Bankruptcy: Oaktree Objection Hits Claire’s Plan Valuation, Distribution Scheme

Oaktree Capital Management on Sept. 6 objected to confirmation of Claire’s Stores’ reorganization plan, saying that “there are more than 20 material flaws” in the plan, “any one of which standing on its own could be a basis for the denial of confirmation of this plan at this time.”

Further, according to Oaktree, “taken in the aggregate, and viewed collectively as a body of work, these flaws can lead to but one conclusion: the process in these Chapter 11 cases, and the [reorganization] plan it has produced, are so tainted that the … plan cannot now be confirmed.”

As reported, a reorganization plan confirmation hearing is scheduled for Sept. 17.

The objection from Oaktree was expected. Oaktree, which holds nearly 72% of the company’s second-lien debt, has been fighting the company’s proposed reorganization plan tooth and nail since the Chapter 11 filing on March 19 (see “Claire’s 2L notes holder, Oaktree, slams RSA, proposed reorg plan,” LCD News, March 21, 2018).

As reported, prior to filing for Chapter 11 the company entered into a RSA with an ad hoc group of first-lien lenders led by Elliott Associates and Monarch Alternative Capital, as well as with the company’s equity sponsor, Apollo Management.

Among other things, the ad hoc group agreed to backstop a $575 million rights offering to fund the reorganization plan.

Under the proposed plan, first-lien lenders, with claims of about $1.43 billion, would receive 100% of the reorganized company’s equity, along with a deficiency claim—a recovery valued by the company’s disclosure statement at 69.9% (although the actual recovery will be slightly higher, just over 70%, because second-lien lenders voted to reject the plan, and therefore will not participate in the deficiency claim pool, increasing the first lien deficiency claim distribution by about $8 million).

Second-lien lenders—who, as noted, voted to reject the plan—will participate in the cash recovery for general unsecured creditors, a recovery valued at 0.003–0.495% (had second-lien lenders voted in favor of the plan, they would have participated in the deficiency claim recovery with first-lien lenders on a pro rata basis for a cash recovery of 3.5%).

Throughout the case, Oaktree has argued that the $1.4 billion total enterprise valuation upon which the RSA and proposed reorganization plan are based is too low. In late June, Oaktree successfully challenged the company’s limited and truncated initial marketing process, obtaining a court order requiring the company to extend the process through Aug. 31, and opening it to a wider variety of deals than the 100% payout-event plan initially demanded by the company.

Oaktree was expected to submit a bid in connection with that process, but apparently did not do so.

In its objection, however, Oaktree renewed its argument that the reorganization plan is nonetheless premised on a valuation that is too low.

According to Oaktree, the company’s own financial expert pegged the company’s TEV at a midpoint of roughly $1.52 billion, or $120 million more than plan value.

Oaktree said its expert valued the company at a midpoint TEV $1.992 billion, which the company said was “consistent with all indications of the debtors’ value” other than company’s aforementioned $1.52 billion valuation, which Oaktree described as an “outlier.”

Among the indications of value that Oaktree cited that were consistent with a higher valuation were a valuation of $2.022 billion used by the company in authorizing its 2016 exchange transaction, as well as “the $2.053 billion valuation implied by the percentage recovery provided to holders of general unsecured elective claims under the [reorganization] plan.”

At the higher valuation, the distribution to first-lien lenders would exceed the value of first-lien claims, Oaktree argued. Oaktree also noted that the full value of the first-lien lenders’ participation rights in the new money investment, given the low valuation and the rights offering’s below market rates and plan discounts, was not fully factored into the plan’s recovery calculations.

As for the company’s efforts to market test its valuation, Oaktree argued that the company ran “not one, but two flawed sale processes, the admitted purpose of which was to validate the low-ball valuation that underlies the [proposed reorganization] plan, rather than to obtain a value maximizing purchase offer.”

In addition, Oaktree said the marketing process “featured zero meaningful involvement from the [creditors’] committee, which was not permitted to participate in and had no role in shaping, the debtors’ communications with bidders.”

Oaktree alleged the company’s marketing “outreach was lackluster, rushed, and overseen by a conflicted finance committee with the assistance of conflicted professionals.”

