A SPAC and a Pre-Pack: The Case of Skillsoft Corporation
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Skillsoft is a global software and technology company that provides online learning, training and talent management software to businesses. In 2018 and 2019, Skillsoft’s earnings were declining, and the Skillsoft group was substantially overleveraged. Against approximately US$170 million of EBITDA, the Skillsoft Corporation and its affiliates (Skillsoft) were carrying over US$2.1 billion in funded, secured first lien and second lien debt. Management assessed its options: it developed and executed an operational turnaround plan, and it evaluated selling itself or parts of its business.
When those options failed to produce meaningful enough results, Skillsoft engaged with its two creditor groups. By spring 2020, Skillsoft faced an impending liquidity crisis, made no better by disruptions relating to the global covid-19 pandemic. Skillsoft accelerated negotiations with creditors on a financial restructuring, anticipating a traditional debt-for-equity exchange that would write down approximately US$1.5 billion of its US$2.1 billion in debt and turn over 100 per cent of the equity to its secured creditors.
Around the same time, a special purpose acquisition vehicle (SPAC) made repeated overtures to Skillsoft and certain of its key secured creditors, ultimately offering to acquire Skillsoft for an implied US$1.6 billion enterprise valuation. The merger was too attractive for creditors to ignore. Skillsoft’s creditor groups tentatively agreed a division of value should negotiations with the SPAC move forward.
But the SPAC deal could not be executed in time. The company was due to run out of cash months before the SPAC could complete its diligence and negotiate a merger agreement. The division of value between first and second lien creditors also differed from the negotiated standalone restructuring deal, so Skillsoft would also have required an entirely new plan to move forward with the SPAC deal. Even if a merger agreement could have been executed in time, SPAC transactions are notoriously uncertain because a proposed transaction must be approved by the SPAC’s shareholders. If Skillsoft had filed for Chapter 11 with a plan to execute the merger and the merger fell through, the creditors would have been left with very limited options.
Meanwhile, Skillsoft’s e-learning competitors were capitalising on rumours of Skillsoft’s financial distress to woo customers away from Skillsoft ahead of the industry’s selling season in September. Therefore, it was critical for Skillsoft to have a clear plan to reduce its debt burden and be free from any restructuring process well before September. It seemed impossible to gain the upside of the SPAC merger without risking an unacceptable downside were the merger not to complete.
In the end, a prepackaged Chapter 11 case offered Skillsoft and its creditors the speed and flexibility to pursue the SPAC merger but avoid the risk of a failed transaction. Skillsoft and its creditor groups negotiated a prepackaged Chapter 11 plan that allowed Skillsoft to complete a standalone restructuring before the all-important September selling season and then toggle into the SPAC merger on pre-arranged terms after Skillsoft’s emergence from bankruptcy. The restructuring could not have succeeded without the broad support of Skillsoft’s funded creditors, a plan that did not impair general unsecured creditors and a sophisticated bankruptcy judge overseeing the matter.
Skillsoft is a company that nearly everyone has experience of but few have heard of. It offers software that helps companies provide online training and perform talent management, and it provides its own online business education courses.
It was founded in 1998 and went public in 2000. After a period of expansion and acquisitions, Skillsoft went private again in 2010. In 2014, it was purchased from its previous private equity owners by the private equity firm Charterhouse Evergreen LP for over US$2 billion. Charterhouse’s purchase was, as is common for private equity transactions, financed with a significant amount of debt: against EBITDA of approximately US$180 million, the transaction burdened Skillsoft with a US$900 million first lien term loan and a US$485 million second lien term loan.
Skillsoft continued to acquire assets and incur debt – most notably, to purchase the SumTotal distribution platform in August 2014, which added talent management software to Skillsoft’s suite of educational offerings. By late 2018, Skillsoft’s sponsors and management recognised that the business faced three significant challenges: unsustainable amounts of funded debt approaching US$2 billion, incomplete integration of SumTotal and other acquisitions, and inconsistent growth across its business segments.
By 2019, Skillsoft’s capital structure was as follows:
|Balance, end of FY 2019
|First lien revolving facility
(US$80 million available)
|First lien term loan
|Second lien term loan
|Accounts receivable facility
Skillsoft launched a ‘transformation plan’ to refocus the business on its most popular products and hired financial restructuring advisers to address the overleveraged balance sheet. It also began marketing the SumTotal business segment to generate cash.
In late 2019, two ad hoc creditor groups began to organise for the purpose of negotiating potential exchange offers or other restructuring transactions. One group (the First Lien Group) held a majority of the first lien debt, while the other group (the Crossover Group, represented by Milbank) held over two-thirds of second lien debt as well as over a third of the first lien debt.
