Relevant Documents:
Agenda
First Day Presentation
Interim Cash Collateral Order
Judge Christopher Lopez granted the Robertshaw debtors’ limited
first day relief at a hearing this evening, including approving the debtors’ request for authority to use cash collateral on an interim basis. Judge Lopez set a second day hearing for March 11 at 2 p.m. ET, at which time the debtors will seek approval of a proposed $56 million DIP facility from the ad hoc group of presumptive first-out and second-out lenders composed of Bain Capital, Canyon Capital and Eaton Vance.
The cash collateral motion raised concerns for former first-out lender Invesco and an ad hoc group of lenders that did not participate in the company’s
May 2023 uptier exchange transaction, which gave the first- and second-out group their presumptive senior position in the debtors’ assets. David Hillman of Proskauer, counsel for the nonparticipating lender group, suggested that the debtor stipulations recognizing the validity of the May 2023 transaction in the interim cash collateral order could create an “unlevel playing field” for his clients’ New York state court
suit to avoid the uptier transaction.
Hillman also insisted that his clients had equal cash collateral consent rights as the first- and second-out group under the Bankruptcy Code. Hillman acknowledged that the priority of his clients’ interests in the debtors’ assets are disputed, but noted that the first- and second-out lenders’ priority position is also subject to litigation.
Andrew Glenn of Glenn Agre, counsel for Invesco, said Hillman’s concerns apply equally to his client, which also filed
suit in New York state court to avoid a December 2023 transaction that paid off Invesco’s first-out position and deprived Invesco of “required lender” status and thus control over the company’s reorganization.
Jason Goldstein of Gibson Dunn, for the first- and second-out group, countered that the lenders in his group are the requisite lenders “as things stand today.” His group are the only lenders that can provide the debtors with consent to use cash collateral right now, Goldstein said, and the debtors need to use cash collateral.
George Klidonas of Latham & Watkins, counsel for the debtors, added that “the debtors believe this capital structure is their capital structure, the way the world looks today.”
In approving interim use of cash collateral, Judge Lopez said the debtors need liquidity “runway” for the next three-and-half-weeks until the second day hearing. The judge emphasized that the order would not be used “offensively” with respect to litigated uptier transaction issues and that everything is subject to further court order, with everyone’s rights preserved.
To that end, the judge also directed the debtors to remove a reference to recharacterization or reallocation of adequate protection payments to payments as principal, with the issue subject to further court order. All parties should be provided “flexibility” in a recharacterization scenario, said the judge.
The judge also set a hearing on the debtors’ mediation motion for Wednesday, Feb. 21 at 2 p.m. ET. As to the debtors’ motions to stay New York state court litigation, the judge indicated he would inform the parties regarding their scheduling by noon tomorrow, Friday, Feb. 16, with the parties also agreeing to discuss their timing.
Aside from the cash collateral dispute, today’s hearing gave the litigants an opportunity to lay out their case regarding the May 2023 and December 2023 transactions. Scott Greenburg of Gibson Dunn, counsel for the first- and second-out group, accused Invesco of secretly amassing a majority position in the first-out loans behind the back of the rest of the participating lender group and negotiated a proposed chapter 11 restructuring for its own benefit as a requisite lender.
In December 2023, Greenberg said, the debtors’ management reached out to the members of the group seeking a “lifeline” to “remove the noose from around their neck” and avoid a January 2024 bankruptcy filing sought by Invesco. The group members agreed to provide $218 million to the company to pay down the first-out loans held by Invesco, pay down the ABL facility and provide $40 million in new liquidity, he said. The group hoped that the cash infusion would allow the company to avoid bankruptcy and pursue an out-of-court restructuring in 2025, Greenberg added, but “we obviously did not achieve our goal.”
Glenn responded that prior to the December 2023 transaction, Invesco and the debtors agreed on a process, including a section 363 sale, that the current RSA “replicates.” According to Glenn, the draft first day motions for that filing “were probably used as models” for the first day motions in this case.
Glenn argued the credit agreement forbids the debtors from taking on more debt, so the debtors, equity sponsor One Rock and the three remaining members of the ad hoc group structured the December 2023 transaction as an equity investment and then “recreated” the first-out tranche that Invesco had owned, without Invesco. The transaction was a “sham,” Glenn said, to circumvent the contractual restriction on new debt.
Jennifer Selendy of Selendy & Gay, litigation counsel for the group of nonparticipating lenders, disputed the debtors’ assertion that the May 2023 uptier was made available to all lenders. Minority lenders were only offered “a sort of consolation prize” in the form of fourth- and fifth-out loans, and participation would have required them to release their litigation claims, Selendy said.
Peter Friedman of O’Melveny, litigation counsel for the AHG, maintained that the company is insolvent and belongs in chapter 11. He argued a fifth amendment to the super-priority credit agreement is “very different” from other liability management transactions because “all” Invesco “lost” was its position as required lender, which it was not entitled to. Invesco actually got paid in full and should have said “thanks,” rather than bringing litigation that caused the company “real damage,” Friedman insisted.
As for venue, Friedman asserted the New York litigation by Invesco “obviously” violated the automatic stay by exercising control over the debtors’ property - including the Fifth Amendment.
Glenn in turn characterized the bankruptcy filing as little more than “forum shopping.” According to Glenn, a New York state court judge was poised to grant Invesco’s motion for a preliminary injunction halting the consummation of the December 2023 transaction after a hearing on Feb. 16. The debtors filed chapter 11 to postpone that “judgment day” and possibly secure a more favorable ruling from the bankruptcy court, Glenn asserted.