Lastly, Oaktree also said that critical information was withheld from bidders during the marketing process (although the specific information withheld was redacted from the publicly-filed objection), arguing that this issue was “particularly troublesome” because the company had justified its lower plan valuation by citing the feedback from the marketing process, namely, the lack of a bid.

According to Oaktree, however, while an independent bid from the market can be evidence of enterprise value, “the absence of a bid that the debtors deem to be qualified is evidence of nothing.”

Oaktree added, “That is particularly true here where evidence will show that bidders were influenced by the compressed timing of the process, by the taint of a contentious bankruptcy, and by the perception that the debtors would resist any bid that was not favorable to Apollo and the ad hoc first lien group.”

Moving beyond its valuation claim, Oaktree charged that provisions of the company’s proposed reorganization plan providing for the $575 new money investment from first-lien lenders were neither properly vetted nor market tested.

In addition, Oaktree argued that Apollo’s participation rights in the new money investment, amounted to a recovery to equity holders greater than that for second-lien and unsecured claims in violation of the absolute priority rule.

With respect to the specific terms of the company’s proposed reorganization  plan, Oaktree charged a wide array of gerrymandering, gifting, and classification allegations that, taken as a whole, paint a picture of purported recoveries to other unsecured creditors at the expense of second-lien lenders.

For example, Oaktree expects to recover between 0.003–0.495% of its claim, compared to recoveries of 6.2% for first-lien deficiency claims, 14.6% for unsecured note claims, and 74.2% for general unsecured elective claims.

According to Oaktree, the magnitude of the difference in treatment among different flavors of unsecured claims exceed those that have previously been held to violate the Bankruptcy Code’s prohibition of discrimination within a creditor class. Oaktree further contends that the company’s rationale for these differences, the gifting of certain carve outs from the first-lien collateral, do not meet legal requirements for such gifts. — Alan Zimmerman

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Pacific Drilling, Lenders Spar Over Chapter 11 Progress, Exclusivity

pacific drillingSenior lenders of Pacific Drilling are keeping up their pressure on the company to reorganize sooner rather than later, objecting to the company’s requested 120-day extension of its exclusive periods to file and solicit acceptance to a reorganization plan, despite the company’s offer to agree to mediation in the Chapter 11 case in exchange for the extension.

The battle over exclusivity evidences the continuing breakdown of trust between the parties in the case, at least insofar as the senior lenders are concerned. Lenders have maintained since the case was filed that the company was merely seeking to delay the case and was not acting in good faith to develop a reorganization plan.

The company’s secured lenders late last month sought to force the company into mediation, but the company argued that mediation would be premature at this relatively early stage of the case, and the bankruptcy court overseeing the case denied the secured noteholders’ motion.

In connection with its requested exclusivity extension filed late last month the company said it would now be willing to engage in mediation with secured lenders, provided, among other things, that the senior creditors agreed to the exclusivity extension.

But senior noteholders would not bite, suggesting that the company’s offer to engage in mediation was insincere.

In a March 14 objection to the proposed exclusivity extension, an ad hoc group of secured noteholders noted that while the company “promised serious plan negotiations beginning in January,” it was not until the filing of its exclusivity motion last week that the company agreed to a mediation process.

“If past is prologue,” the ad hoc group asserted, “the debtors have not—and thus will not—show diligence, and extending exclusivity will not advance the cases.”

Beyond rejecting the company’s mediation offer, the ad hoc group charged that the company had “squandered” its first four months in Chapter 11 and “cannot point to any progress [it has] made to show cause to extend exclusivity.”

The ad hoc noteholder group further said, “What makes this failure even more egregious is the comparative simplicity of the task at hand: a balance sheet restructuring to be negotiated among well-organized creditor groups with experienced counsel.”

The company argued in its exclusivity extension motion last week that “after a contentious start to the Chapter 11,” it has “been working hard to jump-start meaningful restructuring negotiations.” The company also asserted that “a lot has been going on in these cases, mostly out of court,” citing numerous telephone conversations and face-to-face meetings with creditors, its development of a business plan, and its efforts to resolve various contingencies, including an arbitration case in London that could add $350 million to the company’s unrestricted cash and eliminate a $336 million unsecured claim against the company.