By 2020, the marketing process for SumTotal had not resulted in a sale that might have generated liquidity. The transformation plan, while effective, was not enough to resolve Skillsoft’s most pressing problems. Skillsoft continued to operate during the covid-19 pandemic, but its order intake decreased, resulting in an even more dire liquidity shortage. Skillsoft began negotiations in earnest with its creditors.
The restructuring terrain
The board decided to skip approximately US$44 million of debt service payments that were due on 30 April 2020. Recognising Skillsoft’s position, both major creditor groups signed forbearance agreements that allowed Skillsoft to continue negotiating with those groups.
The most obvious framework for a restructuring was a standalone deal through which the first lien lenders and the second lien lenders would inject some additional cash into the business and receive some combination of equity and new debt, while the existing equity holders would simply walk away from the company. Many restructurings have been accomplished through this basic framework, and early restructuring proposals among Skillsoft and its creditor groups relied on this approach. Negotiations resulted in the following agreement:
- Certain members of the negotiating creditor groups would backstop a debtor-in-possession financing (DIP financing) of approximately US$50 million. The DIP financing would convert into first-out senior secured exit financing upon emergence, and the same group would contribute an incremental US$40 million to the same exit financing.
- The first lien lenders would receive US$410 million of second-out senior secured ‘take-back’ loans.
- The new equity would be split, 96 per cent to the first lien lenders and 4 per cent to the second lien lenders.
- The second lien lenders would also receive warrants for new equity, to be struck at equity valuations that implied slightly better than par recoveries for the first lien loans.
- General unsecured creditors would be unimpaired by the plan.
- The existing equity holders would receive releases of potential claims against them, but no securities in the reorganised business.
During these intercreditor negotiations, a new player emerged. A SPAC known as Churchill Capital Corp II (Churchill) offered over US$1.2 billion in value to creditors in exchange for Skillsoft. Churchill’s offer involved a combination of US$505 million in cash, US$430 million in take-back debt and 28.5 million of Churchill’s shares (which had been issued at US$10 per share).
Churchill’s offer, at face value, exceeded the lenders’ own estimates of the value of the new equity after a standalone reorganisation by up to US$800 million. Despite the favourable economics of Churchill’s proposal, several obstacles stood in the way of its acceptance.
First, under the standalone construct, second lien lenders would receive all of their value in equity-based securities – including the out-of-the-money warrants for the new equity. Because the Churchill transaction was instead predicated on immediate payment, the split of distributions between the two loan classes would need to be negotiated from scratch.
Second, Skillsoft could not forgo negotiations with the lender groups over the distributions because the support of both lender groups was essential to confirmation of any Chapter 11 plan. The Crossover Group had enough holdings in both classes of loans to prevent either class from accepting a plan by the two-thirds threshold. Thus, without the Crossover Group’s support, Skillsoft would have had difficulty satisfying the Bankruptcy Code’s requirement of an impaired accepting class. Meanwhile, the First Lien Group had enough holdings of the first lien loans to prevent that class from accepting a plan. Under the absolute priority rule, rejection of the plan by the first lien class could have prevented the second lien lenders from receiving any value on account of those claims.
Third, Skillsoft’s business depends heavily on an annual marketing season in September. Already by early summer, potential customers had become concerned about Skillsoft’s ability to continue as a going concern, and competitors had begun to highlight Skillsoft’s financial instability as a key disadvantage. For this reason, Skillsoft’s management believed that it was essential for Skillsoft to complete its bankruptcy process by the end of August.
Unfortunately, three months were left before the critical September marketing season, and SPAC transactions take much longer than that. A SPAC is a publicly traded company with no business operations, which is formed for the sole purpose of finding a business to buy and merge with. The proceeds from the SPAC’s public offering are typically held in trust for purposes of a merger and cannot be used for any other purpose. Rather than investing on the basis of a known business’s operations, the shareholders of a SPAC are betting on the acumen of the SPAC’s managers and their ability to make a good investment. To protect the SPAC’s public shareholders, any proposed transaction must be presented to them for their approval, a process that requires several months’ notice and SEC approval before a shareholders’ vote. (In Skillsoft’s case, Skillsoft also needed to generate far more detailed financial statements to satisfy the SEC’s proxy requirements before the merger could be proposed to Churchill’s shareholders.) Further, the SPAC’s shareholders can typically redeem their shares at the issue price at any time, including if the SPAC’s shares fall below the issue price owing to an unfavourable merger being announced, for example. Accordingly, unlike a private equity sponsor, a SPAC’s managers cannot promise a quick closing or even that the SPAC will be able to close on an agreed transaction at all – whether because the SPAC’s shareholders vote the transaction down or shareholder redemptions deplete the cash required for the SPAC to complete. Moreover, because the SPAC’s cash is typically in a trust account, it cannot offer a break fee to compensate for the increased risk that is associated with a SPAC transaction.
