Court Continues Franchise Group First Day Hearing to Tomorrow, Citing Need for More Evidence to Support Debtors’ DIP Financing Request

After an evidentiary first day hearing today, Judge John T. Dorsey declined to rule on the Franchise Group debtors’ proposed $750 million DIP facility and adjourned the hearing to tomorrow, Nov. 6, at 12 p.m. ET. Judge Dorsey said that based on the evidence presented today, “I’m not comfortable with the consequences” of approving the DIP, adding that the debtors “are asking for a lot of relief on day one.”

“I’ve never seen pricing this high,” Judge Dorsey remarked. The judge also expressed concerns about the number of DIP terms the debtors are seeking approval upon entry of an interim order, noting that “the effect” would be to foreclose constituencies from challenging the terms. The ability to challenge the roll up, reflected in a revised proposed interim DIP order filed earlier today, “doesn’t address my concerns,” he said. “I need more evidence” including on whether the DIP fees are market, he noted.

During today’s hearing, Daniel Fliman of Paul Hastings, counsel to the ad hoc first lien lender group that is backstopping the DIP facility, warned that his clients underwrote the $250 million new money portion of the DIP facility based on its “comprehensive economic package.” Even “adjusting one portion would make the entire economic consideration fall apart,” Fliman stressed.

As proposed, the DIP facility would roll up $500 million of prepetition first lien debt upon interim approval. The debtors seek access to $125 million of the new money financing upon interim approval, while a $50 million draw would become available upon final approval and a third $75 million draw would be available at plan confirmation to fund the debtors’ cases post-confirmation until the plan goes effective.

The first lien lenders would receive a backstop premium of 10% on the new-money loans, payable in kind on interim DIP approval. Additional fees include a 2.5% commitment fee on the new-money portion (payable in kind on interim DIP approval), a 2.5% exit premium on total DIP obligations (payable in kind on the plan effective date or earlier prepayment) and a 0.2% fronting fee on new-money loans funded by fronting lenders.

Matthew Feldman of Willkie Farr, counsel to the debtors, addressed securities fraud allegations surrounding the debtors’ former CEO, Brian Kahn, at an unrelated hedge fund. Feldman maintained that the debtors’ filing was not the result of the alleged misconduct, but rather because the debtors ran out of liquidity to fund their prepetition marketing process. The allegations, however, did affect the company’s ability to access financing, he acknowledged.

Feldman also said that an independent investigation into whether Franchise Group or any of its officers or employees were involved in Kahn’s alleged misconduct, completed by law firm Petrillo Klein Boxer, was “thorough, comprehensive and complete.” A separate independent investigation of the debtors’ 2023 take private transaction is ongoing, also overseen by Petrillo Klein Boxer.

At today’s hearing, Lauria of White & Case, counsel to two ad hoc groups holding approximately $640 million of claims, disclosed that the U.S. Securities and Exchange Commission is investigating aspects of the 2023 take private transaction, but he did not provide further details. According to Lauria, the two ad hoc groups consist of funds managed by Irradiant Partners and Simcorp, which represent 90% of the lenders to the Freedom HoldCo debtor parent and 90% of the second lien lenders to the Franchise Group OpCo debtors, respectively.

Lauria’s colleague Christopher Shore noted that Willkie Farr served as Kahn’s counsel during the debtors’ take private transaction.

Jayme Goldstein of Paul Hastings, counsel to the ad hoc group, argued that “the last thing” his clients wanted was “for us to be here today.” Goldstein asserted the group tried to reach a deal with the second lien lenders so that all lenders could “salvage their own investment,” but the parties “simply ran out of time” to achieve a settlement. He also noted that a DIP proposal from the second lien lenders is not workable because it does not provide enough liquidity and arrived less than 24 hours before the filing.

Lauria, on behalf of his clients, called the DIP facility “obviously oversized,” constituting “an out-in-the-open ham-handed grab on the first day of the case.”

In opposing interim DIP approval, Lauria accused the first lien lenders of seeking to control the case by restricting other parties from performing any reasonable diligence or conducting negotiations. Lauria also pointed out any entered interim order would lack a “proper evidentiary record.”

Andrew Sorkin of Latham & Watkins for JPMorgan Chase Bank, the prepetition ABL agent, cautioned that although the agent is not objecting to interim DIP approval, there are “unresolved issues that we will need to resolve in the coming weeks.” Although the agent has “agreed to live with the adequate protection package for purposes of the interim period,” this agreement is not “an admission that the adequate protection package is sufficient over the longer term,” Sorkin said.

Today’s hearing featured cross-examinations of David Orlofsky of AlixPartners, the debtors’ Chief Restructuring Officer, and Christopher Grubb of Ducera Partners, the debtors’ investment banker, on the negotiation of the DIP facility, the debtors’ liquidity needs and the DIP’s fees and interest rates.