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Innkeepers, HSH Delaware, Crucible, P&C Poultry, GM, Garlock: Bankruptcy
Midland Loan Services Inc., the servicer for the $825 million in mortgage debt, has a commitment from Five Mile Capital Partners LLC to pay $236 million for all the new equity of Innkeepers USA Trust, a real estate investment trust owned by Apollo Investment Corp. The commitment is the cornerstone for a competing Chapter 11 plan that Midland seeks authority to file.
Midland says that the plan proposed by Apollo and secured lender Lehman ALI Inc. is opposed by creditors holding $1.2 billion in secured debt, all of the mezzanine lenders, and the holders of preferred stock.
Midland filed a motion yesterday for termination of Innkeepers’ exclusive right to propose a Chapter 11 plan. If exclusivity is ended, Midland says its plan would sell Innkeepers to Stamford, Connecticut-based Five Mile while providing a larger return to every creditor aside from Lehman Ali, a subsidiary of Lehman Brothers Holdings Inc. The alternative plan is based on a $1.04 billion valuation of the reorganized company, $125 million higher than in Innkeepers’ proposal.
The Midland plan wouldn’t cram down on secured lenders. If they don’t like the plan, they can take their collateral. There would be an auction to test if anyone is willing to buy the equity for more than Five Mile.
The Midland plan would provide an $89.1 million larger recovery for lenders other than Lehman Ali. Midland says that the lower recovery by Lehman Ali better reflects the value of the collateral. The plan would pay down $187.2 million in debt including the $68 million in financing for the Chapter 11 reorganization that Five Mile is providing in part.
The alternative plan entails an $87 million reduction in the $238 million in debt owing to Lehman Ali. A $16.8 million paydown would leave Lehman Ali with debt of $134.9 million.
The holders of $825 million in fixed-rate debt, for which Midland is the indenture trustee, would give up $225.4 million in debt, leaving a new balance of $533.6 million following a $66.4 million paydown.
The Five Mile-sponsored plan has a recovery of about 73 percent for creditors other than Lehman Ali, compared with a maximum 66.3 percent recovery from the Innkeepers’ plan.
Secured lenders with liens on seven hotels would have treatment similar to Midland’s.
The floating rate mezzanine debt would receive a $600,000 payment toward $121 million in debt.
The Five Mile commitment requires terminating exclusivity by Oct. 15 and permitting Five Mile to examine detailed financial information.
Lehman Ali was the originator of debt sold in connection with Apollo’s $1.35 billion acquisition of Innkeepers in July 2007. Innkeepers’ plan was worked with Lehman ALI before the Chapter 11 filing on July 19. The Innkeepers’ plan would give the Lehman subsidiary the all new equity in exchange for $238 million in mortgage debt. The Lehman subsidiary has floating- rate mortgages on 20 of Innkeepers’ 72 extended-stay and limited-service properties.
Lehman in turn must sell half the new stock to Apollo for not less than $107.5 million.
Innkeepers’ plan would give the Midland secured creditors, owed $825 million, $550 million in fixed-rate mortgages on the 45 properties that are their collateral. There are another $206 million in mortgages on seven properties to be reduced by the plan to $150 million. Innkeepers’ general unsecured creditors would receive $500,000 cash under the plan.
Although not yet on the calendar, Midland’s exclusivity motion may be discussed at a hearing tomorrow when the bankruptcy judge is to rule on objections to financing and the so-called plan support agreement that prohibits Innkeepers from moving ahead with any plan except Lehman’s. Tomorrow’s hearing also will determine whether preferred shareholders will succeed on their motion for the appointment of an examiner.
In total, Palm Beach, Florida-based Innkeepers has 72 hotels with 10,000 rooms in 20 states. Apollo acquired the company in July 2007 in a $1.35 billion transaction. The Innkeepers petition listed assets of $1.5 billion against debt totaling $1.52 billion.
