Cleveland Integrity files bankruptcy, eyes sale to secured lenders

By Sarah Lizee

Olympia, Wash., Jan. 31 – Cleveland Integrity Services, Inc. filed Chapter 11 bankruptcy Sunday in the U.S. Bankruptcy Court for the Southern District of Texas.

Matt Kesner, president and chief operating officer of the company, said in a declaration that the company remains in a strong operational position but is in default under its prepetition obligations, which matured before the petition date.

The debt includes a term loan credit agreement with Owl Rock Capital Corp. as administrative and collateral agent that had about $159 million of principal outstanding as of the petition date.

Although the debtors’ prepetition secured lenders provided short-term extensions to allow the company to explore strategic alternatives such as a sale, recapitalization or alternative sources for refinancing, certain industry-wide market factors hindered its ability to obtain long-term solutions, Kesner said.

The company has negotiated a restructuring support agreement with the lenders, which have agreed to act as stalking horse bidder for the company’s assets.

The stalking horse agreement includes a $30 million credit bid, in addition to the assumption of some liabilities and payment of the debtors’ post-petition payroll obligations accrued as of the closing date.

The company is seeking emergency approval of bid procedures to allow the company, through Piper Sandler & Co. as investment banker, to complete its prepetition marketing efforts.

The bid procedures contemplate approval and closing of a going concern sale 60 days after the petition date.

The bid deadline would be 5 p.m. ET on March 1, the auction would take place on March 6, and a sale hearing would take place on March 10.

To qualify for the auction, the initial overbid must exceed the purchase price of the stalking horse bid by $100,000. After that, the minimum bidding increment will be $100,000.

A hearing on the bid procedures is set for Feb. 6.

DIP facility

The company is seeking court approval of a $30 million senior secured debtor-in-possession loan facility with the prepetition secured parties and Owl Rock as agent.

The facility consists of $13 million in new money and a $17 million rollup of the prepetition debt.

Interest on the facility is 12% per annum. Default interest would be an additional 2%.

The facility is set to mature in 90 days, unless certain events occur earlier, such as the closing of the sale or confirmation of a plan.

The company was granted interim access to $3 million of the new money on Monday.

Proceeds from the facility will be used to honor employee wages and benefits and fund working capital and other general corporate operating needs, administer the Chapter 11 cases and then wind down the business.

The company is also seeking court approval to use cash collateral.

A final hearing is scheduled for Feb. 13.

Other details

In its petition, the company listed 5,001 to 10,000 creditors, $10 million to $50 million in assets and $100 million to $500 million in liabilities.

Its largest unsecured claims are mainly litigation claims with unknown amounts. Kesner said that over the last few years the company has been defending claims following a marked uptick in online and social media outreach by contingency fee plaintiff attorneys offering their services and targeting the debtors and other competitors in the industry.

Gray Reed & McGraw LLP is proposed bankruptcy counsel. Piper Sandler and Macco Restructuring Group, LLC are financial advisers.

The Cleveland, Okla.-based company is a provider of inspection services to oil and gas pipelines. The Chapter 11 case number is 23-90052.

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