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AFA Foods (“pink slime” producer) exits Chapter 11; estate seeks $84M in clawbacks

The Chapter 11 liquidation plan for AFA Foods took effect on Wednesday, court records show, following bankruptcy court confirmation of the company’s plan on March 7.

U.S. Bankruptcy Judge Mary Walrath approved a global settlement resolving all key disputes remaining in the case last July. Lawyers for the bankrupt estate are now attempting to claw back about $84 million for creditors. AFA’s estate recently filed 125 suits seeking to recover allegedly preferential payments made to vendors and other parties in the weeks leading up to the company’s April 2012 bankruptcy filing, according to Law360.

Although the gross amount sought by the suits is about $84 million, the net value to creditors will likely be in the $15 million range due to the offset rights of some of the targets, Law360 reported.

AFA repaid its senior lenders last year after selling its meat-processing facilities, which brought in a total of $69.7 million. The company was left with about $14 million in cash on hand after repaying its $56 million debtor-in-possession credit facility.

AFA filed for Chapter 11 in April 2012, in the wake of negative media reports on one of its primary products, a lean, finely-textured processed beef often added to ground beef and known pejoratively as “pink slime.” The ground-beef processing company, based in King of Prussia, Pa., blamed its filing on “recent changes in the market for its ground-beef products and the impact of media coverage related to boneless lean beef trimmings.”

AFA became the subject of media scrutiny as early as 2009, when its facility in Ashville, N.Y., recalled more than 500,000 pounds of ground beef after it was linked to an outbreak of E. coli that killed two people and sickened about 500 others, according to The New York Times. The beef trimmings commonly used to make ground beef are more susceptible to contamination because E. coli thrives in cattle feces that can get smeared on the surfaces of whole cuts of meat, the newspaper reported.

The company faced another blow in March of 2012 when a series of reports by ABC News criticized boneless lean beef trimmings, also referred to as “pink slime,” which ABC said is added to 70% of ground beef sold in U.S. supermarkets. “Once only used in dog food and cooking oil, the trimmings are now sprayed with ammonia so they are safe to eat and added to most ground beef as a cheaper filler,” ABC News said. Still, the product meets federal food-safety standards and has been used for years, according to the Associated Press.

In the wake of the report, large grocery-store chains like Kroger pulled the product from their shelves.

Jones Day, Imperial Capital, and FTI Consulting advised AFA in its restructuring. – John Bringardner

 

 

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To help repay LightSquared creditors, Ergen seeks OK to sue Falcone; “abhorrent” or “frivolous”?

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Harbinger Capital Partners founder Philip Falcone has carried out “one of the most brazen acts seen in recent times by a fiduciary to exert control over the assets of [a] bankrupt estate to the detriment of creditors,” lawyers for Charles Ergen’s SP Special Opportunities wrote in a motion filed late Friday seeking court permission to sue Falcone on behalf of the LightSquared estates.

 

“In short, Mr. Falcone’s complete disregard for his stakeholders is not only abhorrent,” SPSO wrote, “it is illegal. The only silver lining is that LightSquared has now accrued a new source of value – claims against Mr. Falcone worth potentially hundreds of millions of dollars. Unfortunately, LightSquared has determined not only to abandon these claims and look the other way but to affirmatively release them.”

 

“The motion is completely frivolous,” Harbinger lawyer David Friedman said today. SPSO is a special purpose vehicle Ergen created to buy about $1 billion in LightSquared senior debt claims – LightSquared and Harbinger have accused Ergen and SPSO of fraudulently acquiring those claims. Judge Shelley Chapman oversaw a week-long trial on the dispute this January, but has not yet issued her ruling on the matter.

 

SPSO’s allegations on Friday echo complaints an ad hoc group of secured creditors in the case made more than a year ago (see “LightSquared lenders argue for right to sue Harbinger Capital,” LCD News, Jan. 9, 2013). The group – which did not at that point include SPSO – argued that LightSquared was “completely conflicted” and would not sue Harbinger, its controlling insider. SPSO, relying heavily on testimony and discovery from LightSquared’s recent confirmation hearing, largely skipped past Harbinger to lay the blame squarely on Falcone. “Conflict of interest is evident in this case,” SPSO wrote. “Falcone controls LightSquared, and LightSquared holds valuable claims against Philip Falcone.”

 

Rather than facilitate a sale of LightSquared’s assets, SPSO says Falcone has acted behind the scenes to drag the company’s Chapter 11 cases out as long as possible, in order to wait for FCC approval of its proposed spectrum use, which could more than double the company’s valuation.