The case is In re Innkeepers USA Trust, 10-13800, U.S. Bankruptcy Court, Southern District New York (Manhattan).
Updates
HSH Delaware Sets Consensual Oct. 19 Confirmation
The Chapter 11 reorganization of HSH Delaware GP LLC should end without a fight at an Oct. 19 confirmation hearing after the company settled disputes with lenders owed $550 million.
Last week the bankruptcy court in Delaware approved the disclosure statement for the company formed in 2006 by J.C. Flowers & Co. LLC to buy 26 percent of the German bank HSH Nordbank AG. Until the settlement was negotiated, the company and the lenders were tied up in litigation, including a motion by the lenders for the appointment of a Chapter 11 trustee.
The plan will convert the lenders’ unpaid fees and expenses into principal owing on the debt. The maturity will be extended to Dec. 31, 2014.
The plan gives the company time to sell the equity or the assets. If there is a surplus above the debt to the lenders, the plan contains an agreed sharing of the excess between the company and the lenders.
Unsecured creditors will be paid in full.
The lenders contended that the company had no employees or operations while their collateral was worth less than the debt. HSH, on the other hand, believed the stock is worth enough to pay the lenders in full, while providing a “sizeable recovery for the debtors’ equity holders.”
HSH Delaware GP LLC and affiliates filed under Chapter 11 in January.
Court papers say that the 1.25 billion euros ($1.58 billion) purchase price was financed in part with the bank loan. The inability to negotiate a workout with the banks resulted in the Chapter 11 filing to avoid what the company called a “firesale” of the HSH Nordbank stock.
The case is In re HSH Delaware GP LLC, 10-10187, U.S. Bankruptcy Court, District of Delaware (Wilmington).
Old GM to Help New GM Avoid Loss of Tax Benefits
Old General Motors Corp., in its role as a significant shareholder of new GM, is seeking a blessing from the bankruptcy court to vote in favor of an amendment to new GM’s corporate charter.
The amendment is intended to help preserve $42 billion of net operating losses to which new GM succeeded when it purchased old GM’s business. The motion to approve voting for the charter amendment comes to bankruptcy court for hearing on Sept. 24.
A company can lose the ability to utilize tax loss carry- forwards if there is a so-called change in control. A change of control for tax purposes can occur if significant shareholders increase their stock holdings more than tax law allows.
New GM is seeking unanimous approval of the charter amendment from existing shareholders. If the charter change occurs after an initial public offering, old GM said that the prohibitions on accumulating additional stock will be more restrictive. The motion also says that the market is expecting the limitations on stock transfers, according to new GM’s underwriter.
Old GM sold the core business to new GM and in return received 10 percent of the stock of the new company plus warrants for 15 percent. The warrants will have value if the new company is profitable enough to raise the company’s value to specified levels. New GM is 60.8 percent owned by the U.S. government.
Old GM began the largest manufacturing reorganization in history by filing under Chapter 11 on June 1, 2009. The sale was completed on July 10, 2009. GM listed assets of $82.3 billion against debt totaling $172.8 billion.
The case is In re Motors Liquidation Co., 09-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Nortel Selling Multiservice Business for $39 Million
Nortel Networks Inc., once North America’s largest communications-equipment provider, has a hearing scheduled for tomorrow where the bankruptcy judge will set up procedures for testing whether a $39 million cash offer is the best bid for the multiservice switch business.
If approved by the judge, other bids will be due Sept. 21, followed by an auction on Sept. 24 and a hearing for approval of the sale on Sept. 30.
The buyer, PSP Holdings LLC, is a company sponsored by Marlin Equity Partners from El Segundo, California, and Canada’s Samnite Technologies Inc.
The multiservice switch business allows customers to integrate data, voice and video into one network available at multiple locations. The business has customers in 100 countries.
