Liquidity concerns emerged early last month after Wheel Pros management declined to take analyst questions during the company's latest earnings call. By the 26th, the company had missed an interest payment and entered into a forbearance agreement with lenders.

Per Reorg, the company's first lien lenders are likely to equitize their holdings and take majority ownership. A debtor-in-possession financing is also being arranged, though no plans have been finalized, and an out-of-court transaction may still be on the table.

The current process is made more interesting by the company's double dip transaction completed last year — Wheel Pros is now expected to be the first instance of a double dip financing in which the issuer failed to turn the business around and ultimately required a deeper restructuring.

A type of liability management exercise, a double dip allows lenders to work within existing covenants and baskets to provide a secured loan to a borrower, who then uses the proceeds to provide an intercompany loan to an affiliated entity. This additional step gives the initial secured loan lenders two claims against the same borrower: one direct claim from the first loan, and an additional indirect claim supported by the pledge from the intercompany loan.

This arrangement, along with other liability management deals more broadly, is meant to incentivize lender participation and increase the odds of obtaining additional financing for a distressed company that might otherwise struggle to find funding. By providing additional downside protection at the expense of non-participating lenders, an issuer is better able to convince lenders to provide new money.

In September, cash-strapped Wheel Pros negotiated a deal with lenders to provide additional liquidity as it tried to weather a prolonged period of weak post-pandemic consumer spending.

The agreement included a new $235 million first-in, last-out (FILO) facility open to all pre-transaction term loan lenders. Unlike a traditional FILO, which usually has a second lien or a third lien on term priority collateral, Wheel Pros' facility had a first lien on the term loan priority collateral and a second-out first lien on the ABL priority collateral.

As part of the deal, existing lenders provided new first lien and second lien term loans to two newly-formed Wheel Pros subsidiaries, who then lent the loan proceeds to their parent entity Wheel Pros Inc. in the form of a first lien intercompany term loan, after which the cash was used to make open-market purchases of the company’s original outstanding first lien term loan and unsecured notes.

The newly issued term loans received a secured guarantee pari to the existing loans, as well as an additional claim on the same collateral thanks to the double dip structure (as a result of the intercompany loan).

While the full cohort of pre-transaction term lenders participated in the deal, a small number of the unsecured noteholders remain outstanding. This group, along with any other unsecured creditors, is now pushed even further down the queue for repayment.

Kirkland & Ellis is acting as Wheel Pros' legal advisor, and Houlihan Lokey as its financial advisor. Akin Gump and PJT Partners are representing an ad hoc group of lenders.