Orchids Paper files bankruptcy, reaches $175 million sale option deal

By Caroline Salls

Pittsburgh, April 2 – Orchids Paper Products Co. filed Chapter 11 bankruptcy Monday in the U.S. Bankruptcy Court for the District of Delaware to facilitate the potential sale of substantially all of its assets through an option agreement with pre-bankruptcy secured lender Orchids Investment LLC and address its debt obligations, according to a news release.

If the option is exercised, Orchids Investment would purchase the assets in exchange for a credit bid of roughly $175 million against Orchids Paper’s pre-bankruptcy secured credit facility, plus other consideration.

Orchids Investment is indirectly owned by a fund affiliated with Black Diamond Capital Management, LLC and Brant Paper Investment Co. LLC.

The company has requested court approval of the bid procedures for the potential sale. The purchase agreement will be subject to the receipt of higher and better offers through a court-supervised auction process.

If Orchids Investment is not ultimately the winning bidder, Orchids Paper will pay it a $5.25 million break-up fee and reimburse up to $2 million of its sale-related expenses.

The initial overbid amount will be $7.75 million. Subsequent overbids must be in minimum increments of $500,000.

Competing bids are due by 4 p.m. ET on June 6, and an auction will be held on June 10, if necessary.

Orchids Paper said it expects the transaction to be completed by no later than August.

“The company began experiencing financial difficulty in late 2016 due to a number of factors, including unprecedented increases in input costs, most notably fiber and freight, which the industry has not yet been able to fully recover with price increases to customers; new competitive industry capacity driving down selling prices to defend and grow business; and construction cost overruns and start-up inefficiencies at its new production facility in Barnwell, South Carolina,” president and chief executive officer Jeffrey Schoen said in the release.

“Ultimately it was determined that using the Chapter 11 process to facilitate a potential sale was the swiftest and most efficient way to preserve stakeholder value and sustain business operations.”

DIP financing

In conjunction with the bankruptcy filing, Orchids Investment has agreed to provide $11 million in debtor-in-possession financing to support the company’s day-to-day operations during the pendency of the bankruptcy case.

The DIP facility will mature on Sept. 30.

Interest will accrue at a rate of 12%.

The company is seeking interim access to $4 million of the DIP financing.

Current management will continue to lead the company during the pendency of the sale process, with operations supported by the DIP financing. Orchids Paper said it intends to operate its business as usual while it works to complete the potential sale.

The company said it also has filed customary motions seeking approval to continue employee wages and benefit programs, permit payments on pre-bankruptcy claims of critical suppliers and other vendors and maintain customer programs in the normal course.

“Our commitment to providing high quality consumer tissue products is unwavering and we have found a new partner who can help us strengthen our business under a new capital structure, leverage new resources and opportunities and build on our strong foundation, so that our business can continue to provide value to the marketplace,” Schoen said in the release.

Debt details

According to court documents, Orchids Paper had $322.06 million in total assets and $$260.86 million in total debt as of Feb. 28.

The company’s largest unsecured creditors are Fabrica De Papel San Francisco, SA of Calexico, Calif., with a $4.4 million trade debt claim; Dixie Pulp & Paper of Tuscaloosa, Ala., with a $1.65 million trade debt claim; and Little Rapids Corp. of Green Bay, Wis., with a $1.2 million trade debt claim.

The company is advised by the law firm of Polsinelli PC, Deloitte Transactions and Business Analytics LLP is the company’s interim chief strategy officer, and Houlihan Lokey Capital, Inc. is the financial adviser and investment banker.

Orchids makes consumer tissue products and is based in Brentwood, Tenn. The Chapter 11 case number is 19-10729.

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