Nortel filed a liquidating Chapter 11 plan on July 13 without an accompanying disclosure statement. The current deadline for filing the disclosure statement is Sept. 3. The plan was filed on the last day of Nortel’s exclusive right to propose a liquidation scheme.
The plan would pay secured creditors in full with distribution of remaining asset sale proceeds to unsecured creditors after creditors with higher priorities are paid in full. There would be no distributions to creditors with subordinated claims.
There is no substantive consolidation, so recoveries will vary depending on the Nortel company that owes a particular debt.
Nortel raised $2.6 billion from the sale of various businesses. Patents and patent applications are yet to be sold.
The Toronto-based Nortel companies filed for bankruptcy reorganization in January 2009 in the U.S., Canada, and London. The Nortel companies reported $11.6 billion in consolidated assets against debt totaling $11.8 billion as of Sept. 30. Revenue was $9.7 billion in 2007. For the first nine months of 2008, sales were $6.8 billion.
The Chapter 11 case is In re Nortel Networks Inc., 09- 10138, and the parent’s Chapter 15 case is In re Nortel Networks Corp., 09-10164, both in U.S. Bankruptcy Court, District of Delaware (Wilmington).
Steelmaker Crucible Confirms Chapter 11 Plan
Crucible Materials Corp., at one time a steelmaker for the auto and aerospace industries, has an approved Chapter 11 plan following the signature by the bankruptcy judge on an Aug. 26 confirmation order.
Crucible generated $14.4 million from four asset sales after secured lenders were fully paid on $64.5 million in claims outstanding when the Chapter 11 case began in May 2009. When the disclosure statement was filed, Crucible had $25.2 million cash on hand. The disclosure statement said that unsecured claims against Crucible Materials might total $400 million while unsecured claims against Crucible Development Corp. might be $300 million. Crucible sold most of the assets to three buyers in September 2009 for $52 million and sold the remainder in January for $13.2 million.
On filing under Chapter 11, Crucible listed assets of $163 million against $130 million in debt. Affiliate Crucible Development’s schedules listed assets at $17 million against debt totaling $70 million. Syracuse, New York-based Crucible is owned by its 1,000 employees. Crucible went into bankruptcy with two plants and 12 regional service centers.
The case is In re Crucible Materials Corp., 09-11582, U.S. Bankruptcy Court, District of Delaware (Wilmington).
New Filings
Chicken Processor P&C Poultry Files in Los Angeles
P&C Poultry Distributors Inc. and affiliate Custom Processors Inc., processors of chicken meat for fast-food chains, filed Chapter 11 petitions on Aug. 27 in Los Angeles in the wake of declining sales.
Court papers say that sales of $55.8 million in 2008 declined to $47.2 million in 2009. In early 2010, revenue declined further when the largest customer, Yum! Brands Inc., revised its menu to serve more grilled rather than fried chicken. Yum is the parent of KFC, previously known as Kentucky Fried Chicken.
Although sales rebounded later in 2010, chicken prices rose on account of the heat wave. The largest supplier, Lawrence Wholesale, sued to recover $12 million. Although a settlement was negotiated, the secured lender, East West Bank, didn’t approve.
The bank is owed $5.5 million on a revolving credit and $3.3 million on a term loan. It has liens on all the assets.
The July 31 balance sheet listed assets of $16.5 million and total liabilities of $27.7 million. The plant in Industry City, California, can process one million pounds of raw meet a week.
Other customers include CKE Restaurants Inc., and Carlson Companies.
The case is In re P&C Poultry Distributors Inc., 10-46350, U.S. Bankruptcy Court, Central District California (Los Angeles).
Mexico’s Metrofinanciera Files Chapter 15 in Corpus Christi
Metrofinanciera SAPI de CV, a subprime and construction lender based in Monterrey, Mexico, filed a Chapter 15 petition yesterday in Corpus Christi, Texas, to insure that no U.S. creditors try to upset the reorganization approved in June by a Mexican court.
