First Brands Secures Interim DIP Approval Amid Unresolved Collateral Disputes; Evolution Previews Potential Request to Appoint Examiner, Ch. 11 Trustee to Address Financial Irregularities

Relevant Documents:
Amended Agenda
Further Revised Proposed DIP Order
Revised Proposed Cash Management Order
First Day Presentation
Interim DIP Order (entered Oct. 1)
Interim Cash Management Order (entered Oct. 2)

The First Brands Group debtors received critical first day relief today in their bankruptcy cases after filing a freefall chapter 11 on Sept. 28 without a restructuring support agreement in place. Judge Christopher M. Lopez approved the debtors’ $1.1 billion new-money DIP financing on an interim basis during the morning portion of the hearing and approved the remainder of the first day relief this afternoon.

Judge Lopez set a hearing for Oct. 29 at 2 p.m. ET to consider final DIP approval and other second day relief. Live updates from today’s hearing can be found HERE.

The debtors’ $4.4 billion DIP financing package is provided by a Gibson Dunn-represented ad hoc group of first lien cross-holders and backstopped by certain members of the group. The $4.4 billion DIP includes a $1.1 billion new-money component, with $175 million immediately available and $325 million funded into escrow upon interim approval and the balance funded into escrow upon entry of the final DIP order. The DIP also includes a $3.3 billion “creeping” 3:1 rollup of certain prepetition first lien term loan debt, with $1.5 billion rolled up upon interim approval.

Judge Lopez approved the DIP financing even though ABL agent Bank of America was not fully signed off on consensual cash collateral use, citing potential adverse impacts from the debtors’ proposed collateral agreements with other lenders. Judge Lopez overruled limited DIP objections from a number of creditor groups, including factoring partners Raistone Capital and Katsumi Servicing, equipment lessor Onset Financial and inventory lender Aequum Capital.

Daniel McGuire of Winston & Strawn, for Bank of America, noted that although the parties had made “tremendous progress,” they were not resolved on the debtors’ proposed agreements with the CarVa lenders, which he said would “destroy our borrowing base.” It is a “very messy situation,” McGuire added.

Judge Lopez said he was “comfortable” approving the DIP financing on an interim basis as long as the debtors ensure “transparency” on the disposition of disputed collateral such that all parties’ rights are reserved. The judge cautioned that his ruling should not be cited as precedent because of the unique nature of the case.

Judge Lopez also said he would “call balls and strikes,” if necessary, as the parties work out cash collateral stipulations. However, the judge rebuffed requests to push finalization of the stipulations to tomorrow, Thursday, Oct. 2. The judge indicated that in the absence of agreement, he would select controlling language for the interim period and enter the interim DIP order today.

The bulk of the hearing focused on potential collateral disputes among the ABL lenders and other financing parties exacerbated by possible third-party factoring irregularities and commingling of collateral.

Debtors’ counsel Sunny Singh of Weil Gotshal noted that although the DIP is not fully consensual, the debtors “considerably narrowed” the issues by seeking to preserve the status quo during the interim period. Under the debtors’ proposed collateral protections, Singh said liens would not “creep” into the SPV debtors, and the protections granted to the SPV lenders would not cross over into the other debtor facilities. Money would not be sent to either “side of the house” on an interim basis, Singh added.

Singh said that although not all parties were signed off, the debtors are taking a consistent approach with the SPV lenders during the interim period to preserve parties’ rights. He remarked that the debtors “simply do not know” the extent to which the parties’ security interests are valid, but to protect their asserted rights, the asserted liens would be generally retained and protected through escrow mechanics, as reflected in the debtors’ stipulation with Evolution.

Although Evolution agreed to consensual cash collateral use during the interim period, its counsel, Vincent Indelicato of Proskauer Rose, reserved Evolution’s rights to seek the appointment of an examiner or chapter 11 trustee and to potentially move to dismiss the bankruptcy filings of the SPV entities. Indelicato said Evolution is a “victim” of unauthorized transfers of its collateral and questioned the continued participation of prepetition management, despite the oversight of the independent directors on the special committee. “How in the world this could happen is a mystery to us,” he added.

Indelicato noted Evolution made a DIP financing proposal to the debtors before the company put a group of SPV debtors – Carnaby Capital Holdings and affiliated entities – into chapter 11 last week.

Singh emphasized that the debtors are now proceeding with the support of 99% of first lien loans, 100% of sidecar term loans and 84% to 86% of second lien loans. He also noted the DIP milestones require the debtors to execute transaction support and restructuring support agreements with the DIP lenders in 30 days.

Singh underscored that the parties would have a “better understanding of the facts” before consideration of the DIP financing on a final basis but cautioned that the company would liquidate and threaten creditors with minimal recoveries if the DIP was not approved today.

Scott Greenberg of Gibson Dunn, for the cross-holder ad hoc group, said it had been a “hard lift” to underwrite the DIP, noting it has been one of the most difficult financings of his career. The ad hoc group is “just starting to peel back the onion,” he remarked, as the debtors’ special committee investigates whether receivables may have been “factored more than once” and other irregularities.

Greenberg said the DIP lenders are funding into a “black box” with only a fraction of the diligence that would be done in the ordinary course. He characterized the DIP financing as a true “rescue facility” as the company makes a “crash landing” into bankruptcy. Greenberg remarked that the lenders are “hopeful” the DIP financing will enable the debtors to stabilize their business and reach a value-maximizing solution.

However, Greenberg said there are still more questions than answers on how the company spiraled into bankruptcy so quickly after being on course for an ordinary course refinancing in July.