First Brands UCC Blasts DIP as ‘Unprincipled Overreach’ Likely to Consume All Unencumbered Value; Warns of Potential ‘Swipe’ of Operating Assets via Credit Bid

Relevant Documents:
UCC Objection / Genereux Declaration
Onset Supplemental Declaration

In the lead-up to the final DIP hearing on Thursday, Nov. 6, the First Brands Group official committee of unsecured creditors unsealed its objection to final approval of the debtors’ $1.1 billion new-money DIP financing, attacking the financing as a “product of unprincipled overreach” by the ad hoc group of cross-holders and “desperation” by the debtors. The committee argues that approval of the DIP facility as proposed would be case-dispositive, effectively guaranteeing that unsecured creditors receive no recovery.

The debtors also submitted supplemental declarations in support of the DIP financing, while SPV lender Onset filed a supplemental declaration in support of its objection attaching its underlying master lease and financing agreements.

The UCC filed its objection under seal on Oct. 30. ABL agent Bank of America and multiple creditors, lenders to the debtors’ special purpose vehicles, factoring agents and landlords are also objecting to final approval of the First Brands Group debtors’ DIP financing.

The final DIP hearing is scheduled for Thursday, Nov. 6, at 10 a.m. ET.

The UCC argues the DIP financing imposes “enormous costs” while providing “limited and inadequate benefit” to the bankruptcy estates. According to the committee, the DIP facility will result in approximately $5.2 billion in superpriority claims that “appear[] likely to consume all unencumbered value, leaving nothing behind,” including all estate claims and causes of action – assets that would normally be the primary source of recovery for general unsecured creditors.

Further, the UCC argues that the funding is insufficient to “bridge the cases to a value-maximizing resolution.” The committee warns the DIP financing would create an “acute risk of administrative insolvency” from the moment it is approved. The UCC observes that the 13-week DIP budget shows the debtors “exhausting most of the new money DIP funding” by the end of December. The UCC contends that resolution of the cases will “extend far beyond December (if they last that long),” and the debtors will “likely require either additional funding,” which would provide “even further leverage” to the ad hoc group, or material improvements in business performance, which “lacks evidentiary support.”

According to the UCC, the DIP financing would also “foreclose[] any possibility of a value-maximizing reorganization.” The committee notes that if the DIP financing is approved, the debtors would need to raise more than $5 billion when exiting bankruptcy, despite the absence of capital market access and “reliable information” on their potential debt capacity.

The committee asserts that the 3:1 rollup of $3.3 billion of prepetition debt is “unprecedented” and argues that the potential fees on the rollup obligations are “conspicuously off-market” and may exceed $200 million. The UCC argues that the rollup is “notably egregious” in the present context. Typically, the UCC asserts, rollups are approved when there is a “strong indicia” that there is sufficient collateral coverage to repay the debt and “soft marshalling” concepts ensure that the impact of rollups on other creditors are minimal.

However, the UCC notes that the debtors’ DIP marketing materials indicated that the prepetition term loan “may be materially under-secured” (emphasis added). The UCC argues that the rollup would consequently improperly transform “likely under-secured prepetition debt” into a fully secured, superpriority claim with the effect of “depriv[ing] unsecured creditors of any realistic prospect of a recovery.”

In sum, the committee contends the benefits of the DIP financing flow “almost exclusively” to the prepetition lenders at the “expense” of the estates’ other creditors, and the cases “must have a purpose beyond marshalling, managing, and monetizing assets for the Lenders’ exclusive benefit.”

The committee also attacks the stricture of the DIP’s challenge provisions and estate waivers. The UCC argues the Dec. 8 challenge deadline and $50,000 investigation budget are insufficient and would effectively shield the prepetition lenders from challenges to their liens and claims and liability from any involvement in the participating events leading to the bankruptcy.

Beyond the financial terms, the UCC argues the DIP facility “predetermines the outcome of these cases” and constitutes an impermissible sub rosa plan of reorganization ✐. In addition to “decisively” determining value entitlements in favor of the prepetition lenders, the UCC argues the “tripwire” events of default under the DIP will dictate the substance and timing of any plan, sale process and “who gets paid and when” in the cases.

The UCC points to several “overbearing case controls” that cede authority from the debtors to the lenders:
 

• Plan control: Any chapter 11 plan must be “in form and substance acceptable to the Required Lenders.” The agreement also “prohibits the Debtors from filing any Chapter 11 Plan or disclosure statement without the Lenders’ consent.”
   
• Sale control: The debtors are prohibited from selling “any material assets outside of the ordinary course of business without the prior written consent of the Required Lenders.”
   
