IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE
In re:
RENOVATE AMERICA, INC., et al.,1 Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 20-13172 (LSS)
(Joint Administration Requested)
DECLARATION OF CHRISTOPHER POWELL IN SUPPORT OF DEBTORS’ MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (I) AUTHORIZING THE
DEBTORS TO OBTAIN SENIOR SECURED POSTPETITION FINANCING; (II) GRANTING LIENS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS;
(III) SCHEDULING A FINAL HEARING; AND (IV) GRANTING RELATED RELIEF
I, Christopher Powell, hereby declare under penalty of perjury as follows:
1. I am the Chief Financial Officer of Renovate America, Inc. (“RAI”) and Personal Energy Finance, Inc. (“PEFI” and, together with RAI, the “Debtors”), each a corporation organized under the laws of the state of Delaware and a debtor and debtor in possession in the above-captioned chapter 11 cases. I have served the Debtors as Chief Financial Officer since January 2019. I generally am familiar with the Debtors’ day-to-day operations, business and financial affairs, and books and records.
2. I submit this declaration (this “Declaration”) in support of the Debtors’ Motion for
Entry of Interim and Final Orders (I) Authorizing the Debtors to Obtain Senior Secured Financing; (II) Granting Liens and Superpriority Administrative Expense Status; (III) Scheduling a Final Hearing; and (IV) Granting Related Relief (the “DIP Motion”),2 which seeks approval of
1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification
number, include Renovate America, Inc. (4352) and Personal Energy Finance, Inc. (8208). The Debtors’ service address is 16870 W. Bernardo Dr., Suite 408 San Diego, California 92127.
2 Capitalized terms used but not defined herein have the meanings given to such terms in the DIP Motion or the
the Debtors’ secured superpriority debtor in possession credit facility on an interim basis in an amount of $18 million and on a final basis in an amount up to $50 million in the aggregate (the “DIP Facility”).3
3. Except as otherwise indicated, all facts set forth in this Declaration are based upon my personal knowledge, my discussions with other members of the Debtors’ management team and the Debtors’ advisors, my review of relevant documents and information concerning the Debtors’ operations, financial affairs, and prior restructuring initiatives, and/or my opinions based upon my experience and knowledge. If called as a witness, I could and would testify competently to the facts set forth in this Declaration. I am authorized to submit this Declaration on behalf of the Debtors.
Overview, Events Leading to the Chapter 11 Cases, and Retention of Professionals
4. The Debtors are a leader in the home improvement financing industry, specifically as it relates to financing for certain environmentally-friendly home improvement projects. Historically, the Debtors maintained two business divisions: HERO and Benji. The Debtors’ HERO business, which ceased accepting applications for financing from homeowners in October of 2020, originated Property Assessed Clean Energy (“PACE”) assessments for residential projects. PACE programs, authorized by local governments under state legislation, offer financing in the form of property assessments for residential and commercial renewable energy and efficiency improvements. Benji, the Debtors’ remaining business division, provides home improvement financing to contractors and homeowners.
3 The material terms of the DIP Facility are set forth in detail in the DIP Motion. For the avoidance of doubt, any
description of the DIP Facility herein or in the DIP Motion is qualified in its entirety by reference to the DIP Documents.
5. In recent years, the Debtors’ HERO (PACE) business suffered from declining assessment originations as a result, in part, of legislation that became effective in early 2018. This legislation tightened credit underwriting criteria and made the underwriting process more cumbersome, drastically reducing the Debtors’ pool of potential HERO customers, and made it more difficult for contractors to participate in the HERO program. RAI also incurred significant expenses to defend against and settle growing litigation against it stemming from its HERO business. Finally, the global COVID-19 pandemic had a considerable negative impact on the Debtors’ revenues. As a result of these factors, the Debtors’ revenues and liquidity profile— including their working capital balance and EBITDA—have become dramatically impaired. Notwithstanding year-over-year gains in the Debtors’ Benji business and dramatic cuts to the Debtors’ operating expenses, these gains and savings have not been sufficient to offset the Debtors’ overall losses.
6. The weight of the obligations related to the Debtors’ HERO business strained the Debtors’ ability to achieve profitability and the capital necessary to maintain and grow their business. As a result, the Debtors’ parent retained Moelis & Company LLC in early 2020 (which Armanino LLP has subsequently replaced), and in March of 2020, engaged Glass Ratner Advisory & Capital Group, LLC d/b/a B. Riley Advisory Services, each to advise management and RAI’s board of directors regarding potential strategic alternatives, including the sale of substantially all of the Debtors’ assets. On May 6, 2020, the Debtors also engaged Bryan Cave Leighton Paisner LLP as legal counsel in connection with a potential restructuring and sale.
