ITEM 2.04 Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement
Chapter 11 Accelerations
The commencement of the Chapter 11 Cases constituted an event of default or termination event, and caused the automatic and immediate acceleration of all debt outstanding under or in respect of a number of instruments and agreements (the “Debt Instruments”) relating to direct financial obligations of the Debtors or certain of the Debtors’ subsidiaries (the “Accelerated Direct Financial Obligations”). The material Accelerated Debt Financial Obligations include:
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Indenture (as amended and supplemented, the “Indenture”), dated as of November 26, 2013, among the Operating Partnership, as issuer, the REIT, as limited guarantor and Delaware Trust Company (as successor to U.S. Bank National Association) as trustee (the “Trustee”), as amended, modified or supplemented by that certain First Supplemental Indenture, dated as of November 26, 2013 by and among the Issuer, the REIT and the Trustee, the Second Supplemental Indenture, dated as of December 13, 2016, by and among the Issuer, the REIT and the Trustee and the Third Supplemental Indenture dated as of January 30, 2019, by and among the Issuer, the REIT, the Trustee and certain subsidiary guarantors (the “Subsidiary Guarantors”) pursuant to which an aggregate of $1,375 million of the Operating Partnership’s Notes are outstanding.
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Credit Agreement, dated as of January 30, 2019, by and among the Company, Wells Fargo Bank, National Association, as administrative agent (the “Agent’) for the lenders (the “Lenders”) party thereto (as the same may be amended, restated, supplemented, replaced or otherwise modified from time to time, the “Credit Agreement’), pursuant to which the Company has $439 million outstanding under the term loan thereunder and $676 million outstanding under the revolver thereunder.
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Certain property level debt of the subsidiaries of Debtor equaling an aggregate outstanding principal amount of approximately $800 million to $850 million.
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The Debt Instruments provide that, as a result of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable without notice from the lenders thereunder. Any efforts to enforce such payment obligations due under the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.
Credit Agreement Alleged Default
As previously disclosed, on each of May 26, 2020, June 2, 2020, June 16, 2020 and August 6, 2020, the Operating Partnership received notices of default and reservation of rights letters (the “Original Notices and Letters”) from the Agent, which asserted that certain defaults and events of default occurred and continue to exist by reason of the Operating Partnership’s failure to comply with certain restrictive covenants in the Credit Agreement and resulting from the failure to make the $11.8 million interest payment that was due and payable on June 1, 2020, to holders of the 2023 Notes and the $18.6 million interest payment that was due and payable on June 15, 2020 to holders of the Operating Partnership’s 2026
Notes, prior to the expiration of the applicable grace periods. In addition, the Operating Partnership received a notice of imposition of base rate and post-default rate letter from the Agent, which (i) informed the Operating Partnership that following an asserted event of default on March 19, 2020, all outstanding loans were converted to base loans at the expiration of the applicable interest periods and (ii) sought payment of approximately $4.8 million related thereto for April through June 2020 (the “Demand Interest”). As previously disclosed, on August 19, 2020, the Operating Partnership received, (i) a notice of default and reservation of rights letter (the “August Notice and Letters”) from the Agent, which asserted that each of the failure to pay the Demand Interest and the entry into the RSA constituted events of default under the Credit Agreement and (ii) a notice of acceleration (the “Notice of Acceleration”) of obligations under the Credit Agreement from the Agent based on the events of default previously asserted by the Agent, pursuant to which, the Agent declared the $1.123 billion principal amount of the loans together with interest accruing at the base rate and the post-default rate, which as previously disclosed are rates being disputed by the Company, $1.3 million of outstanding letters of credit and all other obligations under the Credit Agreement to be immediately due and payable. As previously disclosed, in addition, the Agent also terminated the revolving and swingline commitments and the obligation to issue letters of credit under the Credit Agreement and instructed the Operating Partnership to deliver approximately $1.3 million to cash collateralize outstanding letters of credit.
On October 16, 2020, the Company received an additional notice of default and reservation of rights letter from the Agent which asserted that certain defaults exist and continue to exist by reason of the Operating Partnership’s failure to comply with certain restrictive covenants in the Credit Agreement and resulting from the failure to make the $6.9 million interest payment that was due and payable on October 15, 2020, to holders of the 2024 Notes and that such default will constitute an event of default under the Credit Agreement if such interest is not paid within the 30-day grace period (together with the Original Notices and Letters and the August Notice and Letter, the “Notices and Letters”). On October 28, 2020, the Company received (i) a Notice of Exercise of Remedies under that certain Collateral Agreement, dated as of January 30, 2019 (the “Collateral Agreement”) and that certain Pledge Agreement, dated as of January 30, 2019 (the “Notice of Exercise”), pursuant to which the Agent and Lenders notified the Company of their election to exercise the rights reserved pursuant to the Agent Notices and Letters and (ii) a Revocation of License to Collect Rents, pursuant to which the Agent, on behalf of the Lenders, revoked the revocable license to collect rents (“Rents”) payable by tenants at properties encumbered by mortgages and deeds of trust that secure the Credit Agreement, thus requiring such Rents to be paid directly to the Agent. Pursuant to the Notice of Exercise, effective immediately, the Agent, on behalf of the Lenders, elected to exercise all voting rights and other ownership rights in respect of all of the equity interests in certain subsidiaries of the pledgors under the Pledge Agreement and all Collateral (as defined in the Credit Agreement) owned by each pledger or grantor, as applicable, under the Pledge Agreement and the Collateral Agreement, as applicable.
Notwithstanding these actions by the Agent, the Company intends to continue to operate its business, retain legal ownership of the entities pledged under the Collateral Agreement and the Pledge Agreement and manage its properties. The Company contends that the actions taken by the Agent are unauthorized and unlawful and the Company continues to disagree with the assertions made by the Agent as to the basis for the Notice of Acceleration and the Notice of Exercise and, accordingly, the validity of the Notice of Acceleration and the Notice of Exercise. The Company is vigorously defending against the claims made by the Agent and the Lenders. Among other things, the Company, in good faith, disputes that any breaches of the Credit Agreement or any events of default (the “Events of Default”) thereunder have occurred and are continuing. On November 2, 2020, the Company filed an adversary proceeding in the United States Bankruptcy Court for the Southern District of Texas seeking among other things, a Temporary Restraining Order (the “Order”) and for a Preliminary Injunction to enjoin, pending a determination of the parties’ rights, the Agent or any of its officers, agents, servants, attorneys and successors from taking any action to exercise any and all remedies under the Credit Agreement or other agreements as a result of the Events of Default asserted by the Agent pursuant to the Agent Notices and Letters, or any other right or remedy that would otherwise accompany the occurrence of an Event of Default, including without limitation, any rights of acceleration under the Credit Agreement, rights flowing from the Notice of Acceleration, right exercised pursuant to the Notice of Exercise or any other rights or remedies properly exercisable solely upon an actual or determined Event of Default.