UCC ‘Vehemently’ Opposes Avon Debtors’ Case Strategy; Argues Proposed DIP/Stalking Horse Bid Leaves ‘No Recovery’ for Unsecureds, Only Benefits Natura

Relevant Documents:
Bid Procedures Objection
DIP Objection

Today, the recently formed Avon official committee of unsecured creditors filed forceful objections to the debtors’ DIP and bidding procedures motions. According to the UCC, the debtors’ cases are being run for the sole benefit of their parent, Natura & Co. Holding SA. The proposed sale process, which would feature a Natura stalking horse credit bid, would leave essentially nothing for unsecured creditors, the objection states, and the committee contends that the nature of the credit bid (it can be upped to over $800 million) makes it highly unlikely that any other bidders will submit offers. The committee further argues that the DIP financing is being used to give Natura “unwarranted control” over the “trajectory” of the cases and should not be approved absent material modifications.

The Avon debtors, U.S. holding companies for nondebtor manufacturers of beauty, fashion and home products and overseas direct-to-consumer sales channels filed their cases saying they had a “three pillar strategy” to address talc claims and operational challenges. The strategy includes funding the cases through the Natura DIP, selling substantially all their assets through a sale process utilizing Natura as a stalking horse and implementing a settlement with Natura which includes a $30 million cash payment from Natura to the debtors.

However, the UCC “vehemently” objects and argues that the three-pillar strategy is really just a pretext for Natura’s full integration of the Avon debtors coupled with valuable releases for what would, absent the bankruptcy strategy, otherwise be “massive potential successor liability.” The UCC notes that the 2015 spinoff that created the debtors – and spun off Avon’s domestic operations to nondebtors unaffiliated with Natura and not part of the current case – saddled the debtors with talc liabilities. It is “disappointingly easy” to understand why Natura is supporting the bankruptcy, according to the UCC, which contends that Natura’s absorption of the debtors by any other means would “crystalize” “the looming threat that Natura could be held liable for those talc claims as Avon’s successor.”

“The only relief powerful enough to eliminate the risk Natura is facing is a chapter 11 plan discharge and injunction, and there can be no doubt that Natura orchestrated the filing of these Cases in a creative gambit to get a similar fresh start,” according to the committee.

The objections assert that the proposed transactions should not be condoned by the court. “The only relief powerful enough to eliminate the risk Natura is facing is a chapter 11 plan discharge and injunction,” the committee states, but such relief is “reserved for debtors that reorganize through chapter 11.” It adds, “free and clear sales are only available for buyers that purchase assets in good faith and for value. Natura is neither, and it cannot buy the right to be treated as both by paying for a truncated chapter 11 process (or a lengthy one, for that matter).”

Under the proposed stalking horse bid, the debtors would sell substantially all of their assets to Natura for a $125 million credit bid, but would be permitted to retain as excluded assets “(i) $1 million in cash, (ii) an insurance payable the debtors ‘estimate’ is worth $4.2 million, and (iii) preference claims with little evident value,” according to the UCC. The committee believes that such consideration would “unquestionably leave the estates administratively insolvent” (emphasis added). The UCC argues that the debtors attempt to “conceal” that defect through tying the relief with the proposed $30 million Natura settlement payment, which it would pay in exchange for a debtor release and third party injunction (objections to the settlement are due by Oct. 1). Nonetheless, the committee continues that either with, or without, a $30 million payment, “general unsecured creditors still receive nothing” as any value would be sucked up by administrative expenses.

The UCC asserts that the bidding procedures motion should be subject to a stringent heightened scrutiny standard reserved for insider transactions, but that it fails even under the more lenient business judgment standard. The committee argues that the motion must fail because the proposed sale process would see Natura take all potentially valuable estate claims “for no cash,” and impose unreasonable time limits on the UCC’s investigation of prepetition transactions. The UCC contends that the litigation assets should be excluded from the sale “and disposed of only through a plan” and argues that, at a “bare minimum,” the debtors should not be permitted to include the assets in the sale until the UCC finishes its investigation.

With respect to that investigation, the UCC intends to investigate the “myriad of self-interested transactions that commenced immediately upon the Debtors’ merger with Natura in 2020.” The UCC also hinted that those transactions include Natura transactions with the debtors inside the one-year statutory insider preference period. According to the UCC, during the preference period, “Natura: (i) purported to obtain liens on substantially all of the Debtors’ previously unencumbered assets and ‘up-tiered’ or refinanced unsecured debt into $804 million in secured debt; (ii) looted over $141 million in valuable businesses; and (iii) terminated the Debtors’ ability to access cash pools with hundreds of millions of dollars they had shared with their own subsidiaries, among other transactions” (emphasis added).

Regarding the DIP, the UCC says that the debtors’ “purported liquidity constraints” are “pure artifice” because the debtors “are holding companies with relatively modest net cash needs and no active operations of their own to stabilize.” According to the objection, the DIP is mostly designed “to pay the fees of the estates’ professionals through the closing of the Sale to Natura” and to provide Natura “liens on the estates’ otherwise unencumbered avoidance actions and any commercial tort claims, so Natura can also acquire those assets with the Credit Bid.”

Among other modifications to the DIP that the the UCC requests is an extension of milestones, an increase in the timeline and budget cap for the UCC’s investigation (the DIP currently proposes a “mere $50,000”), and removal of provisions that would provide liens on unencumbered assets and “overly broad” releases.

The motions are scheduled for hearing on Sept. 26 at 2 p.m. ET.