But the ad hoc noteholder group was not buying that, either.

“It was not until months after the cases were filed, and as their 120-day exclusivity period drew to a close,” the group said in its objection, “that the debtors even retained experts and began to put together a business plan.”

Wilmington Trust, the agent bank under the company’s senior secured credit facility, made a similar argument, reiterating its concern that the company and its equity sponsor, Quantum Pacific, were simply seeking to delay the case in the hope that changing market conditions would ultimately create value for an equity recovery in the case.

Meanwhile, lenders under the company’s prepetition revolver and Citibank, the agent under the company’s RCF, did not formally object to the extension, since doing so would, under the cash collateral orders entered in the case, endanger adequate protection payments to RCF lenders.

Still, Citibank said in its response to the motion, “The [bankruptcy] court … should be under no illusion that the agent supports the debtors’ request to extend their exclusive periods within which to file, and solicit acceptances on, a plan of reorganization.”

Similarly, an ad hoc panel of RCF lenders said in a court filing, “The absence of an objection to the motion should not be construed as affirmative support for an extension of exclusivity and that the RCF group has concerns regarding the progress of these cases.”

A hearing on the exclusivity extension is set for March 21. — Alan Zimmerman

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iHeart Again Extends Forbearance as Bankruptcy Looms

iHeartMedia lenders have again agreed to forbear from calling default on the company’s missed interest payment, as the radio broadcaster continues to work on a consensual pre-arranged bankruptcy filing.

In a Form 8-K filed with the SEC, iHeartMedia said lenders have agreed to forbear on the missed interest payment until 11:59 p.m. Central Time on March 12, from the previously extended deadline of March 7.

As reported, iHeart failed to make a $106 million Feb. 1 interest payment to holders of its 14% senior unsecured notes due 2021 issued via subsidiary iHeartCommunications, entering instead into a customary 30-day grace period with lenders.

The company earlier this week filed a draft restructuring support agreement and term sheet showing senior lenders—including holders of the company’s term loans and priority guarantee notes—stand to receive 93.25% of the recapitalized equity, bridging the gap on a key sticking point of contentious year-long negotiations between the company’s sponsors and its debtholders.

iHeart is also is also operating under a customary 30-day grace period after it missed interest payments due on two series of priority-guarantee notes, ramping up the pressure among its more senior lenders to achieve a comprehensive restructuring of the company’s $20 billion debt load. — Rachelle Kakouris

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Fieldwood Energy Files Ch. 11 Petition, Looks to Slash Debt By $1.6B Through Restructuring

Fieldwood Energy has filed for bankruptcy protection in Houston to implement a restructuring plan that would reduce the company’s debt by $1.6 billion.

In a statement, the company said it has secured a $60 million DIP to support its Chapter 11 case, and intends to raise about $525 million in capital through an equity rights offering.

Additionally, Fieldwood said it has agreed to acquire all the deepwater oil assets of Noble Energy, located in the Gulf of Mexico, which complement its existing asset base and operations.

Details of the company’s restructuring support agreement have yet to be filed with the court, but the company said it has secured support from key stakeholders, including those holding 75% in principal of its first-lien debt, 72% in principal of its first-lien last-out term loan, and 77% in principal of its second-lien term loan, in addition to private equity sponsor Riverstone Holdings.

Today, Fieldwood filed a number of customary motions, including requesting clearance to pay pre-petition claims and use its cash management system. A first-day hearing has been scheduled for tomorrow morning.

The company also requested that its case be designated as a complex Chapter 11 due to the fact that it has more than $10 million in liabilities and there are more than 50 parties in interest in the case.

Fieldwood reported $1–10 billion in assets and liabilities in its petition.

The company recently entered into forbearance with first-lien last-out and second-lien term loan lenders after the exploration-and-production company failed to make interest payments due Dec. 29.

Fieldwood, a portfolio company of Riverstone Holdings, focuses on the acquisition and development of conventional oil and gas assets in North America, including the Gulf of Mexico.