 

“Mr. Falcone has filed, threatened to file, or caused LightSquared to pursue meritless litigation–hostile actions if taken by an outsider; illegal if pursued by a director in violation of the automatic stay,” SPSO wrote. “At best, such litigation has wasted millions of dollars. At worst, Mr. Falcone’s actions have jeopardized and undermined LightSquared’s chances of achieving the one goal that could save the company – FCC approval.”

 

Falcone, through Harbinger and affiliated funds, indirectly owns about 96% of LightSquared. Under the reorganization plan that LightSquared just spent two weeks defending in court (see “LightSquared plan ‘jammed Charlie’ as compromise, Phil Falcone says,” LCD News, March 31, 2014), Harbinger would remain the single largest shareholder of the reorganized company, with 36.02% of NewCo common stock and hold call options to purchase additional Class B and C common stock.

 

SPSO alleges Falcone breached his fiduciary duties of loyalty, care, and good faith, and violated the bankruptcy code’s automatic stay by initiating a $4 billion lawsuit against GPS industry representatives – without warning LightSquared it was doing so. SPSO asked Judge Chapman to enjoin Falcone from participating in the case, and asked for “substantial damages” that could total hundreds of millions of dollars.

 

SPSO further specified that it would welcome court appointment of a trustee to pursue the claims, instead of doing so itself.

 

“Mr. Falcone has caused massive damage to the value of these estates since well before these cases were commenced,” SPSO’s lawyers wrote. “The estate’s claims against Mr. Falcone represent an untapped source of value when the debtors, by their own admission, cannot raise sufficient capital to repay more than half of their senior secured debt obligations. The failure to pursue the estate claims is unjustified and SPSO should be permitted to sue Mr. Falcone on the estates’ behalf.”

 

“As an admitted violator of the federal securities laws, Falcone is no stranger to manipulation and fraud,” SPSO’s motion went on. “He has treated LightSquared like his own pocketbook, and the influence and control he has wielded over the decisions of LightSquared has done immense harm.”

 

A hearing on SPSO’s motion had not yet been scheduled, as of press time. LightSquared is slated to return to court on April 9 to present Judge Chapman with details of its latest debtor-in-possession financing request (see “LightSquared seeks court OK for new $80M DIP as case grinds on,” LCD News, April 3, 2014), which includes new funding from both Harbinger and SPSO. Closing arguments in LightSquared’s confirmation hearing are scheduled for May 5-6. – John Bringardner

 

 

 

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LightSquared’s latest turn: Plan “jammed Charlie” as compromise, Phil Falcone says

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Philip Falcone never wanted Dish Networks founder Charlie Ergen in LightSquared’s capital structure, but opted to support a plan that “jammed Charlie” in order to get the company out of bankruptcy as soon as possible, the Harbinger Capital Partners founder testified today in Manhattan bankruptcy court

Falcone took the stand on the final day of a two-week reorganization-plan-confirmation hearing in LightSquared’s long-running Chapter 11 proceedings. Judge Shelley Chapman scheduled closing arguments for May 5 and 6, but did not indicate when she expects to finally approve or deny the plan.

Judge Chapman, meanwhile, has yet to rule on litigation between LightSquared and Ergen’s investment vehicle, SP Special Opportunities, in a dispute at the heart of LightSquared’s reorganization plan. In January, she held a week-long trial to determine whether Ergen improperly acquired about $1 billion in LightSquared senior claims via SPSO. Closing arguments in the dispute ended just two days before the confirmation hearing began, even though Chapman’s final decision in that dispute directly impacts her ability to confirm LightSquared’s plan. (see “LightSquared v. Ergen trial wraps, judge’s ruling yet to come,” LCD News, March 17, 2014).

SPSO is the sole LightSquared creditor opposed to the company’s current plan – based on new financing from Melody Capital Partners, J.P. Morgan, Fortress Investment Group, and Harbinger – but the size of its claims gives Ergen a blocking position, allowing SPSO to veto any plan proposal. The current plan proposes to repay SPSO’s claims in full, but it would do so via a third-lien, seven-year payment-in-kind note, instead of the cash that creditors in the same class will receive.

LightSquared has asked Judge Chapman to dismiss SPSO’s claims altogether, a move Chapman has already said she would not consider, or to subordinate SPSO’s claims and designate its vote. Doing so would effectively guarantee confirmation of LightSquared’s plan.