For Skillsoft and certain creditors, the Churchill transaction risk was a nearly fatal flaw. If the SPAC could not complete the transaction, Skillsoft would have incurred millions of dollars of expenses in Chapter 11, only to be faced with renegotiating a standalone deal with its creditors, this time with significantly less value to go around. Under the best of circumstances, completing the Churchill transaction in Chapter 11 would take so long that Skillsoft would have to remain in Chapter 11 through the all-important month of September with a serious cloud over its long-term viability. Selling to Churchill through the Chapter 11 process was simply not an option.
By early June, Skillsoft had nothing more than a non-binding offer from Churchill, and it needed cash quickly to keep the clock ticking on negotiations. As a public company with its cash tied up in a trust account, Churchill was in no position to finance Skillsoft’s ongoing operations. The existing lenders were the only option to provide ongoing financing, and they were only willing to do so if the cash was provided as priming DIP financing in a pre-packaged Chapter 11 case.
With no time left to meaningfully pursue the Churchill merger, Skillsoft signed a restructuring support agreement (RSA) with its two creditor groups on 12 June 2020. The RSA bound Skillsoft and the creditors to pursue the standalone restructuring plan. On 14 June, Skillsoft commenced solicitation on its plan and filed for Chapter 11 relief in the US Bankruptcy Court for the District of Delaware. The case was assigned to Judge Mary Walrath, who has served since 1998 as a bankruptcy judge in one of the United States’ busiest bankruptcy courts.
Skillsoft agreed with its creditor groups to keep the option of a merger with Churchill alive for as long as possible while pursuing its expedited pre-packaged Chapter 11. Continuing the dual track restructuring required two things. Churchill needed exclusivity and expense reimbursement (due on signing a merger agreement) from Skillsoft to continue its negotiations. And Skillsoft needed extra money from its creditors to do the additional accounting work vital to obtaining ultimate approval from the SPAC’s public shareholders. Skillsoft signed its exclusivity letter with Churchill on 15 June and the creditors pledged to increase the DIP financing by the US$10 million necessary for Skillsoft to do the extra accounting work associated with the Churchill merger.
Because Skillsoft executed the exclusivity letter after it commenced its Chapter 11 cases, it required the court’s approval of its entry into the letter as a transaction outside the ordinary course of the company’s business. Usually, such relief requires some period of notice, but Skillsoft sought approval of the exclusivity letter at the first day hearing, held on 16 June. Skillsoft was on an extraordinarily tight timeline owing to the accounting work required to produce public company financials, and Churchill indicated that it would walk away if the letter was not approved on the first day. The US Trustee objected, asking the court to require more notice before it considered approving the letter.
Judge Walrath deftly adapted to the change in circumstances on short notice, and approved Skillsoft’s entry into the letter over the US Trustee’s objection. She noted that the terms she was being asked to approve were limited, that the only impaired creditor groups were both willing to fund the ongoing negotiations, and that ‘it will not otherwise prejudice any other party and  might provide an upside for the lenders and the estate.’
At the same hearing, Judge Walrath approved all of Skillsoft’s requested first day relief, including interim approval of its (now) US$60 million DIP financing. The voting deadline for the plan was set for 26 June (just 10 days after the first day hearing) and the confirmation hearing for 24 July.
Weeks passed. The standalone plan’s voting deadline came, and the plan was approved by wide margins. Yet the required detailed financials were still at least a month away from being produced, and as a result, Churchill had still not made any firm commitment to the offer it had made before the Chapter 11 cases commenced. But Skillsoft’s creditors remained unwilling to relinquish the possibility of a Churchill merger.
As deadlines for the confirmation hearing approached, the only tangible progress that had been made in merger negotiations was agreement between the two creditor groups as to how they would divide the US$505 million cash, US$430 million take-back term debt and 28.5 million shares that had been offered by Churchill. The first lien lenders would receive all of the cash, all of the take-back debt and 24 million shares, while the second lien lenders would receive 4.5 million shares. Neither group would support the merger on any other terms.