Weil, Gotshal & Manges LLP is debtor counsel; Opportune LLP is financial adviser; and Evercore Group LLC is investment banker. — Kelsey Butler/Rachelle Kakouris

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Toys R Us Plans to Close Up to 182 Underperforming Stores

Toys R Us is seeking bankruptcy court authority to close up to 182 “underperforming brick-and-mortar store locations” in the United States, according to a court filing.

The company has roughly 900 stores in the U.S.

According to a Jan. 23 court filing, the company has not yet made the final decision to close all of the locations, saying that some final decisions will depend upon whether the company is able to negotiate more favorable lease terms for those stores.

The company did not specifically state when those final decisions would be reached, but said lease negotiations are “continuing.” The company said, however, that it expects most of the closings to be completed by April 16.

The company said the store-closing plan follows a performance evaluation that included “an extensive store-by-store performance analysis of all existing stores evaluating, among other factors, historical and recent store profitability, historical and recent sales trends, occupancy costs, the geographic market in which each store is located, the potential to downsize certain stores, the potential to consolidate certain Toys “R” Us and Babies “R” Us locations within a reasonable proximity of one another, the potential to negotiate rent reductions with applicable landlords, and specific operational circumstances related to each store’s performance.”

With respect to the stores pegged for closure, the company said that “overwhelming majority … have negative sales trends and have failed to meet the performance standards set by the debtors.”

The company added that it may ultimately need to close additional stores, noting that it had recently filed (and following a hearing yesterday, the Richmond, Va., bankruptcy court had granted, according to the court docket) a motion to extend the deadline for deciding on the assumption of store leases through the date that a reorganization plan is confirmed (the current deadline to decide upon leases was April 16).

As reported, the company is targeting the summer of 2018 for confirming a reorganization plan, with the goal of emergence from Chapter 11 ahead of the 2018 holiday season.

Meanwhile, in connection with the current round of story closings, the company is seeking to retain two groups, joint ventures Hilco Merchant Resources/Gordon Brothers and Tiger Capital Group/Great American, to manage the process and related sales of merchandise and furniture, fixtures, and equipment.

A hearing on the motion is set for Feb. 6. — Alan Zimmerman

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Bankruptcy: Armstrong Creditor Panel Agrees to Back Plan After Recovery Boost

Armstrong Energy on Jan. 9 entered into an amended restructuring support agreement with the unsecured creditors’ committee in its case under which the company boosted the recovery for holders of general unsecured claims, and the panel agreed to support the company’s reorganization plan, court filings show.

The company filed an amended reorganization plan on Jan. 9, reflecting the increased recovery.

The company’s reorganization plan confirmation hearing remains scheduled for Feb. 2, according to the court filings. The St. Louis bankruptcy court approved the adequacy of the company’s disclosure statement on Dec. 18, 2017.

Under the amended plan, the company would establish a GUC reserve of $2.2 million, with the company providing $1.225 million, Thoroughbred Resources (the company’s primary mineral rights provider, and a subsidiary of the company’s equity sponsor) contributing $0.55 million, and Knight Hawk Holding (which will manage the company’s operations upon completion of the restructuring transaction) contributing $0.425 million.

The company’s initial disclosure statement said that unsecured claims would be allowed in the amount of $124–127.8 million, including a senior note deficiency claim (which would not receive any distribution from the GUC reserve) of $99.1–102.8 million, translating into allowed GUCs that would receive a distribution from the reserve of $21.2–28.7 million, or a recovery of 7.7–10.4%.

Under the company’s initial plan, the recovery for GUCs, which consisted of a distribution of unencumbered collateral, would have been minimal, at 0–1%.

As reported, under the company’s proposed reorganization plan, the company’s noteholders would receive all of the equity in a reorganized company in exchange for the satisfaction of $90 million of their claims, subject to higher and better offers that the company agreed to seek during a 45-day post-petition marketing period.