SPSO has maintained that its debt purchases were all “perfectly legal,” and that it is being unfairly discriminated by the plan. SPSO lawyer James Dugan repeatedly questioned Falcone today about his decision to support subordination of SPSO’s claims. Citing e-mails Falcone wrote last December, Dugan focused on his animosity toward Ergen, evidence that could support SPSO’s argument that subordination of its claims was a punitive tactic, which would render the plan unconfirmable.

“You specifically thought it was a good idea to subordinate SPSO’s debt, right?” Dugan asked Falcone.

“I think it goes above and beyond that,” Falcone replied.

“What you say in your e-mail is, I like [the] subordination plan,” Dugan said.

“It would help the company exit bankruptcy,” Falcone said. “It wouldn’t necessarily do much for me.”

Among other things, Falcone also said in another e-mail Dugan cited that if LightSquared does not eventually receive FCC approval for the company’s proposed spectrum use – a crucial factor in the company’s business plan – he would file lawsuits that would tie up the FCC and the Department of Defense in litigation for the next decade.

Harbinger agreed to various plan provisions that are detrimental to its interests in order to push through a viable plan for LightSquared, Falcone said under questioning from his own lawyer, Kasowitz, Benson, Torres & Friedman partner David Friedman. Among other things, under the current proposed plan Harbinger agreed to give up its right to sue Ergen, the GPS industry, or the FCC on behalf of LightSquared.

After an earlier plan proposal fell apart in December, Falcone testified that he agreed to a new proposal from Melody Capital Partners that would subordinate Ergen/SPSO claims in order to repay the rest of the company’s creditors in cash.

Under the current plan, Harbinger will receive about 36% of the equity in reorganized LightSquared in exchange for its current 80% equity stake and an additional $150 million investment. A call-option gives Harbinger the chance to take up to 45% of the equity for an additional “couple hundred million,” Falcone testified.

LightSquared will run out of operating cash around April 15, when it is expected to exhaust a $33 million debtor-in-possession credit facility the court approved in February. The company is currently working on a new financing agreement with lenders to support the company through the remainder of its case, Milbank partner Matthew Barr told the court this afternoon. Barr said he would file a notice with the court tomorrow regarding a deal on financing by May 31. – John Bringardner

 

 

 

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Ergen created excuse to pull LightSquared bid, lender witness says

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An ad hoc group of creditors in LightSquared’s Chapter 11 proceedings today expanded on its theory that Dish Networks founder Charlie Ergen purposely withdrew a $2.22 billion stalking-horse bid for LightSquared’s assets, at the last minute, as part of a long-running strategy to acquire the company’s spectrum at an even lower price.

Blackstone Senior Managing Director Steven Zelin, a financial advisor to the ad hoc group, took the witness stand this morning as LightSquared’s two-week reorganization plan confirmation hearing continued in Manhattan. After a contentious and disorganized day of witness testimony from Charlie Ergen on Wednesday (see “LightSquared lenders accuse Ergen of ‘scheme’ in pulling $2.22B bid,” LCD News, March 26, 2014), ad hoc group lawyer Glenn Kurtz today asked Zelin a series of questions outlining his experience dealing with Ergen in both LightSquared’s Chapter 11 and that of another bankrupt spectrum company, TerreStar. (See “TerreStar nets plan confirmation,” LCD News, Feb. 15, 2012).

LightSquared has previously brought up Ergen’s role in the TerreStar bankruptcy, and that of DBSD, to argue that he has a pattern of maneuvering in Chapter 11 cases to acquire wireless spectrum at a discount.

Abandoned bid

The ad hoc group backed a $2.22 billion bid for LightSquared’s spectrum assets from L-Band Acquisition Corporation (LBAC) – a Dish special purpose vehicle originally created by Ergen to acquire LightSquared’s assets – in an auction scheduled for Dec. 11, 2013. Bid procedures for the auction were approved in September, followed by a process of contract negotiation and diligence that Ergen’s lawyers conducted, Zelin testified. “On a number of occasions, [Ergen lawyer] Rachel Strickland clearly expressed to me that Ergen had more money to spend,” Zelin said. Without giving a specific extra dollar amount Ergen was willing to pay, his lawyers said LBAC was willing to spend more money to get LightSquared’s support for the sale, Zelin noted.

As Ergen testified on Wednesday, he and a team of advisors and Dish board members flew from Denver to New York for the auction, where LBAC was willing to spend up to $2.4 billion at auction. The auction was cancelled at the last-minute, however, when LBAC’s team raised a technical issue, the true impact of which they claimed to have discovered that day, “in real time,” Ergen said.

