A&P, Workflow, Schutt, Mesa, Loehmann’s: Bankruptcy

Great Atlantic & Pacific Tea Co. will face opposition from secured noteholders at a Jan. 10 hearing for final approval of a secured $800 million loan to finance the reorganization begun Dec. 12 in White Plains, New York.

Holders of 44 percent of the $260 million in 11.375 percent second-lien notes say that they are now subordinate only to $331.7 million in debt. If the new financing were approved, they calculate that $950.5 million in secured debt will come ahead of them.

The noteholders argue that the intercreditor agreement didn’t give their consent in advance to the new financing. The noteholders say that the pre-bankruptcy senior secured lenders have been paid in full by new financing. They believe that only the “old” senior lenders are entitled to enforce the intercreditor agreement. They also postulate that A&P never was a party to the intercreditor agreement and isn’t entitled to enforce it.

In addition, the noteholders contend that the intercreditor agreement, even if still in effect, doesn’t permit making them subordinate to $950.5 million in debt.

Numerous landlords also object to the financing. They say their leases prohibit giving lenders a lien on leases without landlords’ consents.

The bankruptcy judge already give interim authority for A&P to borrow $550 million from the promised $800 million loan. JPMorgan Chase Bank NA is agent for the lenders.

The interim loan paid off $336.2 million in pre-bankruptcy secured liabilities. The debts repaid included $97.5 million outstanding on a term loan, $42.5 million on a revolving credit, and $196.2 million in letters of credit.

Montvale, New Jersey-based A&P filed for reorganization with 395 supermarkets, mostly in New York, New Jersey and Pennsylvania. It listed assets of $2.531 billion and debt totaling $3.211 billion. Along with A&P, store brands include Pathmark, Food Emporium and Waldbaum’s.

In addition to the pre-bankruptcy secured debt that was repaid, liabilities include the $260 million on 11.375 percent second-lien notes and $632.8 million on four issues of unsecured notes. A&P has $175 million in convertible preferred stock.

On sales of $8.81 billion, A&P had a $876 million net loss and an $802 million loss from continuing operations for the fiscal year ended in February. The loss from operations in the year was $600.6 million. For the 28 weeks ended Sept. 11, the operating loss was $161.4 million on sales of $4.483 billion. The net loss in the period was $276.3 million.

The case is In re The Great Atlantic & Pacific Tea Co. Inc., 10-24549, U.S. Bankruptcy Court, Southern District of New York (White Plains).

Watch List

Tasty Baking Surprises Market with Liquidity Squeeze

Tasty Baking Co., the producer of baked goods under the Tastykake brand, surprised Wall Street yesterday by announcing it has “extremely tight liquidity.” The stock, which closed on Jan. 4 at $6.43, fell 37 percent yesterday on the Nasdaq Stock Market, closing at $4.05.

Tasty Baking blamed the problems on “certain production difficulties” at the new plant in Philadelphia where the company is based. Tasty Baking said it has also been adversely affected by the Great Atlantic & Pacific Tea Co. Chapter 11 filing and the “sharp rise in commodity costs.”

To conserve liquidity, the company said that bank lenders agreed to defer principal payments and “credit facility reductions” until Jan. 14. The landlords for the Philadelphia bakery and home office also agreed to defer “certain payments” until Jan. 31.

Yesterday’s statement said the company engaged a financial adviser to explore “strategic options,” including raising additional capital, a merger or sale. The statement also said there are discussions with the lenders about increasing the funds available under its line of credit.

Tasty Baking reported a $12.2 million net loss for 39 weeks ended Sept. 25 on net sales of $127 million. Net income in the same period of 2009 was $1.7 million. Revenue in the period declined 7.1 percent from the same quarters in 2009.

The three-year high for Tasty Baking stock was $11.28 on July 2, 2007. The low was $2.78 on Nov. 21, 2008.

The company produces snack cakes, pies, cookies and donuts at two plants in Pennsylvania.

Updates

Workflow Files New Plan Supported by Second-Lien Lenders

Workflow Management Inc., a provider of promotional marketing services and printed business documents, filed a revised reorganization plan last week in anticipation of a Jan. 13 hearing to approve the explanatory disclosure statement.

The revised plan would see an affiliate of Perseus LLC, the existing owner, emerging from the reorganization owing 41.5 percent of the new common stock in return for a $12.5 million investment. The new plan is supported by the agent for second- lien lenders owed $196.5 million.

Both first- and second-lien lenders were opposed to Workflow’s original plan that promised full payment to everyone. The lenders argued that the plan would have left the company insolvent and encumbered with more debt than before. The agents for the first- and second-lien lenders are Credit Suisse AG, Cayman Islands Branch, and Silver Point Finance LLC.

For the first-lien lenders owed $141.5 million, the new plan calls for full payment by the issuance of a new note maturing in four years, paying interest at 7 percentage points more than the London interbank offered rate. The loan will amortize $3 million in principal in 2011, rising to $8 million a year from 2012 until maturity.

