Court Grants Multi-Color Interim DIP Approval but Reduces Interim Rollup, Directs Parties to Mediate; Ad Hoc Cross-Holder Group to ‘Immediately’ Appeal

Today Judge Michael B. Kaplan granted interim approval for the Multi-Color debtors’ proposed $675.5 million DIP financing at a continued first day hearing, overruling objections from a cross-holder ad hoc group and excluded first lien lenders. However, the judge approved only a $125 million rollup of prepetition first lien debt and $3.75 million of a requested $7.5 million backstop premium. The debtors had requested that a $150 million rollup be approved on an interim basis.

Bruce Bennett of Jones Day, counsel for the ad hoc cross-holder group, said his client will appeal the interim DIP ruling “immediately.”

The heavily contested prepackaged cases still face challenges on multiple fronts. Judge Kaplan scheduled a hearing for Feb. 25 at 11:30 a.m. ET on the cross-holder ad hoc group’s motion to dismiss or transfer venue, saying the issue needs to be resolved before the second day hearing on March 3 at 10 a.m. ET.

The judge also directed the debtors, equity sponsor CD&R, the secured ad hoc group, the excluded lenders and the cross-holder ad hoc group to mediation.

The DIP financing consists of $250 million of new money, a $250 million rollup of first lien debt, a $7.5 million DIP backstop premium and up to $150 million in additional new-money loans provided by prepetition first lien lenders. The financing is backstopped by equity sponsor CD&R and certain members of the secured ad hoc group that signed on to the restructuring support agreement. All first lien lenders can participate in the DIP facility subject to a 30% holdback for the backstop parties.

The debtors announced today that they are reducing their interim new-money request to $125 million from $150 million. Steven Serajeddini of Kirkland & Ellis explained that Multi-Color is only seeking “what is absolutely necessary” now and may come back to the court to ask for another interim draw.

In their objections, the ad hoc cross-holder group and excluded first lien lenders argued that the interim DIP relief unfairly locks in case outcomes to the advantage of certain lenders and sponsor CD&R. The cross-holder group asserts that the debtors should have accepted its better alternative proposal, discussed below.

Judge Kaplan took interim DIP approval under advisement after the first day hearing on Jan. 30, but authorized the debtors to use up to $45 million of cash collateral and DIP financing pending today’s continued hearing. Today, Serajeddini reported that the parties were unable to agree on a form of order to release the $45 million, but said the debtors worked with their fronting bank and should be able to close the DIP quickly to avoid delays in funding payroll and other expenses.

The judge observed that the cross-holder ad hoc group made a competing DIP proposal – discussed below – that would be nonpriming and involve “less fee exposure in the short term.” However, Judge Kaplan echoed arguments from the debtors in concluding that the cross-holder proposal lacked broad lender support, was not “coupled with a feasible exit proposal” and could have risked delaying the cases with no guaranteed pathway for emergence.

Judge Kaplan rejected the cross-holder ad hoc group’s argument that the DIP is an insider transaction that should be assessed under the stricter entire fairness standard, not the deferential business judgment standard. There is nothing “apart from argument and conjecture” to show any conflict of interest or bad faith, the judge said.

The debtors exercised their business judgment in picking a DIP, the judge continued, noting they could consider exit financing when choosing between DIP proposals. Judge Kaplan also rejected the argument that the DIP constitutes a sub rosa plan, saying it provides a necessary framework but did not dictate plan terms.

Judge Kaplan also acknowledged the excluded first lien lenders’ concerns that the DIP favors some of the first lien lenders in violation of pro rata provisions in the first lien credit documents. The judge remarked that he is “cognizant of the math and that a rollup may produce a significant pro rata uplift for certain lenders,” but he added that this recovery cannot be viewed in a vacuum separate from the benefits the DIP financing will provide. He also said that disputes over prepetition liens do not have to be resolved at the interim DIP approval stage.

Judge Kaplan found that the DIP fees and proposed rollup were integral components of the financing package, but said he will only approve $125 million of a proposed $150 million interim rollup today because the “extent and value of collateral securing” the first lien claims “remains unresolved.” He also deferred approval of 50% of the backstop fee, or $3.75 million, pending the appointment of an official committee of unsecured creditors.

Judge Kaplan emphasized that his approval of the DIP “does not constitute final adjudication of any contractual disputes” among lenders and the excluded lenders’ rights to pursue available remedies is expressly preserved.

Comparison of DIP Financing With Ad Hoc Cross-Holder Group Proposal

On Jan. 30, Brendan Hayes of Guggenheim filed a declaration in support of the ad hoc cross-holder group’s objection to Multi-Color’s DIP financing. He attaches an exhibit summarizing the terms of the ad hoc cross-holder group’s alternative DIP proposal, dated as of Jan. 25, as follows:

Hayes’ declaration also includes a presentation from Jones Day, counsel for the ad hoc cross-holder group, arguing that the ad hoc cross-holder group’s DIP proposal provides better economics for the company because of the absence of the DIP rollup feature. The debtors’ current proposed DIP rollup feature provides DIP lenders with $125 million to $146 million of incremental recovery value that would otherwise be distributed to prepetition lenders.

The ad hoc cross-holder group proposed a DIP financing with cheaper economic terms, including no backstop premium, a 1% OID paid in cash (compared with 2% in the debtors’ proposal), and no DIP holdback. See the details in the table above.

The debtors’ proposed DIP financing also contemplates an incremental DIP loan of up to $150 million, to be provided by the DIP backstop parties and funded as needed to satisfy liquidity requirements. The incremental DIP loans bear no interest or fees and will be repaid in cash or, at the lenders’ election, applied toward new preferred equity subscription proceeds.

Also on Jan. 30, Benjamin Rosenblum of Jones Day filed a declaration in support of the ad hoc cross-holder group’s objection, which includes a proposed DIP backstop letter and term sheet.