Red Lobster $40M Interim DIP Draw

Relevant Document:
Agenda

Judge Grace E. Robson approved all of the Red Lobster debtors’ requested first day relief at a hearing today, including interim approval of $40 million in new-money DIP financing and a partial rollup of prepetition term loan obligations, overruling an objection from the Office of the U.S. Trustee. The UST had also objected to the debtors’ cash management and consolidated creditor matrix motions, but both objections were resolved at the hearing.

On a final basis, the $275 million DIP financing, led by Fortress as agent, would consist of $100 million of new-money term loans and a $175 million rollup that would roll up prepetition term loan obligations on a 1.75:1 ratio with draws on the new-money term loans.

Jeffrey Dutson of King & Spalding, counsel for the debtors, the “largest casual dining chain” in the United States, said that the debtors were well positioned to execute an in-court restructuring or a sale process with a “fully-baked” DIP, restructuring support agreement and executed stalking horse asset purchase agreement with the debtors’ prepetition and DIP lenders.

Dutson noted that shortly before the petition date, the debtors closed 93 of their nearly 600 locations and identified another approximately 120 leases for rejection. According to Dutson, the debtors intend to seek “meaningful rent concessions” regarding certain leases to avoid further location closures. He added that the debtors are also investigating prepetition actions taken by former management and equity sponsor Thai Union.

Andrew Sorkin of Latham & Watkins, counsel for Thai Union, said that his client “strongly disagreed” with the “mischaracterization” of the parties’ relationship in the first day declaration of CEO Jonathan Tibus. Sorkin said that Thai Union’s role as supplier to the debtors predated its equity investment and added that he hopes the parties’ relationship can continue.

The U.S. Trustee argued today that the proposed DIP financing contained “aggressive” and “extraordinary provisions” under both local bankruptcy rules and the federal rules of bankruptcy procedure, including a “creeping” rollup arguably prohibited under Eleventh Circuit precedent and “pretty problematic” milestones that would preclude an official committee of unsecured creditors from having any input on the sale process.

The UST also argued that the proposed $150,000 UCC professional fee budget was “stingy” and that the lien challenge mechanism featured improper “gatekeeping” provisions such as fee-shifting and the requirement to file a standing motion.

Counsel for the debtors argued that granting the DIP financing on an interim basis today was “absolutely critical” for the debtors to make payroll for 36,000 employees by Friday, May 24.

Judge Robson said she was inclined to grant the DIP on an interim basis, adding that although she did not interpret Eleventh Circuit precedent to categorically prohibit rollups, she would review the relevant decisions and let the parties know as soon as possible if she has concerns after her review.

To resolve the UST’s creditor matrix objection, the debtors agreed to generate a consolidated top 100 creditors list, exclusive of the debtors’ current and former employees. The debtors also agreed to withdraw their request to redact all names of individual creditors and employees from all documents filed with the court, although the court granted the debtors’ request to redact such parties’ mailing addresses and email addresses.

The UST agreed to the debtors’ proposed form of interim cash management order while reserving its rights, provided the debtors agreed to continue making efforts to comply with relevant UST guidelines in advance of the final hearing.

The court set the second day hearing for June 14.