Skillsoft, the First Lien Group and the Crossover Group quickly realised the overwhelming challenges they faced in pursuing the standalone plan and the merger at the same time. Based on the 96:4 equity split in the standalone plan, if Skillsoft emerged on the terms of the standalone plan and later tried to execute the merger, the first lien lenders would be required to give up some of their cash and take-back debt to the second lien lenders, which they were unwilling to do. At the same time, with Skillsoft’s September selling season approaching, Skillsoft could not stay in Chapter 11 to find out whether a merger agreement could be signed and a new plan developed on the basis of it. Even if Skillsoft had tried to remain in Chapter 11 longer, the creditors were unwilling to support a sale plan given uncertainty around the outcome of the SPAC’s shareholder vote, which could only take place months after the merger agreement was signed.
The only viable solution had to achieve multiple goals at once. It had to permit Skillsoft to exit Chapter 11 quickly and allow signing of the merger agreement after emergence. It had to preserve the standalone restructuring as a fallback if the merger fell through, while also permitting the new shareholders of Skillsoft to receive a distribution of value that differed from what would be implied by their 96:4 equity splits. As an inter-creditor matter, it had to lock in a value floor and a timeline for executing a merger agreement. As a business matter, it had to provide Skillsoft with a stable platform for its selling season and a clear narrative that Skillsoft’s restructuring was complete. It also had to be acceptable to Churchill. In addition to all that, the solution had to minimise changes to the plan to maintain Skillsoft’s expedited timeline for emergence by August.
Skillsoft, the First Lien Group and the Crossover Group negotiated a solution. They would make one simple change to the standalone plan: instead of distributing one class of equity to first lien and second lien lenders, Skillsoft would distribute one class of equity to its first lien lenders, and a different class of equity to its second lien lenders.
In this way, the organisational documents of Skillsoft’s post-emergence holding company (Newco) could be written to require that the creditors receive the agreed distributions if the sale to Churchill completed on the terms that had been agreed between the creditors. First lien lenders, who would become Class A shareholders, would receive cash, debt and equity. Second lien lenders, who would become Class B shareholders, would receive equity only.
Some finer points had to be drafted into the Chapter 11 plan and its ancillary documents. The plan provided that the Class A and Class B shares would collapse into one class of shares if a ‘Favored Sale’ did not reach certain milestones for signing of the merger agreement and closing the transaction. The concept of a ‘Favored Sale’ was limited to a sale to Churchill on the monetary terms that the creditors had agreed to accept, namely:
- US$505 million of cash;
- US$285 million worth of shares (calculated using the original issue price); and
- US$20 million of incremental debt (which would be added on to the US$410 million of take-back debt already contemplated by the standalone plan).
The same ‘Favored Sale’ concept and deadlines had to be drafted into the Newco articles of association and the shareholders’ agreement. Special governance rights were also negotiated around amendments to the ‘Favored Sale’ concept and the sale milestones, to preserve the rights parties would have had if the sale had been negotiated and executed as part of the Chapter 11 process. The exit facility also had to be increased to permit Skillsoft to continue negotiating the merger after emergence from Chapter 11. Because the strike price of the warrants was higher than the Churchill acquisition price, the warrants would automatically fall away upon the merger and needed no meaningful changes.
Although the changes to the plan were limited and simple, they represented a real change to the parties’ economic rights. On 10 July, Skillsoft sought the court’s permission to, among other things, re-solicit votes on the plan from first- and second lien lenders on an expedited basis. In a hearing held on 24 July, Judge Walrath approved the uncontested motion, and set a new confirmation hearing date of 6 August allowing a severely truncated re-solicitation period to preserve Skillsoft’s ability to emerge from Chapter 11 on an expedited basis. Following a successful re-solicitation, the court confirmed Skillsoft’s amended plan on 6 August 2020. In spite of the somewhat unusual circumstances of the case, Judge Walrath had kept pace with the twists and turns of Skillsoft’s cases and saw the benefit to, and ‘overwhelming support’ from, Skillsoft’s impaired creditors.
Upon emergence from Chapter 11, Skillsoft had shed over US$1.5 billion in debt, providing a stable platform for its September selling season and preserving Skillsoft’s option to pursue the Churchill merger. The simplified reorganised capital structure, including the pre-agreed outcome should the merger with Churchill complete, was as follows:
|Pre-emergence capital structure
|US$60 million priming debtor-in-possession financing
|US$60 million first-out term loans, plus US$50 million incremental new exit financing from certain DIP lenders
|US$110 million first-out term loans
|US$1.32 billion first lien term loans US$80.5 million first lien revolving loans
|Class A equity in Newco, representing 96 per cent voting power and economic rights
|US$505 million cash US$20 million additional second-out term loans 24 million Churchill shares
|$410 million second-out term loans
|$410 million second-out term loans
|$696.6 million second lien term loans
|Class B equity in Newco, representing 4 per cent voting power and economic rights
|4.5 million Churchill shares
|$67.8 million accounts receivable facility
|$63 million accounts receivable facility
|Unaffected by merger
Following Skillsoft’s successful emergence from Chapter 11, a reorganised Skillsoft signed and announced its merger with Churchill on 12 October 2020, following a strong September selling season. While negotiating the Skillsoft merger, Churchill also negotiated and announced an add-on merger with Global Knowledge Training LLC, another IT and professional skills development organisation, to create what Churchill billed as the ‘world’s leading digital learning company with a comprehensive suite of content; customized learning journeys; accessible modalities and an expanded course portfolio of next-generation, on-demand and virtual content for enterprise learning’.