7. As a result of considerable prepetition marketing efforts, on December 21, 2020, the Debtors entered into that certain Asset Purchase Agreement (the “Stalking Horse Purchase Agreement”) with Finance of America Mortgage LLC (“FOA” or “DIP Lender”) whereby FOA
proposes to serve as a stalking horse bidder in connection with a court-approved sale of substantially all of the Debtors’ Benji assets. In consultation with their advisors and FOA, the Debtors developed bidding procedures for a robust postpetition marketing and sale process to maximize the value of the Debtors’ assets, for the benefit of the Debtors’ stakeholders. The Debtors intend to file a motion seeking approval of bidding procedures and the sale as soon as reasonably practicable on or after the Petition Date, followed by a liquidating chapter 11 plan.
8. The Debtors, with the assistance of their advisors and after a thorough analysis of potential third-party financing sources, and after vigorous, arm’s-length negotiations among the Debtors, the Debtors’ advisors, and FOA and its counsel, successfully obtained an agreement with FOA whereby FOA will provide debtor-in-possession financing for the Debtors’ chapter 11 cases and sale process, in the form of the DIP Facility. The DIP Facility will meet the Debtors’ liquidity needs, enable them to operate their business in a manner that will permit the Debtors to preserve and maximize the value of their estates, and avoid immediate and irreparable harm to their estates and stakeholders.
Debtors’ Prepetition Secured Obligations
9. PEFI is the borrower under that certain Loan and Security Agreement, dated as of December 9, 2019 (as amended from time to time, the “PEFI Credit Agreement”), with ING Capital, LLC, as administrative agent and the initial lender (in such capacity, the “PEFI Agent”), TMF Group New York, LLC, as collateral agent, and the lenders from time to time party thereto (collectively, the “PEFI Lenders”). The PEFI Agent and PEFI Lenders collectively are referred to as the “PEFI Secured Parties.” The PEFI Credit Agreement provides for a senior secured warehouse credit facility with a maximum amount of $35 million (the “PEFI Warehouse Facility”), of which $25 million is committed and $10 million is uncommitted.
10. RAI is the borrower under that certain Amended and Restated Credit Agreement, dated as of August 24, 2017 (as amended from time to time, the “RAI Credit Agreement”), with ING Capital LLC, as administrative agent and the initial lender (in such capacity, the “RAI Agent”), Cortland Capital Market Services LLC, as collateral agent, and the lenders from time to time party thereto (collectively, the “RAI Lenders”). The RAI Agent and RAI Lenders collectively are referred to as the “RAI Secured Parties.” The RAI Credit Agreement provides for a senior secured warehouse credit facility with a maximum commitment of approximately $1.3 million (the “RAI Warehouse Facility”).
11. Under the PEFI Warehouse Facility, the PEFI Lenders provided to PEFI commitments in respect of revolving loans in the aggregate principal amount of up to $25,000,000 (and an additional uncommitted amount of $10,000,000). Under the RAI Warehouse Facility, the RAI Lenders provided to RAI commitments in respect of revolving loans in the aggregate principal amount as of the Petition Date of up to approximately $1,300,000 as of the Petition Date. Immediately prior to the Petition Date, (1) the aggregate principal amount outstanding under the PEFI Warehouse Facility was $6,000,000, of which approximately $2,779,473 has been used to purchase certain contracts constituting the PEFI Lenders’ collateral, and the remainder of which remains unused and in escrow (such amounts owed to the PEFI Lenders, together with any accrued and unpaid interest, fees, expenses and disbursements payable under the PEFI Credit Agreement the “Prepetition PEFI Warehouse Obligations”), and (2) the aggregate principal amount outstanding under the RAI Warehouse Facility was approximately $1,252,944 (such amount owed to the RAI Lenders, together with any accrued and unpaid interest, fees, expenses and disbursements payable under the RAI Credit Agreement, the “Prepetition RAI Warehouse Obligations”).
