New Cotai Holdings – PIK Noteholders Fire New Salvo in Silver Point “War”, Object to DIP Financing as Mechanism for Shielding Silver Point from Litigation and Offer Alternative DIP Financing

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June 4, 2019 – An ad hoc group (the “Ad Hoc Group”) of unaffiliated holders of the Debtors’ 10.625% Senior Pay-In-Kind Notes due 2019 (the “Notes”) objected [Docket No. 71] to the Debtors' motion requesting Court authority to access $6.25mn in debtor-in-possession (“DIP”) financing to be provided by SPCP Group, LLC, an affiliate of Silver Point Capital, L.P. (together with its affiliates, "Silver Point"). The objection argues that the proposed Silver point DIP financing is "simply a mechanism through which Silver Point intends to shield itself from the investigation and prosecution of claims and causes of action that already play a prominent role in these chapter 11 cases" and highlights that the Ad Hoc Group has now offered alternative, and superior, DIP financing arrangements to the Debtors.

The present DIP objection falls on the footsteps of the Ad Hoc Group's May 24th motion [Docket No. 48] urging the Court to terminate the Debtors’ Plan exclusivity periods; a motion that the Debtors vigorously challenged in a June 3rd objection characterizing the Ad Hoc Group's efforts as a declaration of war [Docket No. 64]. 

The DIP objection states: "By the Motion, the Debtors seek approval of a proposed DIP facility to be provided by an affiliate of Silver Point Capital, L.P…the Debtors’ controlling equity holder and the likely target of extensive litigation surrounding the purportedly public offering of Studio City stock. Although the Debtors emphasize the ‘better than market’ terms of the Silver Point Proposal (as defined herein) and the ‘flexibility’ afforded to the Debtors by (among other things) the absence of milestones, the Silver Point Proposal is simply a mechanism through which Silver Point intends to shield itself from the investigation and prosecution of claims and causes of action that already play a prominent role in these chapter 11 cases. Indeed, by providing just $6.25 million in financing to the Debtors on a super priority, senior secured basis, the Silver Point Proposal would have the effect of, among other things:

  • precluding the Debtors and other parties in interest from using estate assets to pursue claims against Silver Point in any capacity;·
  • impeding the investigation or pursuit of claims against Silver Point by excluding fees related to such activities from the Carve Out;·
  • granting Silver Point liens on and claims against the proceeds of avoidance actions, including avoidance actions against Silver Point itself; and·
  • preventing the Debtors and other parties in interest from challenging Silver Point’s ability to credit bid in a sale of the Debtors’ assets.

To avoid the inequitable outcome that would be imposed on these estates by approval of the Silver Point Proposal, the Ad Hoc Group has proposed alternative DIP financing that offers the Debtors improved economic terms and increased liquidity to enable the Debtors to pay all of their creditors other than the Noteholders in full on terms that are otherwise substantially similar to the Silver Point Proposal—without hampering the Debtors’ and other parties’ ability to investigate and pursue claims and causes of action against Silver Point. In light of the foregoing,the Silver Point Proposal does not—and cannot—withstand the heightened scrutiny applied to insider financing proposals. Accordingly, the Court should deny the Motion as to the Silver Point Proposal and, instead, should authorize and direct the Debtors to accept the Ad Hoc Proposal.”

The Below chart compares the key terms of the Silver Point Proposal and the Ad Hoc Group Proposal

Silver Point Proposal

Ad Hoc Proposal

Administrative Agent

Silver Point Finance, LLC

Cortland Capital Market Services LLC

Lender

Silver Point Lender

Certain members of the Ad Hoc Group

Facility Size

$6.25 million

Same, plus an additional $300,000 to pay in full all unsecured claims against the Debtors other than the Notes

Interest Rate

LIBO Rate Loans: L + 7.00% ABR Loans: ABR + 6.00%

LIBO Rate Loans: L + 6.50% ABR Loans: ABR + 5.50%

Commitment Fee

$1.00%

0.75%, from which fees charged by the administrative agent will be deducted

Maturity Date

12 months from the date of entry of the Final Order, subject to additional 12 month extension at the Debtors’ option

Same as the Silver Point Proposal

The Court scheduled a hearing to consider the objection for June 10, 2019.

