December 10, 2019 – Pre-petition and debtor-in-possession ("DIP") lender Melody Lenders objected to the Debtors' proposed sale of substantially all of its assets to Hex L.L.C. ("Hex") [Docket No. 393]. On December 6th, the Debtors notified the Court that Hex had emerged as the successful bidder in an auction held on December 5th; Hex's bid of $15,000,010 topping the $15,000,001 bid of Energy Capital Partners Mezzanine Opportunities Fund A, LP, serving as agent for pre-petition and DIP lenders…by just $9 dollars. The Melody Lenders, who believe that the Debtors are "internalizing the mantra that ‘cash is king’," argue that even the apparent equality of the two bids (with the tie going to the cash bidder) gets the true value of the bids wrong; undervaluing the credit bid by an amount including "interest, fees and other expenses that will increase the total amount of the DIP Obligations well above $15 million," and overvaluing the cash bid by 15%, the amount of the purchase price that the Debtors will have to withhold under the Foreign Investment in Real Property Tax Act (this because the debtors' financial sponsor is a foreign entity).
Clearly the Melody Lenders have now gotten someone's attention, with the sale hearing delayed from December 12th to December 20th. Now the Melody Lenders will want the Debtors to explain how and why the Hex bid was justifiably a winning one and even more importantly how the Debtors expect net proceeds from that bid to repay DIP borrowings, in full and in cash, as required.
The objection states, “Throughout these chapter 11 cases, the Melody Lenders have expressed support for the Debtors’ efforts to market and sell their assets on an expedited basis. Indeed, although the Melody Lenders were hopeful that the marketing process would produce many active bidders, and that the Auction conducted pursuant to the Bidding Procedures would result in those bidders materially increasing their bids, the marketing process yielded only two bids: (a) a credit bid submitted by the DIP Agent and the Prepetition Term Loan Agent valued at $15,000,001 for the purchase of the equity of the Debtors pursuant to a plan of reorganization (the ‘Credit Bid’); and (b) a significantly lower cash bid from HEX L.L.C. (‘HEX’) for the purchase of the assets of the Debtors (the ‘Initial HEX Bid’).
On the day of the Auction, but before the official commencement of the Auction, HEX submitted a bid to the Debtors via term sheet that purported to improve the terms of the Credit Bid, including (x) changing its bid from an asset purchase to an ‘equity purchase’ pursuant to a plan of reorganization; (y) increasing its purchase price to $15,000,010 (just $9 above the Credit Bid purchase price); and (c) agreeing to assume certain contracts, all without certain contingencies that were identified in the Credit Bid (the ‘Revised HEX Bid’). Without creating any record or showing how or why the Debtors determined that the Revised HEX Bid was a better bid than the Credit Bid, the Debtors announced that the Revised HEX Bid was the Successful Bid. Since the Auction concluded, the Debtors have filed only a single notice with the Court, indicating that the Revised HEX Bid is the Successful Bid and confirming that the hearing to approve the Sale remains scheduled for December 12, 2019 [Docket No. 377]. The Debtors have yet to file the terms of the Revised HEX Bid, the Purchase Agreement, or the revised Sale Order, leaving parties in the dark as to the actual terms of the Successful Bid.
The Melody Lenders are concerned that the Debtors, internalizing the mantra that ‘cash is king’, may have accepted an offer that they are not in fact capable of effectuating because, among other things, it attempts to strip the Melody Lenders of certain fundamental rights and protections (including the right to be repaid in cash in full on its outstanding portion of the DIP Obligations and to consent to the release of collateral, including the proceeds of the Tax Credits).
Accordingly, the Melody Lenders are forced to bring this Preliminary Objection to ensure their rights under the Final DIP Order, the DIP Credit Agreement, the New Side Letter and the Bankruptcy Code are not trampled upon as collateral damage in the Debtors’ effort not to lose the ‘bird in hand.’ At a minimum, until such time as the parties have had a chance to fully review and digest all of the terms of the Revised HEX Bid, including the terms of the HEX Purchase Agreement, HEX Sale Order and HEX Plan, it is premature to proceed with the Sale Hearing as presently scheduled…the $15,000,010 in cash to be provided by HEX in connection with the Revised HEX Bid is all but certain to be insufficient to repay the DIP Obligations in full. The cash purchase price announced by the Debtors of $15,000,010 is, despite its aesthetic similarity to the principal amount of the DIP Loans, a misleading figure. Before the Debtors’ creditors will see any portion of the $15 million in cash, the Debtors will be required to withhold 15% of the purchase price for Foreign Investment in Real Property Tax Act (‘FIRPTA’) withholdings because the Debtors’ financial sponsor is a foreign entity. That withholding alone will reduce the available cash proceeds to $12,750,008.50, well below the $15 million principal amount of the DIP Loans— which amount doesn’t include interest, fees and other expenses that will increase the total amount of the DIP Obligations well above $15 million…The Melody Lenders similarly object to any provision of the Form of Sale Order that requests the holdback of some unspecified amount of the sale proceeds to be used as cash collateral during the remainder of the cases. The Melody Lenders are not agreeing to fund additional administrative expenses out of the cash proceeds of the sale. These provisions— alone—raise serious doubts regarding the Debtors’ designation of the Revised HEX Bid as the Successful Bid over the Credit Bid. Because the Melody Lenders have not agreed to waive their right to be paid in full in cash, nor consented to less than full repayment of their DIP Obligations in cash, redirecting the cash proceeds of the sale to HEX (the ‘HEX Sale’) in any manner contravenes the express terms of the Final DIP Order, the DIP Credit Agreement, the Form of Sale Order and section 1129 of the Bankruptcy Code.”
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