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May 20, 2019 – The Court hearing the Orchids Paper Products Company case issued an order (i) approving amended bidding procedures for the Debtors' sale of assets, including the removal of proposed break-up and expense reimbursement fees, (ii) authorizing entry into a pair of agreements with the stalking horse bidder (an “Option Agreement" and "Stalking Horse Agreement,” the former giving the Debtors the "option" to enter into the latter) and (iii) scheduling an auction timetable [Docket No. 179]. The order contains substantial amendements to reflect concerns raised by the Debtors' Official Committee of Unsecured Creditors (the “Committee”) which challenged the Debtors and Orchids Investments LLC (an affilliate of Black Diamond Capital Management, "BDCM" and both the Debtors' debtor-in-possession ("DIP") lender and stalking horse bidder) on two fronts: bidding procedures and DIP financing.
Committee Objection to Bidding Procedures Motion
On April 26, 2019, the Committee objected to the Debtors’ proposed bid procedures, the "bid chilling" $175.0mn credit bid of BDCM and an overall sale process "riddled with serious defects" [Docket No. 86].
The objection stated, “By the Bid Procedures and Sale Motion, the Debtors are proposing a sale of substantially all of their assets to the Stalking Horse Bidder (which is also the Prepetition Lender and the DIP Lender) via a bid chilling $175 million credit bid that cannot possibly lead to higher or better offers. While the Committee supports a fair and competitive auction process intended to encourage all prospective bidders to put their best bid forward, protect jobs, and maximize value for all constituents—simply put, this is not that process….The sale process proposed by the Debtors is riddled with serious defects that, if not corrected, may chill bidding and otherwise prevent the Debtors from achieving their purported goal for these Chapter 11 Cases; to realize the maximum value for their business. The abbreviated sale process proposed by the Debtors is designed to guarantee that the Prepetition Lender/DIP Lender will be the Successful Bidder."
Amongst the Committee's principal objections were concerns that (i) the bidding procedures motion would leave the Debtors administratively insolvent, (ii) that the conditionality and general vagueness of the stalking horse bid (eg, the absence of an identifiable Minimum Overbid) were unreasonable and (iii) the proposed bidder protections were "wholly improper" given BDCM's role as prepetition and DIP lender [NB: The bidder protections included a $5.25mn break-up fee, a $2.0mn expense reimbursement fee and a $500k bid incement resulting in a $7.75mn minimum overbid]. The objection states: "Specifically, the key defects identified by the Committee include:
Failure to Provide for Administrative Solvency: The Motion allows for the DIP Lender to purchase the assets via the Credit Bid, assume certain postpetition trade payables and 503(b)(9) Claims (up to a $2.5 million Accounts Payable Cap), and pay the Debtors an extremely limited amount of cash consideration for a wind down and the funding of a plan of liquidation. There is no indication that the cash received by the Debtors through the Cash Component and the Wind Down Payment will be sufficient to cover all administrative claims, including 503(b)(9) Claims and professional fees remaining after the Sale to the Stalking Horse closes. In sum, as currently proposed, the Stalking Horse Bid leaves the Debtors’ estates administratively insolvent….
Unreasonable Conditions Precedent: The conditionality of the Stalking Horse Bid (which is really nothing more than an offer as opposed to a binding agreement) belies the notion that the DIP Lender’s bid could serve the traditional purpose of a stalking horse bid – that is, to serve as a catalyst for other bids and to act as the definitive transaction in the event no other bidders surface. Moreover, the Stalking Horse Bid fails to set an easily identifiable bid floor for the Minimum Overbid. Here, the contingent nature of the Stalking Horse Agreement creates instability and uncertainty, which may further chill competitive bidding and deter prospective purchasers….
The Bid Protections are Inappropriate and Chill Bidding: Under the circumstances, the Stalking Horse Bid Protections are wholly improper. The Break-Up Fee and Expense Reimbursement are not actually necessary to preserve the value of the Debtors’ estates as required by Third Circuit law. The Stalking Horse Bidder already maintains a lien on substantially all of the assets of the Debtors by way of serving as the Prepetition Lender and the DIP Lender and is essentially using the bankruptcy process to conduct a friendly foreclosure to obtain a 'free and clear' sale order. There is also no justification in the Bankruptcy Code for the superpriority administrative expense status awarded to the Break-Up Fee and Expenses Reimbursement."
The Revised Bidding Procedures and Court Order
Further to the Committee's objections and the Court's May 17, 2019 hearing on the proposed bidding procedures, the Court order reflected a number of the concrens raised above, stating: "The Debtors and the Stalking Horse Bidder have advised the Court that they will amend the Stalking Horse Agreement and Option Agreement, as applicable, to provide as follows: (a) the proposed Break-Up Fee and Expense Reimbursement will be eliminated; (b) the Accounts Payable Cap will be increased from $2,500,000 to $14,500,000; and (c) the Cure Cap Amount will be increased from $1,000,000 to $5,000,000."
"In the event of a competing Qualified Bid, all Qualified Bidders will be entitled,but not obligated, to submit Overbids. Such Overbids must propose a purchase price equal to orgreater than the sum of (i) the value of the Stalking Horse Agreement, as determined by the Debtors in consultation with the Creditors’ Committee (which such value calculation shall beavailable to potential bidders upon request); and (ii) $500,000 (the 'Initial Overbid')."
- Sale Objection Deadline: June 24, 2019
- Bid Deadline: June 24, 2019
- Auction: June 27, 2019
- Sale Hearing: July 1, 2019
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