The “technical issue” has been discussed in court numerous times in recent months, but details have been kept largely confidential. References in court records to a “Qualcomm issue” suggest the problem concerns Qualcomm’s development of chipsets for LightSquared handsets and their potential interference with GPS signals. Generally speaking, GPS interference problems helped drive LightSquared into bankruptcy in the first place – the company has lobbied the FCC for several years now seeking approval for terrestrial use of its wireless spectrum, the centerpiece of LightSquared’s business plan. Phil Falcone, founder of LightSquared majority equity holder Harbinger Capital Partners, testified this January that he believes the FCC will approve LightSquared’s spectrum use applications by the end of 2015. If those regulatory hurdles were cleared, Ergen’s financial advisors have pegged the LightSquared’s spectrum value at as high as $8.9 billion. LightSquared’s own advisors valued it as high as $9.8 billion.

Zelin said today the “technical issue” had been revealed in public documents as early as mid-2011, nearly a year before LightSquared filed for bankruptcy protection. LBAC first raised the issue last November, after it had agreed to serve as the stalking-horse bidder at auction. LBAC lawyer Rachel Strickland specifically asked that details of the technical issue be put into a data room for other bidders at the auction, Zelin testified. “It was quite strange,” he said. “I’ve never been in a situation where a stalking horse bidder tried to convince me that an issue like this needed to be disclosed.”

Still, Ergen continued to express interest in the purchase and discussed with the ad hoc group whether it might spend more at auction, Zelin said. But on the day of the auction, when it became clear that a rumored competing bid from Centerbridge Partners had not materialized, LBAC added new conditions to its bid that the ad hoc group would not agree to, and in January LBAC withdrew its offer altogether.

After the fact, Zelin saw documents produced in discovery that showed Ergen’s lawyers at Willkie, Farr & Gallagher drafted a presentation for Dish showing how LBAC could reduce its purchase price if there were no other bidders at auction, he testified.

“Why in the world did he pull the bid if [Ergen] doesn’t mean what he really says, that there’s a technical issue,” Judge Chapman asked Zelin. “How do you explain what’s transpired?”

“He doesn’t want to pay any more for an asset than he has to,” Zelin said. “That’s the simplest explanation I have. When he found out he didn’t have to pay so much, he created a set of circumstances he claimed were brand new, which were in fact not brand new,” he added, referring to the “technical issue.”

GLC Advisors Managing General Partner J. Soren Reynertson took the stand after Zelin, answering questions about the LightSquared valuations he produced for Ergen. Ergen’s team hired GLC five weeks ago, paying $1.25 million in fees for the firm’s expert testimony, Ergen testified on Wednesday.

The confirmation hearing continues Friday with testimony from Omar Jaffrey, a founding partner of LightSquared plan sponsor Melody Capital Partners, and Jake Rasweiler, a technical expert from Sublime Wireless Inc. The witness testimony portion of the confirmation hearing will conclude on Monday, with Philip Falcone. – John Bringardner

 

 

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Bankruptcy: Longview Power exclusivity extension faces objection from contractor

longviewOne of the contractors that has been battling with Longview Power over alleged negligent construction work on the company’s Maidsville, W. Va., power plant, has asked the bankruptcy court to block a further extension of the company’s plan-filing exclusivity period, unless the company agrees to withdraw its current proposed reorganization plan from consideration.

Kvaerner North American Construction argued in a March 26 objection to the company’s bid to extend its exclusivity period through June 4 that the requested extension is “at odds” with the company’s previous position that the case must be resolved as quickly as possible. Indeed, according to Kvaerner, the requested exclusivity extension would push the timetable for the case well beyond the company’s own milestone deadlines set forth in its DIP facility – milestones that have driven the company’s legal strategy up to this point.

The alleged inconsistency is significant from Kvaerner’s perspective because Longview has argued in bankruptcy court that its need for a quick resolution to its Chapter 11 case requires, among other things, that the mechanics’ lien claims asserted in the case by Kvaerner and two other contractors for work on the Maidsville plant – claims about which there is an arbitration proceeding slated for next year – should be estimated at zero for purposes of the company’s proposed reorganization plan.

As reported, Longview filed for Chapter 11 on Aug. 30, 2013, stating among other things that the Maidsville plant had “been plagued by design, construction, and equipment defects and failures that have prevented the facility from operating at full capacity.” The company cited alleged shoddy work as a primary reason behind its Chapter 11 filing, saying, “These issues have prevented the debtors … from selling electricity on anything other than a day-ahead basis” and “limiting the debtors’ sales and ability to sell higher-margin energy services, and reducing the revenue stream from power facility operations while increasing volatility around their cash flows.”

