Relevant Document:Hearing Agenda
At a first day hearing
contested by a
group of Bon-Ton’s second lien noteholders today, Judge Mary Walrath granted the majority of the Bon-Ton debtors’ requested
first day relief, including the request for interim approval of an up to $725 million DIP financing facility featuring a rollup of the company’s prepetition ABL facility. During the proceeding, Judge Walrath said she could not accept the noteholder group’s assumption that a liquidation of the debtors would realize more value than a going concern. The court asserted that the evidence on the record does not support the noteholders’ assumption, and Judge Walrath added that she separately is not aware any circumstance where a debtors’ payment in connection with a first day motion resulted in a diminution of value to the estates. Judge Walrath remarked that she “must defer to” the debtors’ rather than the noteholders’ business judgment.
However, Judge Walrath partially sided with the noteholder group in relation to the debtors’ employee wages motion. After being told that senior management was paid about $6.7 million in bonuses before the petition date, Judge Walrath agreed to defer approval of any prepetition payments to senior management until the second day hearing. The judge also emphasized that it is important for the debtors to provide the second lien noteholders with information regarding who the payments are going to, and she directed the debtors to share such information with the noteholder group prior to the second day hearing, which is scheduled for March 7. The court later clarified that its information-sharing requirement covers all of the first day motions to which the noteholder group objected.
Bon-Ton’s second day hearing is scheduled for March 7 at 10:30 a.m. ET, with objections due Feb. 28 at 4 p.m. ET.
Reorg’s live coverage of today’s first day hearing can be found
HERE.
Appearing on behalf of the debtors were Kelley Cornish and Alexander Woolverton of Paul Weiss, as well as Pauline Morgan, Andrew Magaziner and Sean Greecher of Young Conaway. Sidney Levinson of Jones Day spoke for the second lien noteholder group, and Julia Frost-Davies of Morgan Lewis & Bockius appeared on behalf of the DIP agent and prepetition ABL agent.
Levinson, speaking for for the second lien noteholder group that holds approximately $223 million of second lien notes (63% of the total amount), argued that interim approval of certain of the debtors’ first day relief should “at least” be deferred to March 7 because the survival of the business as a going concern is “uncertain.” Regarding the payments objected to by the group, Cornish of Paul Weiss for the debtors argued that even if the company decides to liquidate, not paying taxes that are due and owing could expose the company’s directors and officers to “significant and even criminal liability” and added that “it makes no sense” to withhold payments from customs officers and shippers who are holding product that should be on its way to stores to be sold for “multiples.”
Levinson explained to the court today the background underlying the second lien noteholder group’s objection, stressing that the debtors’ prepetition marketing processes “didn’t result in a single formal indication of interest.” PJT Partners is one of the premier investment banks, and Levinson stated that it is “not very credible” for the debtors to argue that PJT has not already done everything it could in the marketing process and that it needs more time to do so. Referencing bids that the debtors received prior to the bankruptcy filing, Levinson said his group has learned that the guaranty component of certain liquidation bids could be sufficient to pay ABL lenders in full and allow for a liquidation of assets.
During his presentation of the DIP financing motion, Woolverton noted that the debtors received two non-binding term sheets for up to $880 million of DIP financing that would have been used to refinance the DIP facility in whole. Bon-Ton ultimately determined to not pursue the other proposals, in part because of the debtors’ belief that it would be “very difficult” to pursue and obtain court approval of a third-party DIP facility, explained Woolverton. In comparison with the DIP proposal from the debtors’ prepetition ABL lenders, said Woolverton, any third-party DIP proposal would have likely involved non-consensual priming and an expensive and destructive priming fight. When Judge Walrath questioned why there would have been a priming fight if the proposals would have been sufficient to pay off the prepetition ABL facility, Woolverton said there was no guarantee that the prepetition facility would be paid on “day one.”
With respect to adequate protection, Woolverton explained that in return for the DIP financing, the prepetition secured parties would receive adequate protection liens and superpriority claims. When Judge Walrath asked why the prepetition secured parties would “need that” if they are being repaid in full, Woolverton responded by noting that the superpriority claims and replacement liens would only be with respect of any diminution in value of the parties’ prepetition claims that are not being refinanced - namely, the parties’ contingent indemnification claims. After observing that the debtors are posting a $500,000 reserve for such claims, Judge Walrath pressed further, asking, “Why do they [the prepetition secured parties] need anything else?”
Frost-Davies defended the proposed adequate protection package on behalf of the DIP agent and prepetition ABL agent. She explained that the prepetition secured parties had originally requested that the $500,000 indemnity account be funded upon closing of the facility. However, the debtors asked the lenders to provide them with additional liquidity by not funding the indemnity reserve, Frost-Davies said. Therefore, by maintaining the replacement liens and superpriority claims in favor of the prepetition secured parties until the expiry of the challenge period, the adequate protection package permits the debtors to have access to an additional $500,000 in liquidity, she asserted.
Additionally, Woolverton noted the benefits provided under the proposed DIP facility as compared with those of any third-party DIP proposals, including the benefit of the interest rate on the DIP facility being lower than that on the prepetition facility.
Judge Walrath also granted the debtors’ joint administration, utilities, trading procedures, insurance, customer programs, taxes, shippers, foreign vendors, section 503(b)(9) and cash management motions. Additionally, the court granted the debtors’ motion to assume the store closing agreement with Hilco and Gordon Brothers and approved the retention of Prime Clerk as the debtors’ claims agent.
The second lien notes last traded today at 18, up from 15.25 on Feb. 1, according to TRACE.