Court Grants OPI Limited Interim $10M DIP Relief; Sends Debtors, March 2027 Noteholders to Mediation While Staying OID Litigation For 30 Days

Judge Christopher Lopez granted the Office Properties Income Trust debtors first day relief, including interim approval of a $125 million nonpriming new-money junior DIP financing, at a hearing today. In granting interim DIP relief, as modified on the record (discussed below), Judge Lopez rejected the March 2027 notes ad hoc group and trustee’s objections that interim DIP funding is unnecessary. Instead, the judge found that the debtors need funds to operate.

Interim DIP approval unlocks the debtors’ access to $10 million in DIP financing and authorizes the facility’s10% anchor capital commitment aka backstop fee, which would be payable in cash or reorganized equity (subject to dilution by a 2% management incentive plan).

The DIP is backstopped by the September 2029 ad hoc group steering committee consisting of Helix Partners and Redwood Capital, and would be provided by September 2029 noteholders that join the debtors’ restructuring support agreement. The RSA is supported by holders of over 80% of the September 2029 notes and manager The RMR Group. Under the proposed RSA plan, September 2029 notes claims would receive secured exit notes, reorganized common equity or a combination of the two.

However, Judge Lopez limited interim DIP relief to the next 30 days, as opposed to the debtors’ proposed six-week interim period. The judge also ordered that “everyone will be on equal footing” with respect to adequate protection terms during the interim period, including receiving interest only at the nondefault rate.

To the extent a lender seeks default interest, that would have to be by agreement among all the parties and “I won’t’ get into the way” of that, the judge said, directly addressing a point raised by Benjamin Rosenblum of Jones Day, counsel to the credit facility ad hoc group.

Credit facility lenders are the “only parties” entitled to default interest under the debtors’ proposed adequate protection terms, according to Rosenblum. He explained that the group is “substantially overcollateralized” – a point agreed to by the debtors – and is “positioned differently.”

Brian Pfeiffer of White & Case, counsel to the September 2029 ad hoc group, said he believes his clients would be “okay” with the adequate protection changes, subject to their confirmation.

In addition, in an effort to break the “log jam” between the debtors and the 2027 noteholders, Judge Lopez ordered the debtors and the 2027 notes ad hoc group to mediation while putting the debtors’ adversary proceeding seeking disallowance of any unamortized original issue discount, or OID, associated with the March 2027 notes “on ice” for the next 30 days. The parties need to work constructively over the next three weeks, the judge noted.

Ray Schrock of Latham & Watkins, counsel to the debtors, suggested tapping Judge Marvin Isgur as the mediator. Judge Lopez was open to the idea, stating that if the parties cannot agree on a mediator by noon tomorrow, Nov. 4, he will “just order” mediation with Judge Isgur, assuming Judge Isgur is available.

In terms of mediation participants (besides the debtors and the 2027 ad hoc group), the debtors would not be keeping anyone from attending, said Schrock. He noted, however, it would be hard to imagine how credit facility lenders would be impacted, and if a deal with unsecured creditors is reached in the near-term, then unsecured bondholders would be the largest constituency of any appointed official committee of unsecured creditors and therefore it “makes sense” to have them participate. Nevertheless, whether parties participate at the “front or back end” of mediation, the debtors would still need to get lenders that will remain in the debtors’ capital structure on board with any agreement, Schrock elaborated.

At the outset of today’s hearing, Schrock told the court that the debtors hope to get to an agreement with the 2027 noteholders and stressed that the debtors “feel very strongly” that 2027 note issues should be “settled.” The parties’ dispute centers on the value of the lenders’ collateral, the lenders’ claim amount and relatedly, the treatment of their OID.

The debtors’ March 2027 notes adversary proceeding would reduce the notes claims by up to approximately $76.4 million, he said, while reserving the debtors’ rights to seek additional disallowance of incurred obligations and invalidation of security interests granted in connection with the notes. Schrock noted that the OID is “very unusual” in that the exchange took place over a year ago and the notes claim actually increased as a result of the exchange.

As outlined in the debtors’ hearing demonstrative, the OID litigation would turn on whether the OID falls within an exception to disallowance and if disallowed, determining the appropriate calculation of the “issue price” of the notes. This, in turn, would determine the amount of OID generated in exchange at issue and inform the unamortized amount as of the petition date.

The company’s position is that the exchange offer for the March 2027 notes does not fall into one of the few exceptions to disallowance of OID and the appropriate issue price calculation is the methodology used for tax purposes, according to the demonstrative.

In addition, the debtors are “close to an agreement” with the unsecured noteholders, said Schrock – a point confirmed by Andrew Glenn of Glenn Agre, counsel to the unsecured bondholders group.

According to Glenn, the bondholder group believes there is “value available” for unsecured bondholders including “some equity” that could “flow upwards” to unsecured creditors. The group looks forward to finalizing an arrangement with the debtors and the September 2029 ad hoc group to minimize administrative costs that would otherwise eat into available value, he said.

In opening remarks, Dennis Dunne of Milbank, counsel to the 2027 notes ad hoc group, attacked the proposed DIP specifically and the RSA generally. According to Dunne, the debtors are seeking to use the DIP to “in essence” “zero out” value with respect to his clients’ unsecured guarantee claims. Dunne maintained there is no reason to approve an “outsized” DIP on an interim basis, when the debtors have no employees or vendors. The court can say “no” to the interim DIP without a “parade of horribles,” stressed Dunne.

Dunne also highlighted that while there are a number of independent directors throughout the debtors’ organizational structure, there are no independent directors at the entities where the group’s structurally senior guarantees are located. “No one is looking out” for creditors here, he said.

During the hearing, Alexander Lees of Milbank, counsel to the 2027 ad hoc group, cross-examined Rachel Murray of Moelis, the debtors’ investment banker, to solicit testimony showing that the fees of the group’s alternative DIP were lower than the proposed DIP.

Murray, however, testified on re-direct conducted by Amy Quartarolo of Latham & Watkins, counsel for the debtors, that the alternative DIP carried several issues. For example, in contrast to the debtors’ DIP, the alternative DIP’s terms of equitization of DIP claims was based on “mutual agreement” with no “agree-to-agree in the future” provision, in reference to the RSA terms, Murray explained. This was especially important to the debtors in order to avoid having to raise capital to pay down the DIP facility at chapter 11 exit, she noted.

In addition, the debtors looked at DIP proposals “holistically” and no other party provided more favorable terms than the proposed DIP “as a whole,” Murray told the court, adding that there is a fiduciary out in the RSA.

In approving the DIP, as modified, Judge Lopez said the alternative DIP is “certainly viable” but “not so materially different” from the debtors’ proposed DIP.

As noted above, Judge Lopez granted the debtors’ other requested first day relief. This included the debtors’ cash management motion, but with the clarification that lenders would receive superpriority claims on an interim basis for any deficiencies in funding from different silos in their capital structure.

The debtors’ second day hearing is set for Dec. 3 at 2 p.m. ET, with objections due Nov. 26 at 5 p.m. ET.