The mergers closed on 11 June 2021, and Skillsoft now trades publicly under the ticker SKIL.
The United States’ reorganisation system has a reputation for being expensive and cumbersome. Yet Chapter 11 provided enough speed and flexibility to solve Skillsoft’s financial problems and achieve a better-than-expected outcome for both groups of creditors. At three key points in the process, the stakeholders found ways to move the case forward on the expedited timeline that Skillsoft’s marketing department needed, while preserving the option to sell the company to an eager purchaser.
First, the ‘pre-pack’ solicitation rules of Chapter 11 allowed Skillsoft to propose an expedited solicitation process. Skillsoft and its creditors could be confident that the bankruptcy judge would approve the expedited process, since pre-pack solicitations of private lenders have become routine in major US bankruptcy courts. Second, once an agreement for the ‘toggle’ plan had been reached, Skillsoft was able to re-solicit votes on the new plan in short order. Throughout the case, Skillsoft was able to credibly assure its trade creditors that they would be paid in full, which avoided expensive litigation and the appointment of any formal representative of those unsecured creditors. Third, the rules governing confirmation of a Chapter 11 plan protected both groups of secured creditors from unfair distributions, while giving the groups enough room to agree on, and bind other creditors to, two different potential allocations of value. Finally, and critically, Judge Walrath, an experienced bankruptcy judge, readily understood the value of Churchill’s offer and was willing to grant Skillsoft’s motion to enter into an exclusivity agreement with Churchill on the first day of the case, even over an objection from the government. Her commercially sensitive and pragmatic approach to the cases permitted Skillsoft and its creditors to achieve their goals of speed and flexibility, while respecting Chapter 11’s procedural and fairness protections.
The result was a clear success: Skillsoft was able to deliver its balance sheet and emerge from bankruptcy before its sales season, while preserving its ability to implement a value-maximising but complex transaction.
 Evan Fleck is a partner, and Sarah Levin and Benjamin Schak are associates at Milbank LLP. The authors are grateful to Barak Klein, Cullen Murphy and Brett Bar-Eli of Moelis & Company for their review of, and contributions to, this chapter.
 The third and two-thirds levels are important to negotiation dynamics in the United States, where a class of creditors is considered to ‘accept’ a Chapter 11 plan of reorganisation only with the support of two-thirds of the claims that are voted in the class. Class acceptance is a key concept because, for a plan to be confirmed when a class of claims does not accept the plan, (1) at least one impaired class must vote to accept the plan and (2) the plan must meet the Bankruptcy Code’s requirements for cram-down (including strict adherence to the absolute priority rule) with respect to any class that votes to reject.
 Because Churchill’s proposal involved a distribution of take-back loans, similar to a standalone restructuring, the apples-to-apples comparison was between Churchill’s cash and equity consideration, plus US$20 million of incremental debt, versus Skillsoft’s equity value after a standalone restructuring.
 Skillsoft’s customers have purchasing budgets tied to a calendar year, so its sales process is in high gear for the few months leading up to each new year.
 Importantly, the solicitation for votes on the plan commenced shortly before the bankruptcy filing. The Bankruptcy Code allows a debtor to solicit votes on a Chapter 11 plan prior to filing its case, so long as the debtor complies with any applicable non-bankruptcy law. When the plan seeks to impair holders of publicly traded debt, it is generally not feasible to comply with securities regulations and a debtor must instead go through the Bankruptcy Code’s months-long process for post-petition solicitation. But when the plan seeks to impair only privately held debt, such as Skillsoft’s secured loans, then the creditors may be solicited on an expedited timeline prior to commencement of the case. This is commonly known as a ‘prepack.’
 See 11 U.S.C. § 363(b).
 The Office of the United States Trustee is a bureau of the US Department of Justice, charged with monitoring the conduct of bankruptcy cases and protecting the integrity of the US bankruptcy system.