Paper Source & Pine Holdings

DEBTORS AND THEIR BUSINESS

The Debtors in this jointly administered bankruptcy case are Pine Holdings, Inc. and Paper Source, Inc. Pine Holdings is the parent company, owning 100% of the equity in Paper Source, which, in turn, is the company’s front-facing brand. Paper Source was founded in Chicago, Illinois in 1983 and has grown steadily since then. Paper Source operated 158 physical stores as of the filing of the bankruptcy case, as well as an ever more popular e-commerce site, and a small wholesale business.

Paper Source products are primarily sold in their physical store locations. While the company has experienced an increase in e-commerce sales since the COVID-19 pandemic shut down retail stores in March 2020, it has not equaled the loss in revenue from the shutdowns. The company was able to sustain itself with landlord concessions and some additional loans for a while, but was ultimately unable to over the effects of the pandemic without filing for bankruptcy.

A SALE OF THE PAPER SOURCE BRAND IS PLANNED

In their initial filings, Paper Source has disclosed its plans to sell the brand and substantially all assets. The Paper Source brand and stores will continue under new ownership after bankruptcy, if the Debtors’ intentions are fulfilled.

The Debtors already contacted potential purchasers pre-bankruptcy, but have not yet lined up a buyer. They did get a commitment from their pre-petition lender, MidCap Financial Trust, to participate as a “stalking horse” bidder in their sale process. The United States Trustee has objected to the proposed sale terms as being overly favorable to MidCap, and as resembling a “loan to own” scheme. The Debtors have contested this characterization and have committed to having a robust marketing process in order to find the best possible terms for sale.

IS A SALE GOOD NEWS FOR CREDITORS?

With over $103 million in secured debt as compared to a reported 2019 EBITDA of approximately $13 million, it may be difficult for the Debtors to find a buyer who will be willing and able to provide a return for unsecured creditors. The creditor body would be well served by forming a Committee and retaining competent representation.

One point in the proposed sale process that is a good sign for creditors is the lack of protections for MidCap if the Debtors are able to find an alternate buyer. Typically, stalking horse bidders are given perks like “break-up” fees if the sale falls through or reimbursement of expenses incurred by the bidder, which can total in the hundreds of thousands in a sale of a large company like Paper Source.

The bidding procedures in this case provide no such perks to MidCap. That means that if the Debtors are able to find another buyer who will pay more, there is no reason not to take the better deal. Creditors may be able to participate in the Debtors’ sale process through a Committee of Unsecured Creditors. A Committee could help the Debtors market and find the best buyer for the business, which would increase the payout to creditors.