Faegre & Benson LLP and The Deal’s Turning the Emergency Escape Valve: The 363 Auction Sale

1. Faegre & Benson LLP and The Deal’sTurning the Emergency Escape Valve: The 363 Auction Sale

2. Turning the Emergency Escape Valve: The 363 Auction Sale Moderator: Matt Miller, The Deal Expert panelists: Jonathan B. Cleveland, Houlihan Lokey Bruce M. Engler, Faegre & Benson LLP Rafael Klotz, Gordon Brothers Group Michael R. Stewart, Faegre & Benson LLP

3. Summary of Historical Section 363 Sales(Transaction Values in $USD millions) 3

4. Focus on Section 363 Asset Purchases • Where the action is in distressed M&A • Chrysler and GM both sold through 363 sales in under 50 days • Description • The simplest and quickest distressed deal approach in which debtor sells assets, subsidiaries or entire entity via formal process under Bankruptcy Code • Often driven by (i) secured lenders pushing for sale (e.g., negative cash flows, lender fatigue, etc.) or (ii) debtors selling assets to fund a reorganization • 363 asset sales can run the gamut from (i) discrete assets (e.g., equipment, fixtures), to (ii) overburdened middle-market companies that can’t finance or survive a restructuring, to (iii) the sale of entire large enterprises • Sales processes and solicitation of offers can occur (i) wholly inside Chapter 11 or (ii) outside Chapter 11 with consummation of the deal shortly after a Chapter 11 filing

5. Focus on Section 363 Asset Purchases Illustrative Timeline for Middle-Market 363 Process Week 8 Week 11 Competitive Bid Deadline Filing of Sale Motion Weeks 1-5 Weeks 6-7 Weeks 13-15 Closing Select Stalking Horse Expedited Marketing Process Court Auction Bid Procedure (competitive, but fast) (typical) (describes breakup fee, deposit requirements and overbid amounts)

6. Comparison of 363 Sale and Plan of Reorganization • Plan of Reorganization • Permits complex financing techniques, issuance of new securities • Requires a comprehensive plan and multiple-party agreement • Two step approval: first the disclosure statement and then the plan itself • Better successor liability protection • 363 Sale • Much faster—approved by motion with a relatively short, 20-day notice to creditors • Prospective buyer can be more easily overbid • Like traditional M&A transaction with an ordinary asset purchase agreement, except: • Limited representations and warranties—“as is, where is” • Generally no indemnification (but may have holdback or escrow) • Limited closing conditions • Deposit or down payment typical

7. Other Alternatives to Bankruptcy Sales • Receivership • Assignment for the Benefit of Creditors • UCC Foreclosure • Out-of-Court Negotiated Sale

9. Section 363 Process — Initial Solicitation • Initial process parallels traditional “healthy” auction process: • Confidential marketing effort undertaken to solicit interest from one or more potential buyers • No fixed rules governing the manner in which the company markets its assets for sale • However — distressed context quickly introduces a number of procedural departures from a traditional auction process: • Speed — process is typically conducted on an expedited basis: • Frequently driven by, among other issues, business liquidity constraints, threat of customer flight, supplier disruption, employee instability and competitive threats • Ability to close quickly becomes a paramount objective and a differentiating attribute of buyers • Constituencies — lenders and other creditor constituencies may be (usually are) heavily scrutinizing process • Disclosure — in general there is comparatively greater and more immediate disclosure but auction participants are required to submit to several unique confidentiality requirements: • Nonsolicitation provisions of CA typically more stringent • "Standstill" provision precludes credit bids to ensure process integrity • Ultimate objective — in the interests of speed the typical 363 auction process is designed to secure the interest of a stalking horse: • Value maximization not necessarily paramount in the initial auction • Section 363 procedural requirements compel further open auction designed to ensure value maximization

10. Section 363 Process — Initial Solicitation • A successful initial solicitation culminates in an interested buyer outlining the parameters of an acceptable deal subject to higher and better offers, court approval and a host of other conditions: • Initial solicitation may be conducted on a pre- or postpetition basis: • Value maximizing strategy is often to conduct prepetition solicitation/negotiation process and then file for Chapter 11 • In order to gain court acceptance of a 363 sale, the buyer must submit to a second official "court auction" process • In negotiating the initial purchase agreement, the initial bidder or stalking horse will seek to impose substantial restrictions on subsequent bidding while the company and creditors committee will negotiate for as much competition as possible • Combining offer with DIP financing can give stalking horse extra measure of control and create extra hurdle for competitors • May include significant prepayment penalties and be credited against final purchase price • Accelerate timing (with milestone covenants in DIP financing to minimize competition) • Influence pessimistic financial disclosures to chill bidding

11. Section 363 Process — Court Auction Process • Key procedural requirements and distinguishing aspects of the court process include: (1) Notice: • Notice must be to all creditors and interested parties under Bankruptcy Rule 2002 • Notice is often published to attract bidder and other interested parties (2) Due Diligence: • Courts generally require equal access to due diligence materials to create a level playing field • Burden is on buyer to conduct extensive due diligence or suffer consequences because sales are “as is” often without any meaningful representation or warranties • If auction being conducted postpetition, buyer should look at title reports, UCC filings, court dockets, etc. for mechanics’, creditors’ and tax liens, terms of leases, environmental problems, etc. • Stalking-horse purchase agreement is typically posted to the court docket so buyer looking to unseat stalking-horse buyer should examine carefully • If APA is not posted, buyer should request from company financial adviser