As also reported, Longview has resolved its dispute with one of the three contractors that worked on the plant – Foster Wheeler (see “Longview Power settles with one contractor, two more to go,” LCD News, Feb. 12, 2014) – while it is scheduled to begin mediation today with the other two, Kvaerner and Siemens Power Generation (see “Longview Power enters mediation with contractors,” LCD, March 7, 2014).

Against that backdrop, the company’s proposed reorganization plan, filed late last year, would convert about $1 billion of pre-petition debt into 85-90% of the equity in the reorganized company, with the remaining equity distributed to lenders behind the company’s $150 million debtor-in-possession credit facility. The bankruptcy court approved the adequacy of the disclosure statement on Dec. 19, 2013.

The plan provides for the Maidsville mechanics’ lien claims to be estimated at zero for plan purposes. The company has said that the plant has a sufficient equity cushion in case the company is ultimately held liable for payments to the contractors.

According to Kvaerner, however, the company’s reorganization plan “has proved unworkable,” and as a result, Kvaerner argues, the company’s exclusivity should be terminated to allow other parties to propose plans.

But Kvaerner’s objection also said that if the company were willing to withdraw its current proposed reorganization plan and “agree to propose a realistic plan which does not include their failed disputed mechanics’ lien claims resolution procedure,” then an exclusivity extension would be warranted.

It is worth noting that while Kvaerner argues that other parties should be freed up to propose alternative reorganization plans if the company insists on pursuing its current proposal, Kvaerner doesn’t state, or even suggest, that it would file an alternative reorganization plan, or even that it is aware of any other party that is interested in doing so.

A hearing on the company’s exclusivity extension is scheduled for April 28. Under Delaware court rules, exclusivity is automatically extended until the bankruptcy court issues a decision on the extension motion. – Alan Zimmerman

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LightSquared lenders accuse Ergen of ‘scheme’ in pulling $2.22B bid

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A Dish Networks subsidiary was prepared to offer as much as $2.568 billion for LightSquared’s assets, and it conducted valuations that pegged the company’s wireless spectrum at as much as $8.9 billion, Dish chairman Charlie Ergen testified during LightSquared’s reorganization plan confirmation hearing in the Manhattan bankruptcy court today.

Lawyers for an ad hoc group of LightSquared creditors and Harbinger Capital Partners, the company’s majority equity holder, questioned Ergen for several hours this morning about what Ergen believed LightSquared’s assets were worth when he made his initial $2 billion offer for its spectrum last May, and why, after gaining the support of the ad hoc group, he ultimately abandoned his bid for the company this January.

Ergen’s testimony comes in the middle of a two-week confirmation hearing on LightSquared’s proposed reorganization plan. SP Special Opportunities, the special-purpose vehicle Ergen created to acquire about $1 billion in LightSquared debt, is the sole creditor opposed to the plan.

L-Band Acquisition Corporation (LBAC), the Dish entity Ergen created to bid on LightSquared’s assets – and later sold to Dish for $1 – originally offered $2 billion in cash for LightSquared’s spectrum, but later raised its offer to $2.22 billion, which became the stalking-horse bid at a Dec. 11, 2013 auction. LBAC’s offer was the centerpiece of a reorganization plan put forth by the ad hoc creditor group – which included Capital Research & Management Co., Cyrus Capital Partners, Intermarket Corp., and UBS – one of four competing plans at the time.

Ergen and a team of his advisors flew to New York for two days in December for the auction, Ergen said. Press reports at the time suggested Centerbridge Partners would bid as much as $3.3 billion for LightSquared’s assets, but the auction was canceled at the last minute when LBAC withdrew its bid and the rumored Centerbridge offer failed to materialize.

This January, the ad hoc group tried and failed to force LBAC to carry on with its bid (see “LightSquared lenders lose battle to preserve $2.2B Dish bid,” LCD News, Jan. 23, 2014), and had to drop its plan proposal in favor of an amended plan put forth by LightSquared.

Under questioning today from ad hoc group lawyer Glenn Kurtz, a partner at White & Case, Ergen said that in spite of a “technical issue” with LightSquared’s spectrum Dish discovered in November, LBAC was in fact ready to proceed with its $2.22 billion offer at auction. LBAC financial advisor Perella Weinberg prepared a fairness opinion suggesting LBAC could bid up to $2.4 billion for the assets, Ergen testified, but at the last minute, on the advice of his technical advisors, Ergen pulled the bid moments before the auction was set to proceed.

