Judge James Garrity granted the Endo International debtors’ first day relief
at a largely uncontested hearing today, though potential fault lines opened between the debtors and two groups left out of their proposed section 363 credit bid sale
to first lien creditors: the ad hoc cross-holder group
represented by Paul Weiss and the ad hoc unsecured noteholder group represented by White & Case.
The unsecured group objected
to the debtors’ proposed cash collateral order, taking issue with adequate protection liens on and payments from potentially unencumbered cash, the definition of diminution in collateral value to be used in calculating any adequate protection claims, “outsized” adequate protection payments for the first lien creditors that included a premium and higher rate of interest than under the prepetition agreements and “automatic” stay relief for secured creditors on termination of cash collateral authority.
The first issue was resolved by language in the proposed order allowing adequate protection to be recharacterized during the prepetition lien challenge period. Judge Garrity endorsed the debtors’ and secured lenders’ compromise approach on the second issue, defining “diminution” solely by reference to the Bankruptcy Code. The judge overruled the unsecured group’s objection to the amounts of the adequate protection payments. Finally, the judge directed the debtors to modify the proposed order to require secured creditors to seek stay relief upon termination of cash collateral authority, at least during the interim period.
More generally, Thomas Lauria of White & Case, counsel for the unsecured group, gave a preliminary statement questioning the debtors’ choice to pursue a section 363 sale as their primary restructuring option. Lauria said that although the debtors’ decision to file chapter 11 is “understandable,” what is not understandable is the decision to default to a sale process while foreclosing the possibility of a plan of reorganization.
This approach, Lauria asserted, would strip creditors of critical protections associated with a plan process, such as disclosure of adequate information, “creditor democracy” and similar treatment for similarly situated creditors. He further argued that the RSA and sale process together function as a “disguised” plan that provides for different treatment for similarly situated creditors, with some receiving full payment, some receiving partial payment and others, including unsecured noteholders, receiving nothing.
In support of the need to explore a reorganization, Lauria maintained that Endo has consistently outperformed its projections and currently holds over $1 billion in cash. There is “plenty of cushion” in the debtors’ cash flow to service its debt, Lauria added.
Lauria asserted that the proposed lengthy sale process could easily accommodate a parallel plan process, saying that one option for the court to remedy the flawed process is to terminate the debtors’ plan exclusivity to allow for competing plans from creditors. At the end of the process, he argued, the court could then decide whether a confirmable creditor plan is superior to a sale transaction. Concurrently with their cash collateral objection, the ad hoc unsecured group today filed a motion
to terminate the debtors’ exclusivity, which Lauria acknowledged was not up for hearing today.
Lauria laid out what a plan could look like that would provide greater recoveries to more parties than the RSA: first lien debt could be reinstated, second lien debt could be likewise reinstated or equitized, and unsecured claims could be equitized. He added that the opioid settlement constructs contemplated under the RSA could be used as a baseline and improved upon, and equity could even have an opportunity to participate. Lauria acknowledged “[t]his may sound like a bold and audacious move” by the ad hoc group, but said it is only in response to the debtors’ “bold and audacious move” to abandon its rights to negotiate and formulate a chapter 11 plan.
Andrew Rosenberg of Paul Weiss, counsel for the ad hoc crossholder group, said that although his group agreed to the cash collateral order and supports the relatively lengthy timeframe for the sale process, the “bad news” is that they were largely excluded from discussions regarding the first lien group’s stalking horse bid and the RSA. “For all the good vibes that we hear,” Rosenberg said, the RSA appears to provide no recovery for the crossholder group’s second lien and unsecured notes positions.
Like Lauria, Rosenberg said his group believes that recent financial results understate the debtors’ enterprise value, pointing to the radical swings in the trading prices of the first and second lien notes this year. At the very least, Rosenberg maintained, the second lien debt is not trading “at anywhere near” mere option value, and the second lien debt may end up being the fulcrum security.
The crossholder group, Rosenberg concluded, believes that “value flows substantially through the second liens if not further down the capital structure.”
Paul Leake of Skadden, counsel for the debtors, attempted to strike a conciliatory tone, focusing on the length of the marketing process and his hope that there will be active bidding for the debtors’ assets, including from the crossholder group. “We are not envisioning an expedited process” for the benefit of secured lenders, Leake said.
With respect to Lauria’s arguments, Leake stated that the debtors disagree with virtually everything Lauria said. “We considered all the alternatives” to a section 363 sale, Leake added, while admitting that today was not the day for this “debate.”
The U.S. Trustee said that the creditors’ committee formation process is underway, with responses to the UST’s committee solicitation papers due Aug. 29.
Judge Garrity approved the balance of the debtors’ requested first day relief with certain modifications discussed on the record. The judge did not schedule the second day hearing today but said he would “very much like to” have the second day hearing in person or on a hybrid basis.