Background

On June 3, 2019, the Debtors objected [Docket No. 64] to a May 24, 2019 motion filed by the Ad Hoc Group asking the Court to terminate the Debtors’ Plan exclusivity periods [Docket No. 48].

The Debtors objection states, “Indeed, the Ad Hoc Group announced its intention to ‘take control’ on day one of these cases. The Debtors had not even had an opportunity to present a single first-day motion before counsel to the Ad Hoc Group stood up in court and declared war. That was hardly a harbinger of a consensual approach and, as described more fully below, is consistent with the Ad Hoc Group’s unnecessarily aggressive approach throughout the pre-petition period. The Debtors will not kowtow to this tactic, and this Court shouldn’t either. The Ad Hoc Group’s motion therefore should be denied. There are two primary reasons why this is so. First, the Ad Hoc Group assumes there is no value for anyone but the Noteholders and that no plan can be confirmed without their vote. Those are fairly presumptuous positions to take so early in a case, before engaging in any negotiations other than to insist on being handed the keys immediately, no questions asked. If necessary, and at the appropriate time, the Debtors will prove the Ad Hoc Group wrong. But the Debtors need not do so in the first three weeks of the case. Indeed, the value the Ad Hoc Group advocates in its motion is based on very thinly traded securities with limited analyst coverage, significant technical overhang, and a massive gaming project that is only partially complete and poised for substantial growth on many fronts in the coming years. The trading value of those securities therefore is not at all reflective of true value."

On May 24, 2019, the Ad Hoc Group stated, “The Ad Hoc Group does not seek such a remedy lightly and recognizes that the relief requested is rarely sought so early in a chapter 11 proceeding. These chapter 11 cases, however, present the rare circumstances where terminating a debtor's exclusivity period is both warranted and appropriate. The Debtors comprise a series of holding companies controlled by Silver Point Capital, L.P. (‘Silver Point’). They have no employees and no operations; they are simply shells that hold a minority equity investment in a Macau-based casino, Studio City The Debtors' only significant liability is the indebtedness underlying the Notes, of which the Ad Hoc Group holds more than 70% (or, upon information and belief, approximately 97% when insider holdings are excluded). Despite the best efforts of the Ad Hoc Group to negotiate a consensual restructuring—efforts that preceded these cases by many months and have continued following the Petition Date—the Debtors have not engaged to date in any meaningful way. The extent of the interactions between the parties is easily and quickly summarized. After months of overtures and requests for information and documentation from the Ad Hoc Group since it became apparent that the Debtors would not be able to pay the Notes on maturity, two Silver Point representatives finally agreed to meet with certain members of the Ad Hoc Group in mid-April 2019. Based on both the substance of that brief meeting held on the eve of maturity and the term sheet received from them immediately thereafter, it was clear that Silver Point's strategy with respect to a restructuring of the Debtors was to try to play out an out-of-the-money option for as long as possible with the hope that the Debtors' interests in Studio City might increase in value as a result of events that might or might not occur in the future.

The Ad Hoc Group, of course, was (and is) simply not willing to gamble its recoveries on events that might potentially play out years from now, and thus found Silver Point's approach untenable. Rather than disengage from the discussions, the Ad Hoc Group instead responded promptly with a counterproposal that outlined the terms of a potential plan of reorganization. Notwithstanding the Ad Hoc Group's repeated requests for a formal or informal response to its term sheet, the Debtors have provided no response and no guidance as to the potential substance of any such response, even on an advisors-eyes-only basis…There is no viable plan of reorganization that the Debtors can propose without the Ad Hoc Group's support given that the Ad Hoc Group holds more than two-thirds of all claims. Under these circumstances, termination of the Debtors' exclusivity period is appropriate to enable the Ad Hoc Group to propose a confirmable plan of reorganization on an expedited timeline, a plan that the Ad Hoc Group would propose to fund through an extremely competitive DIP loan. Indeed, and as evidence of the Ad Hoc Group's good faith and commitment to these cases, the Ad Hoc Group has now submitted to the Debtors a formal proposal to provide DIP financing commensurate with the Debtors' stated needs, utilizing the documentation prepared in connection with the proposed Silver Point facility but improving on Silver Point's proposed economics.”

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