“We had an inkling of the technical issue… but there was a finding put in the data room shortly before the auction” that led LBAC to cancel its bid, Ergen said. Details of the “technical issue” have been kept confidential, with redacted court filings and off-the-record testimony in court.

After the failed auction, LBAC discussed a new offer with the ad hoc group, attaching conditions related to FCC approval of LightSquared spectrum, Ergen said today. As of Dec. 31, 2013, LBAC had raised its offer its offer to $2.568 billion, but the ad hoc group rejected the new terms of the deal.

Kurtz suggested the pulled bid was part of a long-running “scheme” by Ergen and DISH to acquire LightSquared’s spectrum for far less than his own advisors suggested it might be worth. With FCC approval – which Harbinger founder Phil Falcone has said he expects by the end of 2015 – Perella estimated the spectrum could be worth up to $8.9 billion for Dish, with a midpoint value of $7 billion.

The confirmation hearing will continue Thursday with testimony from Blackstone senior managing director Steven Zelin, who is an advisor to LightSquared, and J. Soren Reynertson, a managing general partner at GLC Advisors who provided Ergen with his own spectrum valuation opinion. – John Bringardner

 

 

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Cengage cuts pricing on $1.75B exit leveraged loan, amid heavy investor demand

A Credit Suisse-led arranger group today cut pricing on Cengage’s $1.75 billion exit term loan amid heavy investor demand. Pricing is now L+600, with a 1% LIBOR floor, offered at 99.5, with the commitment deadline accelerated to Monday, March 3 at 5:00 p.m. EST.

By contrast, Credit Suisse, Deutsche Bank, Morgan Stanley, Citi, and KKR Capital originally talked the covenant-lite deal at L+700, with a 1% floor, at 99. As before the loan includes six months of 101 soft call protection.

Cengage is tweaking other items in the credit agreement, including revising step-down levels in the 50% excess-cash-flow sweep and slightly expanding the incremental loan basket.

As revised the loan would yield 7.3% to maturity down from 8.48% at initial talk.

The transaction also includes a $200 million asset-based revolver.

As noted earlier, creditors have until March 10 to vote on Cengage’s reorganization plan, with a confirmation hearing set for March 13. The settlement requires Cengage to emerge from Chapter 11 by March 31.

Under the settlement (see “Cengage, creditors hammer out consensual plan; exit seen by March 31,” LCD, Feb. 3, 2014), first-lien lenders are to receive 100% of the new reorganized equity (subject to the election of second-lien lenders and unsecured creditors to receive equity in lieu of cash in exchange for their claims), cash proceeds of the new term debt, and a share of the company’s “distributable cash,” which will be in an amount to be determined between $50-175 million. The allocation of equity and distributable cash to first-lien lenders will ultimately depend, in part, on the extent to which second-lien and unsecured creditors opt for equity in lieu of cash.

Second-lien lenders and unsecured creditors are to generally receive $225 million, comprised of each holder’s election of either cash or new equity. Of that amount, second-lien lenders will get 62.5%, or about $141 million, while the remaining 37.5% will be distributed to holders of senior notes claims (about $72.14 million), general unsecured claims ($11.22 million), and PIK notes claims (about $1 million), subject to certain adjustments related to the holdings of Cengage equity sponsor Apax Partners. – Staff reports

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Bankruptcy: Tuscany Int’l Drilling files Chapter 11, seeks sale to lenders

tuscanny drillingTuscany International Drilling, a Canadian onshore drilling company with operations in Colombia, Brazil, and Ecuador, filed for Chapter 11 protection in Wilmington, Del., on Sunday, listing nearly $200 million in debt under its prepetition loans.

The company has signed a restructuring support agreement with holders of 95% of its prepetition loans, under which Tuscany said lenders will be able to credit bid their claims in a bankruptcy auction of the company’s assets. Milestones set under the RSA require Tuscany to file its proposed reorganization plan and disclosure statement within 30 days of the Chapter 11 filing, and to hold a confirmation hearing within 90 days.

Lenders will provide the company with a $70 million debtor-in-possession credit facility, consisting of $35 million in new money and a roll-up of $35 million in prepetition debt. Credit Suisse is serving as administrative agent for the DIP, priced at L+800 with a 2% LIBOR floor. Tuscany will ask Judge Kevin Gross for access to up to $15 million in new money on an interim basis at a Feb. 4 hearing.

