Mon 05/20/2024 19:01 PM
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Relevant Documents:
DIP Financing Objection
Consolidated Matrix Objection
Cash Management Objection
Reservation of Rights

The U.S. Trustee has objected to the Red Lobster debtors’ DIP financing and other first day motions ahead of the debtors’ first day hearing set for tomorrow, Tuesday, May 21, at 1:30 p.m. ET. The UST argues the DIP proposal contains “many extraordinary terms,” including a creeping rollup prohibited by Eleventh Circuit precedent. The UST also argues that the debtors’ proposed challenge procedures are “inadequate” because they are too narrow in scope, contain a fee shifting mechanism and refer to state law as a gatekeeping device to limit standing of potential parties in interest.

The UST urges the court to limit interim DIP approval to what is necessary in the “strictest” sense. The UST adds that the UST has been negotiating with the debtors, but the parties have yet to reach an agreement on DIP financing.

The UST also objects to the debtors’ motion to redact certain personally identifiable information and the cash management motion. The UST also filed a reservation of rights to all of the first day motions, saying that any relief granted should be limited to what is “absolutely necessary” for the debtors to “operate without disruption” while the UST and other parties review the requested relief.

The debtors’ case is premised on a restructuring support agreement with prepetition term lenders, who are providing DIP financing and a stalking horse credit bid of outstanding DIP claims for substantially all of the debtors’ assets. The $275 million DIP financing, led by Fortress as agent, consists of $100 million of new money and a $175 million rollup. Prepetition term loan obligations would be rolled up on a 1.75:1 ratio with draws on the new-money term loans.

The UST asserts that the debtors have not established that the DIP lender is oversecured, as required to pay DIP lender attorney fees. The UST further argues that the interest rate is “high,” estimating it would be “on the order of 16%” and applicable to the rollup as well as the new money. The proposed fees are also “substantial,” the UST says, pointing to a 1% upfront fee and 3% DIP exit fee, adding that it is unclear whether the fees would be calculated on the new-money amount or also the rollup.

In addition, the UST takes aim at the proposed milestones, saying they would effectively bind an unsecured creditors’ committee before it is formed, without an opportunity to determine whether a longer case timeline would be more beneficial. Also pointing to an official committee, the UST notes the discrepancy between a carve-out for professional fees for the UCC of $150,000 in comparison with $750,000 for the debtors’ professionals.

The UST also challenges the 506(c) surcharge waiver and a proposed DIP lien on avoidance actions, saying such assets are “usually regarded as the special province of unsecured creditors.”

Turning to the debtors’ request to file a consolidated list of creditors and redact certain personal identifiable information, the UST says such suppression of information may create a “serious obstacle” to the “expeditious” appointment of an official committee of unsecured creditors. The redaction may also create an obstacle to the appointment of a “representative joint creditors’ committee” that “fairly represents” each of the debtors’ creditors, the UST contends. The relief should be limited to creditors who are “unlikely to play a role going forward in these cases,” like employees, the UST argues, and that each debtor should be required to file its own list of top 20 creditors or, in the alternative, file a list that is “substantially larger” than a top 30 list.

As to the cash management system, the UST charges that the debtors are seeking to curtail the depository requirements of the Bankruptcy Code by trying to maintain all “714 deposit accounts across nine Banks” with almost $36 million rather than moving or converting them to bonded or collateralized DIP accounts. The UST says “[r]ecent bank failures demonstrate that the risks of loss are not hypothetical or conjectural,” and the debtors’ compliance with the depository guidelines is essential. Nonetheless, the UST says it is amenable to “brief” interim relief to facilitate the debtors’ transition to DIP accounts.
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