12. Section 363 Process — Court Auction Process (3) Bidding Procedures: • In noticing an auction for the proposed sale of a debtor entity, a bankruptcy court will typically impose procedures that must be complied with by all bidders before a bid can be considered a qualifying bid • Typically such procedures include: • “Overbid protection” also known as an “upset price” which any competing bid must meet or exceed; and • A requirement that all competing bids conform to the terms and conditions of the original purchase contract • No modifications or late bids permitted • Other stalking-horse protections approved by bankruptcy courts • Termination provisions if specific and narrow • Significant deposit requirements (10%-15%) • Breakup fees and expense reimbursements • Exclusivity period or no-shop/limited-window-shop periods (all highly unusual)

13. Section 363 Process — Court Auction Process (4) Higher and Better Offers: • Section 1129 of the Bankruptcy Code sets out the so-called best-interests test, which stipulates: • All holders of impaired claims receive property with a value no less than what they would receive if the company were liquidated • This requirement is true in connection with both a 363 sale and plan of reorganization • The court recognizes that the higher offer is not always better. In evaluating competing bids, courts look at whether financing (or other terms) are contingent, whether regulatory approvals have been obtained and likelihood the bidder will close • Courts also consider whether the various creditor constituencies support the sale: • Treatment of trade is often an issue • Frequently strategic buyers’ desire to assume trade puts them at an economic disadvantage, but provides a basis for a “better” offer

14. Section 363 Process — Court Auction Process (5) Breakup Fees: • Breakup fee is a fixed fee payable to an unsuccessful initial bidder if the sale is made to a subsequent bidder • An acquirer seeking the protection of a breakup fee or expense reimbursement must obtain court approval of the arrangement • In considering breakup fees, the court looks at three factors: • Is there self-dealing between the parties; • Will the fee discourage bidding; and • Is the amount of the fee reasonable given the circumstances — fees usually range between 2% to 3% • Losing bidders have sometimes sought reimbursement of their expenses under Section 503(b) arguing that the estate was benefited from their efforts in that a higher price was obtained (highly unusual to get this approved)

15. Section 363 Process — Court Auction Process (6) Credit Bidding: • Unless the court orders otherwise, the holder of a claim secured by the property to be sold may bid at the sale and may offset such claim against the purchase price (Section 363(k)) • Distressed debt investors sometimes buy secured claims at a discount to bid them at face value at the 363 sale • Courts have permitted the agent for a bank group, if directed by the requisite majority of lenders, to credit-bid on behalf of all lenders over the objection of minority lenders • However, if the sale is proposed under a plan of reorganization, instead of a Section 363 sale, a secured creditor may not have an absolute right to credit bid (In re Philadelphia Newspapers, LLC, 599 F. 3d 298 (3d Cir. 2010))

16. Case Study: Foamex • Company Overview and Background Information • Foamex International Inc. is a leading producer of polyurethane foam-based solutions and specialty comfort products in North America. The company serves the bedding, furniture, carpet and automotive markets via its four strategic business units (foam products, automotive products, technical products and carpet cushion) • Unprecedented earnings levels in 2006 allowed the company to repay in full all creditors from the company’s bankruptcy in 2005, which created a heavily leveraged balance sheet • Situation Overview • Foamex was on the verge of a liquidation from the collapse of its main customer segments in the automotive and furniture industries • The lack of financing alternatives due to the global financial crisis of 2008 left the company in a vulnerable position • Continued weakness in the macro-economic environment and a contraction of the company’s borrowing base resulted in it electing not to pay its January interest payments and filing for Chapter 11 on Feb. 18, 2009 • Although Foamex successfully completed a number of debt reduction and cost-saving initiatives prior to filing for bankruptcy, it was left with total prepetition debt in the amount of approximately $398.6 million • The debtor conducted an accelerated §363 sale in order to salvage value since a Chapter 11 plan process could not be implemented due to operational distress and limited resources of the company • Foamex obtained a $95 million DIP loan from MatlinPatterson to fund operations during the sale process, which was approved by the bankruptcy court on March 16, 2009 • Foamex was able to obtain a junior lien DIP against accounts receivable • The nonpriming nature of the DIP was an important element of the financing, due to the fact that accounts receivable was the only collateral available to lend against (the first-lien lenders had a first lien on the inventory and PP&E) • The financing was tied to a sale of the company’s assets under §363 of the Bankruptcy Code • Due to Foamex's tight liquidity position, the DIP featured PIK interest to conserve cash

17. Case Study: Foamex • Outcome • The auction concluded on May 21, 2009, and the bankruptcy court approved the sale to MatlinPatterson and Black Diamond on May 26, 2009 • The total consideration for the assets was a $155.0 million credit bid, with First Lien lenders given the choice of either taking equity in the new company or the Cashout option, which was equivalent to a $146.5 million cash bid • First lien lenders were given the choice of either taking equity in the new company or the Cashout option, which was equivalent to a $146.5 million cash bid • Actual proceeds to first lien lenders were impacted by a number of items, including the working capital adjustment and cash balance at closing, administrative and priority items, the DIP loan and associated fees, and professional fee and wind-down amounts placed in escrow • The accelerated sale process resulted in a greater than 50 percent increase in purchase price from stalking horse bid • The sale transaction to MatlinPatterson and Black Diamond Capital Management LLC closed on June 12, 2009 • This §363 sale transaction affirms that a credit bid is equivalent to a cash bid of the same amount

18. Focus on the Retail/Consumer Sector • Using the 363 sale to relaunch a brand • Linens ’n Things/Polaroid • Exit store model • Purchase valuable brand through 363 sale • Relaunch as online brand or licensing business • Financial buyers with expertise in 363 sales • Different risk profile than strategic buyers • Familiarity with process • Ability to move quickly

19. Q&A. 19

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