The company said late last year that it was continuing to evaluate two indications of interest that it received during the marketing period, notwithstanding its expiration, “to determine which proposal, including the one memorialized in the transaction agreement [with noteholders], represents the highest and best offer.” — Alan Zimmerman

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Mattel Snags Looser Credit Covenants in the Wake of Toys ‘R’ Us Ch. 11

Toymaker Mattel has revealed that it is getting looser borrowing terms just after industry peer Toys ‘R’ Us filed for bankruptcy. Mattel today disclosed amendments to its credit facility in the wake of the Toys ‘R’ Us Chapter 11 filing, providing for relief from its consolidated-debt-to-consolidated-EBITDA requirement for the fiscal third quarter of 2017, and an increase in the ratio threshold to 4.5x for the fiscal fourth quarter, from 3.75x previously, according to regulatory filings. The ratio requirement then declines to 4.25x over the balance of the covenant-modification period, which ends at the issuer’s request or when consolidated debt to EBITDA is 3.75x or less for four consecutive quarters. (For more information on covenants, click here.)

For reference, Mattel in 2013 boosted its unsecured revolving credit facility to $1.6 billion, from $1.4 billion, under a leverage covenant of 3x.

Notably, the definition of consolidated EBITDA was amended to add back a cap on extraordinary, unusual, non-recurring, or one-time cash expenses, losses, and charges at $275 million, today’s filing shows. Other amendments include more restrictive covenants for receivable financing facilities, guarantee and lien triggers on ratings downgrades, greater restrictions against certain asset dispositions, and a broader base of subsidiary guarantees.

Leading toymakers Mattel and Hasbro have significant exposures to Toys ‘R’ Us, each deriving roughly 10% of their annual revenue from associations with the retailer, according to S&P Global Ratings.

Mattel’s credit profile was already eroding. The current BBB–/Baa2/BBB ratings reflect negative outlooks on all sides, and resulted from a Moody’s downgrade in March this year and subsequent downgrades by S&P Global Ratings and Fitch at the end of July, as top-line and margin headwinds mounted for the company, blocking its efforts to return to leverage in the low-2x area.

S&P Global Ratings yesterday said that its ratings on Mattel and peer Hasbro were not immediately affected by the Toys ‘R’ Us bankruptcy, though it noted that the filing “will cause incremental gross margin pressure and hurt profitability and cash flow if current receivables are not collected or are collected more slowly.”— John Atkins

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Toys ‘R’ Us Files Chapter 11; Has $3.1B Debtor-in-Possession Loan

Toys “R” Us filed for Chapter 11 in bankruptcy court in Richmond, Va., the company announced late last night.

The filing had been rumored for several days.

According to the company’s Chapter 11 petition, the company has $6.6 billion of assets and $7.9 billion of debt. Equity sponsors are KKR (through unit Toybox Holdings), Vornado Realty (through unit Vornado Truck), and affiliates of Bain Capital, with each holding roughly 32.5% of the company’s shares.

In a statement, the company said it would use the Chapter 11 to “restructure its outstanding debt and establish a sustainable capital structure that will enable it to invest in long-term growth and fuel its aspirations to bring play to kids everywhere and be a best friend to parents.”

The company operates some 1,600 stores around the world under the names, “Toys ‘R’ Us” and “Babies ‘R’ Us.”

The company further said that it intends to seek court supervision for its Canadian operations, as well, under the Companies Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice, but that neither filing would include any of the company’s other operations, which include about 255 licensed stores and a joint venture in Asia.

The company said its operations outside of the U.S. and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing and CCAA proceedings.

Beyond the company’s challenging capital structure, it is worth it to note that the company’s largest unsecured trade creditors include Mattel, with a claim of $135.6 million; Hasbro, with a claim of $59.1 million; Graco, with a claim of $59.1 million; Spin Master, with a claim of $32.8 million; and Lego, with a claim of $31.6 million.

Significant leverage and widespread speculation
The company cited its “significant leverage” as a driver of its Chapter 11, according to the first-day declaration in the case filed by CEO David Brandon.

According to Brandon, over the years the leverage left the company without capacity to maintain stores, provide expedited shipping options for customers, or implement a subscription-based delivery service.

Brandon also acknowledged that the company had “failed to capitalize” on its iconic brand “and its unique position as a one-stop shop for toys every day year round,” concluding, “The time for change, and reinvestment in operations, has come.”

But Brandon also pointed to the “widespread bankruptcy speculation in the media” as “leading to a severe constriction in the company’s trade terms.”