After negotiating a reorganization with creditors, the company filed insolvency proceedings in Mexico in August 2009 to restructure more than $880 million in debt. The arrangement later approved by the Mexican court gave a combination of common stock and new subordinated notes to the holders of $367 million in securitization claims and $518 million in other unsecured claims.
The U.S. indenture trustee for the securitizations participated in the Mexican case.
Metrofinanciera wants to use Chapter 15 of U.S. bankruptcy law to preclude creditors from taking action in the U.S. to upset the Mexican reorganization.
If the U.S. Bankruptcy Court concludes that Mexico was home to a so-called foreign main proceeding, and if Mexican law comports with statutory requirements, creditor actions in the U.S. will be halted. In the meantime, the company wants the U.S. court to give temporary relief so no creditors can commence actions.
The Mexican reorganization was approved by consent from 68.5 percent of what the company refers to as “qualified creditors.” The Mexican reorganization didn’t modify the rights of creditors holding $260 million in secured claims or $313 million in what are referred to as creditors with special privilege.
The case is In re Metrofinanciera SAPI de CV, 10-20666, U.S. Bankruptcy Court, Southern District Texas (Corpus Christi).
Briefly Noted
Barclays Says Lehman Options Trading Records a ‘Mess’
Barclays Plc presented witnesses yesterday explaining how Lehman Brothers Holdings Inc. didn’t have good records showing the positions in the futures- and options-trading business that the bank was to buy. For Bloomberg coverage of yesterday’s trial, click here. After a summer break, the trial resumed last week so Barclays could present its witnesses defending against claims by Lehman that the bank took $11 billion more than it was entitled to receive when it purchased the brokerage business. The trial began in May.
The Lehman holding company and its non-brokerage subsidiaries filed a revised Chapter 11 plan and disclosure statement in April. For details, click here and here for the April 15 and 16 Bloomberg bankruptcy reports. The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment banking business to London-based Barclays Plc one week later. The Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court. The brokerage is in the control of a trustee appointed under the Securities Investor Protection Act.
The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investors Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District New York (Manhattan).
Garlock’s Exclusivity Until April 1 for Asbestos Plan
Garlock Sealing Technologies LLC, a subsidiary of EnPro Industries Inc., was given a six-month extension of the exclusive right to propose a Chapter 11 plan to deal with asbestos claims. The new deadline is April 1, 2011. Garlock continues saying it’s committed to proposing a plan that will establish a trust to pay asbestos claims in full. Litigation may nevertheless be necessary to determine the extent of liability, Garlock said in its motion.
Garlock, a Palmyra, New York-based gasket maker, filed under Chapter 11 in June to deal with the 100,000 asbestos claims.
The case is In re Garlock Sealing Technologies LLC, 10- 31607, U.S. Bankruptcy Court, Western District North Carolina (Charlotte).
Advance Sheets
Drunkenness No Defense for Lawyer’s Bankruptcy Fraud
The conviction of a lawyer for bankruptcy fraud was upheld when the attorney continued filing bankruptcy petitions even though he had been suspended from practice.
A lawyer named Thomas O’Connell Holstein had been suspended from practice by disciplinary authorities in Illinois. He nonetheless continued soliciting clients to file bankruptcy.
He instructed his paralegal to omit his name from the petitions and let it appear as though the clients were filing without a lawyer. The petitions didn’t disclose the payment of attorneys’ fees.
The Court of Appeals in Chicago on Aug. 18 upheld the conviction on nine counts of bankruptcy fraud. The appeals court did not accept O’Connell’s argument that he wasn’t responsible because a paralegal prepared the papers while he was “drunk and secluded at his summer home.”
The fact findings by the district judge, who heard the case without a jury, weren’t clearly erroneous, the 7th Circuit held. The prison sentence was a year and one day.
The case is U.S. v. Holstein, 09-2822, 7th U.S. Circuit Court of Appeals (Chicago.)
To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net.
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