The Debtors’ Immediate Liquidity Needs
12. The Debtors are in need of an immediate capital infusion. As noted above, in the ordinary course of their business, PEFI originates point-of-sale home improvement financing to homeowners through contractors. As of the Petition Date, the Debtors will be unable to use their current warehouse financing facilities, which provide the capital necessary to originate loans to homeowners. Further, the Debtors’ ongoing liquidity depends on the Debtors’ whole-loan buyer, Ameris Bank (“Ameris”), continuing to purchase retail installment contracts and promissory notes originated by PEFI. It is unclear whether Ameris will continue purchasing loans originated by PEFI after the Petition Date.
13. As of the Petition Date, the Debtors’ available cash balance was approximately $3.6 million, and they do not have readily available sources of additional financing.
14. In light of the Debtors’ liquidity position, the Debtors, with the assistance of their advisors, engaged in an extensive evaluation of the Debtors’ financing needs and funding alternatives. As part of the Debtors’ evaluation of their financing needs, the Debtors and their advisors reviewed and analyzed the Debtors’ 13-week and long-term cash flow forecasts. These forecasts take into account anticipated cash receipts and disbursements during the projected period and consider a number of factors, including the effect of the chapter 11 filing on the operations of the business, fees and interest expenses associated with the DIP Facility, professional fees, and required operational payments. Based on the Debtors’ liquidity forecast, I do not expect the Debtors to be able to generate sufficient levels of operating cash flow in the ordinary course of business to cover their working capital needs, fund loans as part of their normal business operations, and pay for the costs of these chapter 11 cases.
15. As a result, the Debtors decided, in consultation with their advisors, that procuring sufficient financing at the start of these chapter 11 cases would be necessary for the Debtors to
obtain much needed liquidity and bridge to a going-concern sale of the business. The Debtors determined that the availability of, and options for, postpetition financing likely would be restricted by the Debtors’ existing capital structure, near-term liquidity needs, projected cash burn, and recent financial performance.
16. Following the conclusion of a robust marketing process that did not result in a viable third-party debtor in possession lender and in the face of increasing liquidity concerns, the Debtors engaged FOA in discussions regarding funding the Debtors’ business in connection with a potential sale of substantially all of the Debtors’ assets pursuant to section 363 of the Bankruptcy Code. These discussions ultimately bore fruit, resulting in an agreement between the Debtors and FOA regarding the terms of an up to $50 million debtor in possession financing facility.
The Proposed DIP Financing
17. As discussed, due to a number of factors, the Debtors concluded, in consultation with their advisors, that any workable postpetition financing likely would require the support of, or be provided by, FOA, as the Debtors had few other viable options.
18. The Debtors and their advisors engaged in hard-fought, arm’s-length negotiations with FOA with respect to the terms of the DIP Facility. Ultimately, the Debtors and FOA came to a mutual agreement that provides for a total of up to $50 million in secured postpetition financing, of which $18 million would be available on an interim basis, pending entry of a final order.
19. Additionally, the DIP Facility requires that upon entry of the Interim DIP Order, proceeds of the first draw on the DIP Facility in the approximate amount of $2.8 million will be used to pay and satisfy in full all Prepetition PEFI Warehouse Obligations owed under the PEFI Warehouse Facility. The repayment of the PEFI Warehouse Facility pursuant to the terms of the DIP Facility is a material component of the structure of the DIP Facility and was required by the DIP Lender as a condition to its commitment to provide postpetition financing.
20. In addition to providing the Debtors with up to $50 million of capital, the DIP Facility will ensure continued, uninterrupted operations, preserving the value of the estate for the benefit of all stakeholders. Based on the foregoing, it is my belief that the DIP Facility represents the best option available to address the Debtors’ immediate liquidity needs, and that the terms and conditions of the DIP Facility are reasonable and appropriate under the circumstances. Specifically, the Debtors determined that payment of the Prepetition PEFI Warehouse Obligations is necessary to obtain access to the liquidity necessary to preserve the value of their business. Further, I believe the DIP Facility is the product of extensive good-faith, arm’s-length negotiations with the DIP Lender and is a critical component of the Debtors’ chapter 11 and asset sale process. 21. The DIP Agreement contains certain milestones that the Debtors must meet throughout their chapter 11 cases, and failure to meet such milestones constitutes an Event of Default under the DIP Agreement. These milestones were negotiated and required by the DIP Lender as a condition to the DIP Facility.