As Brandon sees it, if the media speculation did not cause the company’s financial distress, it clearly affected the timing of the company’s actions.

According to Brandon, the company hired Kirkland & Ellis and Alvarez & Marsal—a law firm and a financial advisory firm both known for their work in large corporate Chapter 11 situations, it should be noted—“to consider restructuring and capital structure solutions.” In addition, Brandon said, in late August, the company began negotiations with a group of lenders under its B-4 term loan to afford it breathing room through the holidays and to consider “restructuring alternatives.”

According to Brandon, however, “A news story published on September 6, 2017, reporting that the debtors were considering a Chapter 11 filing, started a dangerous game of dominos: within a week of its publication, nearly 40% of the company’s domestic and international product vendors refused to ship product without cash on delivery, cash in advance, or, in some cases, payment of all outstanding obligations. Further, many of the credit insurers and factoring parties that support critical Toys “R” Us vendors withdrew support.”

Noting that “the timing of all this could not have been worse,” Brandon said that given the company’s traditional 60-day trade terms, cash terms would require the company to immediately obtain more than $1 billion of new liquidity.

A Chapter 11 filing would allow the company to obtain DIP financing, which Brandon explained would stabilize operations and reopen supply channels for the holiday season.

In addition, Brandon said, the DIP obtained by the company provides “hundreds of millions of dollars of new money that is available for immediate and direct investment in the company’s stores and operations.”

DIP terms
The company said it had obtained a $3.1 billion DIP facility from “various lenders.”

Specifically, court filings show, the company’s DIP facility is comprised of three parts.

First is a $2.3 billion DIP ABL from a group led by J.P. Morgan Chase, consisting of a $1.85 billion ABL ($1.3 billion to be available on an interim basis) and a $450 million FILO senior secured term loan that will be used to refinance existing obligations under the company’s prepetition ABL and for general corporate purposes.

The ABL facility also contains a $300 million sub-facility tranche for Canadian operations.

Interest under the ADL facility is L+250, with a 1% LIBOR floor.

The second piece is a $450 million term loan DIP (up to $350 million to be available on an interim basis) provided by an ad hoc group of prepetition term lenders. Interest is at L+775, with a 1% LIBOR floor. NexBank SSB is the administrative and collateral agent.

The last piece of funding includes a commitment from an ad hoc group of holders of the company’s “Taj Notes” (roughly $583 million outstanding of 12% senior secured notes due Aug. 15, 2021, issued through unit, Tru Taj) to provide $375 million in incremental notes to support the company’s international operations. According to the Brandon declaration, the Taj noteholders also agreed to waive certain defaults under the Taj notes and to forbear from exercising rights and remedies pursuant to a default against the Debtors.

Among other things, the waiver allows the company’s prepetition Euro ABL facility to remain in place, Brandon said.

Also note that the DIP financing includes a provision for intracompany borrowing by U.S. borrowers from the company’s Canadian unit, Toys Canada, and Wayne Real Estate Parent Company, in an undetermined amount, from time-to-time (with the amount borrowed from Toys Canada capped at $75 million). — Alan Zimmerman

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Toys ‘R’ Us Debt Deepens Decline As News Reports Infer Bankruptcy

Bonds backing Toys ‘R’ Us renewed their recent dramatic slide today as news reports suggesting that a bankruptcy is increasingly inevitable pushed the issuer’s debt structure deep into distress.

So stark is the selloff that the company’s most pressing maturity—a $208 million issue of 7.375% senior unsecured holdco notes due 2018—has halved in value in the past two weeks.

The bonds traded at just 46 cents on the dollar today, according to MarketAxess, down from quotes of 60/65 yesterday morning and off a staggering 51 points from Sept. 4, when before bankruptcy rumors surfaced the bonds traded in a 97 context.

Several news stories fueled the move today. Debtwire is reporting that the company has retained Prime Clerk, a bankruptcy claims and noticing agent, while Bloomberg followed Debtwire with reports that the company’s vendors have scaled back shipments on heightened bankruptcy fears.

The Toys ‘R’ Us B-4 term loan due April 2020 was quoted at a 63.875 bid today, down roughly two points from the last session, and a fresh low for the year, sources said. The paper has plunged more than 10 points since the start of the month.