• Budget control: The debtors’ budget must be “approved by, and be in form and substance satisfactory to, the Required Lenders in their sole discretion.”
   
• Governance control: The lenders “have the unilateral right to appoint one of three members to the Special Committee” tasked with overseeing the debtors during the bankruptcy.
   

The objection also says the most “anomalous” of the “tripwire” events of defaults is a milestone requiring the debtors to enter into a restructuring support agreement with the ad hoc group by Oct. 28, which the debtors have already breached. The terms of this future RSA are unknown and “will … be determined by the Lenders in their sole discretion.”

The UCC argues that the debtors “never had the slightest chance of satisfying” its RSA and business plan milestones given the lack of verifiable financial information in the cases.

The committee posits that the ad hoc group may choose to “mandate a premature and truncated sale/plan process” that would be “disastrous” to the estates. The UCC argues that forcing a quick sale would result in “low-ball” bids and allow the lenders to “swipe” the operating businesses via a credit bid at depressed prices.

The UCC says that any near-term sale process will be “incapable of ferreting out the company’s true inherent value” given the “enormous complexity and murkiness” surrounding the company. The UCC notes the debtors are beset by “disturbing allegations,” including “missing cash, fabricated invoices, inflated sales figures, tainted books and records, double (perhaps triple or more) pledged collateral,” and “labyrinthine ‘off-balance sheet’ financings.”

The filing references pending criminal inquiries into the company and multiple motions for an examiner. Furthermore, the committee observes much of the debtors’ senior management team, including the founder and former CEO Patrick James, former CFO Stephen Graham, Chief Strategy Officer Michael Baker, and Executive Vice President Ed James, have “left (or are in the process of leaving).”

Finally, the committee argues the ad hoc group cannot obtain the good-faith finding required by the Bankruptcy Code to approve the DIP financing. The UCC contends the “lopsided terms” of the financing demonstrate that the lenders took “grossly unfair advantage” of a debtor with minimal bargaining power by “swiping every last dollar available, vastly expanding their collateral entitlements, and imposing debilitating case controls.”

As evidence, the objection attaches a LinkedIn post from the CEO and chairman of Marathon Asset Management, identified as the lead DIP lender. In the post, the executive allegedly “boasted about the lucrative benefits” of DIP lending to “concern[ing]” companies, describing how such loans can deliver “outsized recoveries” and “15-25% IRRs” through “exorbitant fees, high interest rates, and other lender ‘protections.’” The post explicitly lists “First Brands” as one of eight such DIP loans Marathon has led.

To bolster the UCC objection, Michael Genereux of Ducera Partners, the committee’s investment banker, filed an expert report calling the DIP loan “shockingly expensive” compared with “other DIP loans and, frankly, common sense.” He says the financing would result in the “potential transfer of hundreds of millions or billions of dollars of value away from unsecured creditors” on top of “fees and interest totaling nearly $1 billion” over a 12-month case that the DIP lenders would receive in exchange for the $1.1 million new-money loan.

Genereux asserts that as an “absolute matter, the New Money DIP Loan is the most expensive DIP loan I have observed, both recently and in my experience more broadly,” attaching the following analysis of recent DIP transactions:
 

In Genereux’s view, the new-money DIP loan “reflects an IRR (63.5% to 74.0%) that is materially greater than other recent new money DIP term loans,” with the debtors paying $769 million in fees and interest over a nine-month term and $993 million over a 12-month term. Collectively, these fees represent “35% to 42% of the New Money DIP Loans, under a nine- and twelve-month period, respectively.”

Genereux points to his recent DIP transactions chart, saying that “the median amount of fees paid as a percentage of new money I observed was 7.5%,” or “just ~18% to 21% of the Debtors’ proposed DIP facility fees, based on nine and twelve-month tenors, respectively.” The fees paid as a percentage of new money “represents an additional cost on the estate of $303 million to $377 million,” according to the filing.

Genereux concludes that if the court approves the DIP as proposed, the debtors and UCC would “essentially be ‘working for’ the DIP Lenders” because of the lenders’ resulting $5.2 billion to $5.4 billion superpriority administrative expense claims and DIP liens on all unencumbered estate property (including the proceeds of avoidance actions and other estate claims.) Further, the DIP lenders would “control all material economic aspects” of any chapter 11 plan, Genereux says.

Inventory lender Onset Financial also filed a declaration in support of its DIP objection, attaching copies of related master lease agreements, master progress payment agreements, sample documents for conduit transactions, summary charts of the “Conduit Bailees” and “Trico Bailees” and emails with debtors’ counsel.

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