22. The proposed DIP Facility will provide the Debtors with immediate access to liquidity that is necessary to ensure that the Debtors’ business is stabilized and value is maximized for the benefit of all parties in interest. The Debtors also believe that obtaining the DIP Facility with FOA will send a strong, positive signal to the Debtors’ employees and business partners regarding the Debtors’ prospects, which will allow for the smooth administration and success of these chapter 11 cases. The Debtors also believe that sufficient postpetition financing will provide comfort to the Debtors’ vendors, customers, and employees that the Debtors will be able to continue to meet their commitments while running a sale process and are not likely to languish in bankruptcy. The DIP Facility also provides comfort to potential bidders that the business is adequately capitalized during the chapter 11 process and running appropriately.
The Fees in Connection with the DIP Facility Are Reasonable
23. The Debtors have agreed, subject to Court approval, to pay certain fees to the DIP Agent and the DIP Lenders pursuant to the DIP Documents. Specifically, the Debtors have agreed to pay an origination fee to the DIP Lender in the amount of $175,000, as well as certain fees and costs incurred by the DIP Lender in connection with the DIP Facility, including certain fees of the DIP Lender’s professionals. Based on my experience with respect to non-bankruptcy financing and under the circumstances of these cases, I believe these fees and costs are reasonable, customary, and appropriate under the circumstances.
The Debtors Do Not Have Other Available Sources of Alternative Financing
24. In November 2020, the Debtors initiated a competitive marketing process designed to secure postpetition financing on the best available terms. As part of this process, the Debtors solicited proposals for postpetition financing from five parties in addition to FOA. The Debtors’ advisors contacted an additional four parties to solicit proposals for postpetition financing. With regard to the nine alternative lenders contacted, one party expressed interest in moving forward but indicated a minimum fee amount of $2 million. Other potential lenders expressed concern with providing the postpetition financing due to, among other things, the size of the facility sought being smaller than necessary to achieve financial return hurdles, the term of the facility sought being shorter than necessary to achieve financial return hurdles, and the nature of the Debtors’ collateral being outside the potential lenders’ area of expertise. Additionally, these potential lenders did not address the Debtors’ need for a new downstream purchaser of their Benji loans to replace the Debtors’ existing downstream purchaser, Ameris, or proposed to do so on terms inferior to the Loan Purchase Agreement proposed with FOA, which provides for a purchase price of 102% of face value of relevant Eligible Contracts. The latter is superior to the current arrangement with
Ameris and all other indicative pricing the Debtors have received from potential new downstream purchasers.
25. Further, FOA was unwilling to provide postpetition financing on terms other than the DIP Facility. In particular, FOA was unwilling to provide postpetition financing only on an unsecured administrative claim basis or with liens junior to other secured creditors, other than the RAI Warehouse Facility. FOA was, however, willing to provide debtor in possession financing on a senior, secured basis following the payoff of the Prepetition PEFI Warehouse Obligations. In light of the forgoing, I believe it is highly unlikely that any lender would be willing to provide postpetition financing on more attractive terms to the Debtors than FOA.
26. For the foregoing reasons, I believe that alternative sources of financing with terms as favorable as those of the DIP Facility are not readily available to the Debtors.
Need for Interim Relief
27. The Debtors’ business is cash intensive, with significant daily costs required to originate loans and satisfy obligations to vendors and employees. As such, and due to their current limited liquidity, the Debtors require immediate access to postpetition financing to operate their business, preserve value, and to avoid irreparable harm pending the Final Hearing. Absent funds available from the DIP Facility and the cooperation of key business partners at this critical early stage, the Debtors could face a value-destructive interruption to their businesses and lose support from important stakeholders on whom the Debtors’ businesses depend—namely, the Debtors’ pipeline of contractor/customers—which, in turn, would hinder the Debtors’ ability to maximize the value of their estates and force the Debtors to curtail their operations significantly, to the detriment of the Debtors, their estates, and their creditors.
Conclusion
28. I believe that, given the circumstances, the Debtors’ process to obtain debtor in possession financing produced the best financing option available and that the terms of the DIP Facility are reasonable and appropriate. I also believe that, based on the Debtors’ projections, the proposed DIP Facility will provide the Debtors with the necessary liquidity to effectively manage their chapter 11 process.
Pursuant to 28 U.S.C. § 1746, I declare under penalty of perjury that the foregoing statements are true and correct to the best of my knowledge, information, and belief.
Dated: December 22, 2020 /s/ Christopher Powell
Christopher Powell Chief Financial Officer Renovate America, Inc.
