Ahead of a second lien notes interest payment due on Nov. 15, LBI is preparing for a potential bankruptcy filing and seeking to negotiate a settlement that would resolve the second lien noteholder plaintiffs’ pending
declaratory judgment and
fraudulent conveyance New York state court actions against the company and its CEO Lenard Liberman, according to sources. The sought-after settlement would also seek to resolve the related aiding and abetting claims against first lien lender HPS Investments, which are tied to the fraud counts against the company.
The cash-strapped company is unlikely to be able to make the Nov. 15 interest payment, sources indicate, and the company was only able to make its most recent earlier interest payment - on May 15 - after receiving liquidity from the
May refinancing transaction with HPS that sits at the center of the litigation. Liberman
testified in court on May 16 that the company had not yet made the interest payment and had only approximately $8 million in cash and cash equivalents that day. Liberman said the HPS transaction would provide LBI with the needed liquidity to make the coupon payment. According to the plaintiffs’ briefs, the payment was made after the HPS transaction closed on May 17. Court-mandated mediation between the parties
began in May, but it has thus far been unsuccessful, sources indicate. The second lien noteholders alleged in their
latest memo in support of their fraud claims that LBI is at imminent risk of bankruptcy and remains insolvent.
If the parties
are able to reach a settlement agreement either ahead of the interest payment date or during the subsequent 30-day grace period, such an agreement could help alleviate the amount of litigation that would be presented in the U.S. Bankruptcy Court, according to sources. A recent settlement proposal from the company to second lien noteholders contemplated a slight cash payment to the plaintiffs under a chapter 11 plan, though the terms were not amenable to the noteholders and the parties have not been able to reach an agreement, add sources. In discussions with their first lien lender, the parties have contemplated HPS providing new-money financing for a debtor-in-possession facility.
The noteholder plaintiffs’ litigation alleges that the company’s May 2018 refinancing transaction with HPS Investments was a “conspiracy” to transfer the equity of LBI, “an insolvent company worth hundreds of millions of dollars,” from the company’s pre-existing creditors to HPS and Liberman. The transaction
refinanced $220 million of 10% first lien notes due 2019 into $233 million of first lien debt due 2022 (with a springing maturity to March 2020 if the second lien notes have not been repaid by that time). As amended through the transaction, the first lien indenture now includes approximately $87 million make whole premium - for which the plaintiffs claim LBI received nothing.
The plaintiffs asserted in their latest brief that LBI “devised a scheme to increase the amount of debt on its books” in order to ensure that HPS - characterized as “a hedge fund with whom LBI had secretly partnered” - would control any bankruptcy proceeding.
Prior to the transaction, the company’s capital structure included $259 million in principal amount outstanding in 11½%/13½% PIK toggle second-priority secured subordinated notes due 2020 and $220 million in 10% senior secured notes due 2019; LBI’s holding company LBI Media Holdings had $5.6 million of 11% senior notes, which matured on April 30, 2017, but have not been repaid. Plaintiff Caspian Capital owns the holdco notes, according to court filings.
The second lien noteholder plaintiffs argue that they held notes worth approximately $115 million prior to the “fraudulent scheme,” but that by “fraudulently rendering the First Lien Notes the fulcrum securities,” the defendants “‘erase[d]’” $259 million in debt owned by second lien noteholders.
The plaintiffs’ first New York state court litigation sought to block the transaction before it closed, but the noteholders were denied their preliminary injunction motion by Justice Saliann Scarpulla. A fourth cause of action in that case is
still being briefed and seeks a declaratory judgment that LBI violated the second lien notes indenture and has defaulted on those notes. The
second action was filed on July 24 and alleges against LBI and Liberman fraudulent conveyance, fraud based on concealment, civil conspiracy and deepening insolvency. That case also alleges against HPS claims of aiding and abetting, fraudulent conveyance, tortious interference of contract, civil conspiracy and deepening insolvency. The second action is also still being briefed, with defendants and plaintiffs stipulating to a
Nov. 13 deadline for final reply papers in support of defendants’ motions to dismiss.
LBI Media did not respond to a request for comment on this story.