In its initial court filings, Calgary-based Tuscany traced its financial woes to late 2012, when it began to experience significant revenue, cash flow, and liquidity challenges, due in large part to low rig utilization, non-payment by certain customers on large overdue accounts receivable and underperforming acquisitions in Brazil and Africa. At the moment, its overall rig utilization is less than 60%, Tuscany said.

The company’s board has been pursuing strategic alternatives since 2012, when it hired Black Spruce Merchant Capital Corp. Tuscany also hired Citigroup Global Markets Inc. as a financial advisor in 2013. Latham & Watkins and Young Conaway Stargatt & Taylor are representing the company in its U.S. restructuring. McCarthy Tetrault is counsel to the firm in Canada, where it plans to seek relief under the Companies’ Creditors Arrangement Act. – John Bringardner

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Day 5: LightSquared didn’t know ergen was buying, Phil Falcone testifies

lightsquared logoHarbinger Capital Partners head Philip Falcone suspected Charlie Ergen could be behind LightSquared senior debt purchases made by Sound Point Capital Management as early as May 2012 – but he also suspected AT&T, Cablevision, Carlos Slim or a big private equity firm, Falcone testified in bankruptcy court in Manhattan this morning.

Falcone took the stand on the fifth day of the trial to determine whether Ergen fraudulently acquired about $1 billion of senior debt in LightSquared in order to gain control among the company’s senior lenders and thwart reorganization efforts by Harbinger, the company’s majority equity holder.

The trial is an adversary proceeding, a subset of LightSquared’s Chapter 11 case, the outcome of which will help determine the next steps that the company and its lenders will take as they prepare to battle over three competing reorganization plans. LightSquared and Harbinger are seeking as much as $4 billion in damages from Ergen, and the elimination or subordination of his claims in the case.

A central question in the trial concerns whether and when Falcone and LightSquared knew that Ergen was behind the debt purchases made by SP Special Opportunities, the entity Ergen used to mask his trades. Stephen Ketchum, who testified on Wednesday (see “LightSquared lawyer stonewalled by Sound Point witness on day four,” LCD News, Jan. 15, 2014), heads Sound Point Capital Management, the hedge fund that carried arranged the trades on behalf of SPSO.

Ergen built up his $1 billion position in LightSquared’s senior debt over the course of a year, from May 2012 to May 2013. Shortly after he made his last trade, a Dish Network entity called L-Band Acquisition Corporation offered to acquire LightSquared’s spectrum for $2 billion, a price Falcone considered “extremely low,” he testified today.

“$10 billion and it’s all yours,” Falcone wrote to a Dish representative after the offer, according to an e-mail read aloud in court today.

Falcone’s e-mails came up repeatedly throughout the course of his questioning, as lawyers reviewed his correspondence with bankers, telecom analysts, and journalists. As early as Sound Point’s initial debt purchase, shortly before LightSquared filed for Chapter 11 protection on May 2012, Falcone speculated that Ergen was behind the purchase. Within days, however, his e-mails show he also speculated the buyer could have been Mexican billionaire Carlos Slim or other strategic investors.

“We talked to a couple people on the street, we talked to some reporters,” Falcone said of his effort to pull the veil off of Sound Point. “We were trying to turn over every rock we possibly could.”

LightSquared contends Ergen’s purchases thwarted the company’s efforts to raise the funds necessary to reorganize. The presence of an anonymous buyer with a controlling position in the senior debt scared away potential investors. Among other things, it scuttled an attempt by Jefferies to raise $2-3 billion in new financing, LightSquared lawyers have said.

On cross-examination, Ergen lawyer James Dugan, of Willkie Farr & Gallagher, suggested Falcone knew all along that Ergen bought the debt, and was in fact glad to see he was bidding.

“The Charlie bid is helpful, in that it attracted everyone’s attention,” Falcone wrote in a May 2013 e-mail to LightSquared CEO Doug Smith.

“You thought that was good news,” Dugan said.

“Having someone out there validating the value of the asset doesn’t make the bid good, but the process can be helpful,” Falcone replied.

Falcone also fielded questions throughout the day concerning FCC approval of LightSquared’s proposed spectrum use, the key to unlocking the company’s true value, he has long maintained. “If you talk to anybody, they’ll tell you LightSquared will get the FCC license,” Falcone said. LightSquared’s current proposed reorganization plan is premised on gaining FCC approval by the end of 2014, something Falcone said today he has “no reason to doubt.” On cross-exam, Dish lawyer Robert Giuffra, of Sullivan & Cromwell, pointed out that Falcone said he was sure of approval in 2012, when LightSquared filed for bankruptcy, and again in 2013.

