As had been expected, even by its own earlier admissions, LSC Communications has voluntarily filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York. The only surprise — perhaps expedited from the financial fallout of COVID-19 — is that the announcement came April 13, and not in May as had been previously suggested.
In a press release revealing its Chapter 11 filing, the Chicago-based publication, catalog, and book printing and distribution powerhouse that primarily caters to publishers, merchandisers, and retailers, indicated it has sufficient liquidity to continue operating its business. Its subsidiaries in Mexico and Canada are not included in the court proceedings and will continue to operate in the normal course.
“Since the termination of our merger with Quad/Graphics last year, and given the fundamental changes in the industry, the LSC board and management team have taken proactive and aggressive steps to improve our overall cost structure and streamline our manufacturing platform while continuing to pursue new business opportunities,” Thomas J. Quinlan III, LSC Communications’ chairman, president and CEO, said in the release.
“During that time, we have closed, or are in the process of closing, eight facilities, won new contracts and delivered on our commitments to our clients and vendors,” Quinlan added. “At the same time, we continued to evaluate the best path to creating a more sustainable capital structure for LSC with the support of our senior lenders through the Waiver and Forbearance Agreement.”
LSC reported it has received commitments for $100 million in debtor-in-possession financing from some of its revolving lenders, subject to the satisfaction of certain closing conditions. Following court approval, this financing, combined with cash on hand and generated through its ongoing operations, is expected to be sufficient to support its operational and restructuring needs, LSC officials contend.
Chapter 11: Good for LSC Balance Sheet, Bad for Suppliers
“I predict that this will look an awful lot like the Cenveo reorganization in which they will go private and enjoy significant debt forgiveness,” Peter Schaefer, a principal at leading printing and packaging M&A advisory firm New Direction Partners, told Printing Impressions. “On the positive side for LSC, this move will enhance their liquidity position as they will likely become much less encumbered. This will enable them to become more nimble as they will likely go private and will have the opportunity, in essence, to start over with a clean slate and a stronger balance sheet.”
On the other side, though, Schaefer points to LSC’s vendors and creditors that won’t be paid for their services rendered and — particularly during these unprecedented times — will struggle themselves as they were counting on the amounts owed to them by LSC. “Additionally, many of LSC’s competitors will understandably feel that it is unfair that LSC can walk away from these obligations as they are going to be provided an unfair advantage to become more flexible in the marketplace,” Schaefer added.
Aside from several industry pension and retirement funds listed, a first-day filing of unsecured trade creditors included Flint Group, $6.4 million; RR Donnelley, $2.07 million; Kodak, $2.05 million; Phoenix Color, $1.76 million; Verso Paper, $1.49 million; RR Donnelley Logistics, $1.14 million; International Paper, $1.10 million; and Agfa, $927,000; among others.
Default on Nearly $1 Billion of Indebtedness
According to its Form 8-K filing, the filing of the Bankruptcy Petition constituted a default on the following debt covenants, representing in the aggregate approximately $972 million of outstanding indebtedness of the company:
Credit Agreement Facilities:
- $221.9 million of loans outstanding under the first lien term loan B facility, approximately $300 million of loans outstanding under the first lien revolving credit facility (including $50.8 million in face amount of outstanding letters of credit) and unpaid interest, fees and other expenses arising under or in connection with the Credit Agreement, dated as of September 30, 2016, as amended, among LSC, the lenders party thereto and Bank of America, N.A. as administrative agent; and
Outstanding Secured Notes:
- $450 million of 8.75% senior secured notes due 2023, plus accrued and unpaid interest, fees and other expenses arising under or in connection with the Indenture, dated as of September 30, 2016, among LSC, the guarantors party thereto and Wells Fargo Bank, National Association as trustee and collateral agent
LSC was ranked Number 4 on the most recent, 2019 Printing Impressions 400 annual list of the top 400 printers in the U.S.and Canada, as ranked by annual sales (click here to view the complete PI 400 list), behind both RR Donnelley (ranked Number 1) and Quad (ranked Number 3). At the time, LSC indicated that magazines, catalogs, and books represented 31% of its revenues; books represented 27% of its sales.
Mark Michelson is the Editor-in-Chief of Printing Impressions. Serving in this role since 1985, Michelson is an award-winning journalist and member of several industry honor societies. Reader feedback is always encouraged. Email email@example.com