Thu 06/25/2020 18:30 PM
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Relevant Documents:
Hearing Agenda
Ad Hoc Noteholders’ Objection to DIP

At today’s hearing in the GNC debtors’ bankruptcy cases, Judge Karen Owens granted all of the debtors’ various first day motions. The only contested issue was the debtors’ proposed DIP financing, which was subject to an objection of an ad hoc group of GNC convertible noteholders and objections raised at the hearing by the U.S. Trustee. Conditioned on revisions, clarifications and subjecting certain minor provisions of the proposed DIP order to approval at a later, final hearing, Judge Owens overruled the convertible noteholders’ objections and approved the interim DIP financing. The judge will approve the DIP on an interim basis, subject to the later submission of a revised proposed order on the certification of counsel.

As a result of the interim approval of the DIP financing, the debtors may draw $30 million from the facility and will have access to approximately $30 million in otherwise restricted cash made available in connection with the rollup of the ABL first-in, last-out, or FILO, facility.

A second day hearing is scheduled for July 22 at 1 p.m. ET., with an objection deadline of July 15 at 4 p.m. ET.

Caroline Reckler of Latham & Watkins handled the debtors’ initial case status presentation, noting that the debtors were “fortunate to have two options” in the “dual track” sale and stand-alone plan structure. Reckler stated that the debors expect to file a plan and disclosure statement “within a week.” Noting that the proposed stalking horse, Harbin Pharmaceutical Group Co., is an insider, Reckler took pains to reassure interested parties that the debtors would run a “righteous and level” sale process.

The bulk of today’s hearing consisted of arguments relating to the contested DIP relief. Richard Levy of Latham & Watkins presented the DIP motion on behalf of the debtors. Levy first outlined the three components of the DIP financing: (i) the $200 million DIP loan from the current term lenders, of which $100 million consists of new money and the remainder a dollar-for-dollar rollup of the loans of participating lenders; (ii) the full rollup of the $275 million ABL FILO facility; and (iii) the repayment and refinancing of the senior ABL revolving credit facility, consisting of about $60 million in funded debt and $5 million in letters of credit.

Levy underscored the holistic structure of the DIP financing, which was designed to provide both sufficient liquidity as well as certainty with respect to exit financing if the stand-alone plan path is pursued. He said each segment of the financinging is directed at maximizing the debtors’ available liquidity in that the DIP loan provides for an interim draw of $30 million, which would combine with $30 million of previously restricted cash collateral for use by the debtors freed up in connection with the rollup of the ABL FILO facility. Also, he added that the refinancing of the revolving credit facility would result in cash flow improvements further increasing liquidity, as the facility is oversecured and the debtors would otherwise be required to pay postpetition interest.

Levy concluded that without access to this liquidity, the debtors would “suffer irreparable harm,” as supported by the declarations of Robert A. Del Genio, of FTI Consulting, the debtors’ financial advisor, and Pranay Goel, of Evercore, the debtors’ investment banker. Also, Levy previewed the possibility that in the event that the sale track proceeds, there could be replacement DIP financing, but cautioned that this eventuality was only “speculative” at the current time.

Also advocating for approval of the DIP financing was Mark Shinderman of Milbank, who appeared on behalf of the ad hoc group of cross-over lenders. Shinderman asserted that the DIP financing struck the proper “balance” in providing the liquidity necessary to maximize value in GNC’s chapter 11 cases. Particularly, he advocated for interim approval of the full rollup of the ABL FILO facility, noting that it “is a very important part of the story,” in that otherwise the DIP facility would be much larger and the rollup’s protections against “cram-up” were “meaningless” when the “endgame” for the plan was already built in via the rollover of the loan into the exit facility.

Jacob Adlerstein of Paul Weiss appeared on behalf of the ad hoc FILO lenders. Adlerstein reported that the FILO lenders were standing “arm-in-arm” with the debtors in support of the dual path process. In support of the DIP financing, Adlerstein highlighted the $30 million increase in incremental liquidity resulting from the rollup of the ABL FILO facility. He described that about $17 million of that liquidity resulted from a conceded overadvance by the lenders, constituting “incremental new value” and resulting in “real value to the estate.” Overall, the deal is a win-win, as the debtors gain both “initial liquidity” and the certainty of exit financing, while avoiding prejudice as all challenge rights relating to the rollup of the FILO facility would be preserved, he said.

Craig Martin of DLA Piper presented the ad hoc group of GNC convertible noteholders’ objection. He characterized the objection as reasonable in scope, recognizing the need for financing, but appropriately slowing the case down. The objection requested that the approval of the ABL FILO rollup and certain case milestones be deferred and considered at hearing to consider approval of the DIP financing on a final basis. According to Martin, interim approval of the rollup was unnecessary because the DIP budget demonstrated that the debtors would have sufficient liquidity up to the final hearing without the additional $30 million available as a result of the rollup. In arguing that the case timeline would overly compress the sale process, Martin noted that Evercore had only commenced the sale process “yesterday” and that the 90 days until the expected closing date was insufficient for other bidders to evaluate a “billion dollar” business with complex global operations, especially given the current Covid-19-affected retail environment. Postponing approval of the designated milestones and the rollup to a final hearing was “reasonable” and would “give all parties the chance to confer,” Martin concluded.

Jane Leamy appeared on behalf of the U.S. Trustee, presenting the UST’s objection that certain DIP release provisions, approval of the exit facility conversion fee and the ABL FILO rollup be made subject to later approval at a final DIP financing hearing.

After argument, Judge Owens noted that while she was “initially reluctant” to approve the rollup on an interim bases, she had been convinced by today’s presentations and overruled the objection of the ad hoc group of convertible noteholders and the UST to the DIP’s interim rollup of the $275 million ABL FILO facility.

She also partially overruled the group’s objections to the DIP milestones, noting that while the debor and lenders may agree to milestones, “as customarily done, I do not approve them,” and directed the parties to revise the proposed order to remove any predetermination by the bankruptcy court that breach of a milestone constitutes an event of default. Judge Owens then reviewed a number of minor changes and clarifications to the proposed interim DIP order, including resolving the UST’s objection by making certain releases subject to approval at a final hearing and removing provisions that would “tie the court’s hands” with respect to the entry of certain orders, findings or determinations relating to indemnification, discharge and potential confirmation issues.

As to the other first day relief, after Judge Owens took issue with paragraphs in the debtors’ proposed orders subjecting the relief sought in the first day orders to any DIP order, saying this was contrary to her “customary practice,” the debtors and lenders consented to the global removal of all “tying” paragraphs. After this removal, all the first day relief was approved subject to the submission of revised proposed orders incorporating minor revisions discussed on the record and comments from the UST and the office of the Texas Attorney General.
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