Giuffra repeatedly emphasized that the specter of FCC approval caused Falcone and LightSquared to delay any progress in the Chapter 11 case. The spectrum LightSquared controls is an appreciating asset, Falcone testified. “In the beginning, I was very interested in assets with limited access,” he said of his first spectrum purchases in 2006, four years before he founded LightSquared. “I believed wireless spectrum was very valuable. I kind of considered it like beachfront property.”

“This spectrum is worth a lot of money,” Falcone said. “There are many believers who think this thing will get cleared,” he said of the FCC process.

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LightSquared lawyer stonewalled by Sound Point witness on day four

lightsquared logoThe LightSquared trial to determine whether Charles Ergen fraudulently acquired about $1 billion of LightSquared’s senior debt resumed in Manhattan bankruptcy court this morning, for a fourth day, with testimony from Sound Point Capital Management head Stephen Ketchum, who carried out the trades that gave Ergen’s fund a blocking position in the case.

Philip Falcone, the head of Harbinger Capital Partners, LightSquared’s largest equity holder, will take the witness stand this afternoon.

LightSquared lawyer Michael Hirschfeld, a partner at Milbank, spent hours attempting to establish that Ketchum and Dish Treasurer Jason Kiser – who testified last week (see, “LightSquared trial continues on day two with Dish treasurer,” LCD News, Jan. 10, 2014) – set out to build a blocking position in LightSquared’s senior debt in order to gain control in the company’s bankruptcy proceedings. In the process, Ketchum and Kiser then purposely delayed the closing of many of those trades, Hirschfeld claimed. But Ketchum was a difficult witness for the plaintiffs.

Time and time again, Ketchum answered most of Hirschfeld’s questions with “I don’t recall,” or a simple “no.” At one point, Judge Shelley Chapman paused the proceedings to remind Ketchum, “it’s your obligation to tell the truth here.”

Ketchum has known Kiser for about 20 years. Ketchum recently helped Kiser make trades in the debt of LodgeNet during its Chapter 11 proceedings, on behalf of EchoStar. The LightSquared trades mark the first time Ketchum made trades for Ergen personally, however.

Kiser testified last week that Ketchum established an entity known as SP Special Opportunities to carry out the debt trades on Ergen’s behalf. SPSO would allow Ergen to make the trades without disclosing his identity to the market. When asked this morning whether his firm formed SPSO, Ketchum simply replied: “I don’t recall.”

At one point in this morning’s proceedings, Hirschfeld mentioned an e-mail Ketchum wrote discussing the possibility of selling $5 million in face value of LightSquared debt at 88.5 cents on the dollar in order to test the market. From about May 2012 to May 2013, Ergen bought LightSquared debt, via SPSO, at prices ranging from about 48 to 96 cents on the dollar. Ketchum allegedly wanted to test the market with a sale to “send a signal to the market that we are not going to ride this thing up to the moon,” Hirschfeld said.

Discussing SPSO trades that remained open for weeks or months, Hirschfeld read from e-mails between Ketchum and Jefferies high yield salesman Stephen Sander. LightSquared alleges Ergen purposely left those trades open to thwart alternate funding the company was trying to raise in its reorganization. According to the e-mail transcripts, Sander at one point asked Ketchum if he needed to come to the office in person to discuss closing the trades “mano a mano.”

“Were you afraid this would come to fisticuffs?” Hirschfeld asked Ketchum.

“My Spanish isn’t very good, but I wasn’t worried,” Ketchum said.

LightSquared lawyer Matthew Barr told Judge Chapman this morning the company would present its engagement letter for exit financing in court on Thursday. In late December, LightSquared announced JP Morgan and Credit Suisse were arranging new exit financing that would serve as the cornerstone of the company’s reorganization plan, which calls for a new senior term loan of up to $2.5 billion; a $250 million senior secured term loan from JP Morgan; at least $1.25 billion in new equity contributions from Fortress Investment Group, Melody Capital, and Harbinger Capital; and the preservation of the multi-billion dollar litigation claims against Dish and Ergen being hashed out in this trial.

Harbinger Group, Falcone’s holding company, launched a $200 million offering of eight-year senior notes this morning via bookrunners Credit Suisse, Deutsche Bank, and Jefferies. – John Bringardner