Initial expectations had pointed to a potential distressed exchange for the 2018 notes, given that the fall in bond prices would facilitate a take-out at a much more favorable price. However, because of the extremely negative price action, bankruptcy in the form of a pre-pack is increasingly possible, sources said.

The company’s complex capital structure will see $400 million of secured and unsecured debt maturing in May and October 2018, with $2.6 billion due in 2019.

S&P Global Ratings last week downgraded the issuer’s corporate rating to CCC+, from B–. Ratings at Moody’s and Fitch are B3/CCC, respectively.

Toys ‘R’ Us is expected to report its second-quarter results on Sept. 26. — Staff reports

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Bankruptcy: Avaya Cuts Deal with Credit Panel as Proposed Plan Faces Flak

Avaya said that it has reached an agreement with the unsecured creditors’ committee in its Chapter 11 case under which the cash distribution to unsecured creditors was increased to $60 million, from $25 million, with an election for holders of unsecured claims to choose to receive their recoveries in the form of reorganized stock.

The agreement also eliminated the 8.2% recovery cap for unsecured creditors, the company said in a statement filed today with the Manhattan bankruptcy court.

The settlement is subject to documentation, and the company said it would file a revised reorganization plan and disclosure statement prior to a hearing on the disclosure statement, currently set for Aug. 25.

The agreement comes on the heels of several objections filed to the company’s proposed disclosure statement by key creditor groups in the case.

Avaya announced on Aug. 7 that it had entered into a plan support agreement with first-lien lenders, and a separate agreement with the Pension Benefit Guaranty Corp., on a settlement to drive a reorganization plan. And while the company also filed a proposed amended plan that day, it also said that it would “continue to work to build consensus and gain the support of other stakeholders.”

In an objection filed last week, the ad hoc committee of second-lien lenders in the case charged that the company’s proposed amended reorganization plan was the result of “backroom negotiations” that, “contrary to the debtors’ stated desire for a prompt emergence from Chapter 11, … will only lead to protracted and costly litigation.”

According to the ad hoc panel, the company’s proposed plan, based on an agreement the company said it reached with more than 50% of its first-lien lenders, represents a strategy to pursue a cram-down “dictated by the ad hoc first-lien group, as opposed to the negotiated, arms-length process with all of their creditors that they [had previously] represented to the [bankruptcy] court.”

The second-lien group, alleging that it was excluded from negotiations that resulted in releases being granted to the company’s managers, officers, and directors in connection with intercompany and intra-company disputes affecting the their interests, and alleging conflicts of interest and self-dealing in connection with the settlements underlying the company’s proposed reorganization plan, argued that the proposed reorganization plan was “patently unconfirmable on its face.”

Similarly, the ad hoc crossover group of creditors holding first-lien, second-lien, and unsecured debt in the company, also said that the disclosure statement was premised on a “patently unconfirmable” plan.

Both ad hoc creditor groups argued that it would pointless to approve the disclosure statement and conduct a voting process for a reorganization plan that does not meet legal requirements for confirmation.

A third objection, filed by one of the company’s creditors, SAE Power Co., argued that the disclosure statement failed to disclose the existence of hundreds of millions of dollars of unsecured claims, primarily litigation claims, and numerous administrative claims, that “the company may well have no ability to satisfy.”

As a result, SAE argued, the proposed recovery for unsecured creditors (at the time, $25 million) could be “greatly diminish[ed].”

It is unclear whether the company’s agreement with the unsecured creditor panel fully addresses SAE’s concerns.

As reported, the ad hoc group of second-lien lenders presented an alternative reorganization proposal to the company last month, but Avaya has, so far, refused to negotiate with the group (see “Avaya nets exclusivity extension amid fracas with 2nd-lien group,” LCD News, July 27, 2017).

Prior to that, the crossover group had presented a proposal to the company (see “Avaya crossover group signs NDA, proposes alternate plan for company,” LCD News, May 24, 2017), but the status of that proposal is unclear. Note that the members of the second-lien panel, for the most part, were previously members of the crossover group when its proposal was made, but have since split off. — Alan Zimmerman

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