a long history of lending to financially troubled and bankrupt companies.
Nearly a year after signing the DIP agreement with Ableco, on April 20, 2001, pursuant to an order of the Bankruptcy
Court, Sunterra entered into a new debtor-in-possession financing agreement with Greenwich Capital Markets, Inc.
Sunterra borrowed from Greenwich approximately $46.2 million as term loans and used the proceeds of the loans to
repay all amounts outstanding under its debtor-in-possession financing agreement with Ableco Finance LLC and certain
other lenders that had been entered into in connection with its Chapter 11 filing.
Sunterra thus essentially exchanged Ableco for Greenwich as a DIP.
In addition to the $46.2 million, Sunterra has borrowed from Greenwich approximately $3.6 million as revolving loans to pay certain fees and expenses in connection with the closing of the Financing Agreement. They also borrowed $1.5 million in revolving loans, the proceeds of which will be used for working capital and general corporate purposes. Additional term loans will be available under the Financing Agreement for purposes of repayment of certain pre-petition obligations of Sunterra, including indebtedness owed to Finova Capital Corporation, upon agreement of Sunterra and Greenwich on the terms of such repayment and related matters and subject to approval of the Bankruptcy Court. All borrowings under the Financing Agreement are subject to various conditions.
It is unclear as yet just how much Finova will receive under this agreement.
Finova, which had been a major lender to the timeshare industry, itself recently filed for Chapter 11, though the company is expected to emerge fairly quickly. Finova arranged a bailout with Berkshire Hathaway and Leucadia in March but said last week it was prepared to review a $7 billion counteroffer from GE Capital, Goldman Sachs and creditors.
Revolving and term loans under Sunterra's new Financing Agreement with Greenwich bear interest at 3.5% in excess
of a LIBO-based rate. Sunterra paid a facility fee of $2,600,000 on the Closing Date and will pay a fee of .5%
on the unused portion from time to time of the revolving facility as provided in the Financing Agreement. Certain
fees will also be payable to the lenders under the Financing Agreement upon a repayment of the Finova Loans with
proceeds of term loans, upon a repayment of Finova Loans with certain funds other than proceeds of term loans and
upon failure by Sunterra to meet certain requirements relating to a plan of reorganization. The loans have a maturity
date of (and the availability period for the revolving loans expires 21 days prior to) June 30, 2002, subject to
earlier maturity or termination under certain circumstances. The loans are subject to mandatory prepayment under
various circumstances, including prepayment on a monthly basis with proceeds of certain sales of timeshare interests
(in the case of term loans), prepayment with certain monthly cash balances (in the case of revolving loans) and
prepayment with proceeds of certain sales or dispositions by Sunterra of other assets (in the case of both term
loans and revolving loans).
The loans and other obligations of Sunterra under the facility have certain administrative priorities under Chapter
11 and are secured by liens on and security interests in all of the assets of the Debtors, subject to certain liens
held by pre-petition creditors and other permitted liens. The Financing Agreement contains restrictions on indebtedness,
liens, capital expenditures, investments and sales of assets, on changes in the business and in directors and key
personnel and on various other activities of Sunterra and requires the company to maintain certain collateral ratios
and financial levels.
About Debtor-in-Possession Financing
When a business seeks to reorganize under a Chapter 11 bankruptcy proceeding, it is required to submit a plan
of reorganization to the court. If it cannot formulate such a plan, the business may be forced into a Chapter 7
liquidation. The latter situation is often unnecessary, as there may be recievables and other assets which can
be used as security for financing.
Companies specializing in Debtor-in-Possession financing offer receivable-backed lines of credit and other forms
of asset-based financing such as factoring, equipment loans, inventory loans, and purchase order financing.
With true revolving lines of credit established, not only can a business' liquidity position be considerably enhanced,
its growth can be financed concurrently. A revolving line of credit enables a business to draw down cash as needed
and to pay only for money borrowed. This is particularly important in a Chapter 11 reorganization where the cash
needs may fluctuate on a daily basis.
Some of the highlights of Chapter 11 financing are as follows:
Debtor-in-Possession Fiduciary Duties
The debtor has the same responsibilities and powers as a Chapter 11 trustee. Therefore, the debtor, by its management,
has a fiduciary duty to the creditors, employees, shareholders, company and court. This fiduciary duty extends
to all of the debtor's controlling management, shareholders, officers and directors. Although a difficult concept
to implement practically, the debtor has a legal responsibility to act in the best interests of its creditors,
and not in its own best interest.
The debtor is obligated to:
In many respects, the post-petition debtor becomes a new company and is obligated to pursue any claims created
by the pre-petition company and its management. This may sometimes create the odd circumstance that the debtor's
administrative period management must sue pre-petition management or shareholders. Separate counsel must be utilized
to represent the debtor when suing pre-petition management or shareholders.
The debtor's bankruptcy counsel represents only the company, acting by its management, but not the individual managers
or shareholders. Often the primary shareholder is also the debtor's chairperson and chief executive officer. Experts
in this area advise that in such a case it is a good idea for the primary shareholder and senior management to
engage their own bankruptcy counsel to defend their personal interests.