Second-lien lenders, owed $196.5 million, are to receive a new $140 million second-lien note, $30 million in preferred equity, 58.5 percent of the common stock, and a deficiency claim for $26.5 million. The note will mature in 4.5 years and pay interest at Libor plus 14 percentage points.

Unsecured creditors of the operating companies, with claims estimated at $25 million, are slated to recover between 1 percent and 4 percent by sharing $1 million. If the class votes for the plan, the second-lien lenders’ deficiency claim in effect will be waived.

Some $95 million of unsecured claims against the holding company are to receive no distribution.

Previously, the lender groups had filed a motion to terminate Workflow’s exclusive plan-filing rights. The motion is also on the Jan. 13 calendar.

For details on Workflow’s original plan, click here for the Nov. 12 Bloomberg bankruptcy report.

Dayton, Ohio-based Workflow said initially that it owed $146.5 million on first-lien debt, including $30.2 million on a revolving credit, and $111.5 million on a term loan. The second- lien debt was $196.5 million at the outset, papers said.

With 49 offices, 17 distribution centers and 9 plants, Workflow had about $600 million revenue in 2009.

The case is Workflow Management Inc., 10-74617, U.S. Bankruptcy Court, Eastern District of Virginia (Norfolk).

Riddell Says Sale No Benefit for General Creditors

Riddell Inc., the holder of a $29 million patent- infringement judgment, filed an objection to extending the exclusive right of Schutt Sports Inc. to propose a liquidating Chapter 11 plan.

Riddell says that Schutt, a football-helmet manufacturer, has been guilty of a “serious breach of fiduciary duties” along with the official creditors’ committee and its counsel. The hearing on the exclusivity motion is scheduled for Jan. 10.

The basis for Riddell’s objection rests on what it says were undisclosed details in the court-approved agreement in which the business was sold to Kranos Intermediate Holding Corp., an affiliate of Platinum Equity LLC. The price was about $31.1 million, the company said at the time.

Riddell said it learned after the sale’s approval that proceeds will be used to pay so-called critical vendors and trade creditors, with “very little” if anything remaining for other general creditors.

Riddell says it will be left out in the cold on its $29 million claim, as will the mezzanine lender owed $17.5 million.

“There can be no benefit to the estate from pretending that a plan is even possible,” Riddell said, because “all sale proceeds will be distributed to specified groups of creditors.

At auction, the price rose $8 million. Rawlings Sporting Goods Co. bid at auction and argued unsuccessfully to the judge that its offer was better.

Before the auction, Schutt estimated that secured debt at the time of sale would be some $19.8 million, with administrative expenses totaling $3.5 million more.

When Schutt filed under Chapter 11 in September, $34.8 million was owed to the secured lender Bank of America NA. Another $17.5 million was owed on a subordinated mezzanine note held by Windjammer Mezzanine & Equity Fund II LP. The pre- bankruptcy secured debt was replaced with a $34 million credit to finance the Chapter 11 case. Schutt was forced into Chapter 11 by the $29 million patent-infringement judgment in favor of competitor Riddell Inc.

Based in Litchfield, Illinois, Schutt said assets and debt both exceed $50 million.

The case is In re Schutt Sports Inc., 10-12795, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Taylor Beans Objects to Lien of Servicing Lender

Taylor Bean & Whitaker Mortgage Corp., once the largest independent mortgage originator in the U.S., started a lawsuit last week against Sovereign Bank, as agent for servicing facility lenders.

Taylor Bean, which has a Jan. 19 hearing for confirmation of a Chapter 11 plan, contends that Sovereign only has a security interest in servicing rights associated with Federal Home Loan Mortgage Corp. and Government National Mortgage Association.

The lenders, who filed a secured claim for $168.2 million, contend they also have a security interest in servicing contracts with Wells Fargo Bank NA and Branch Banking & Trust Co. Taylor Bean in addition challenges the agent’s assertion that the lien extends to interests in a hedging agreement not related to the servicing contracts.

For details on Taylor Bean’s plan, click here for the Nov. 12 Bloomberg bankruptcy report. The plan is supported by the creditors’ committee.

Taylor Bean filed under Chapter 11 in August 2009, three weeks after federal investigators searched the offices of the Ocala, Florida-based company. The day following the search, the Federal Housing Administration, Ginnie Mae and Freddie Mac prohibited the company from issuing new mortgages and terminated servicing rights.

Taylor Bean managed an $80 billion mortgage servicing portfolio. The petition said assets and debt both exceed $1 billion.

The case is Taylor Bean & Whitaker Mortgage Corp., 09-07047, U.S. Bankruptcy Court, Middle District of Florida (Jacksonville).

Mesa Settles $68 Million Delta Claims for $7.3 Million

Mesa Air Group Inc. settled almost $68 million in claims filed by Delta Air Lines Inc. in advance of a Jan. 14 confirmation hearing for approval of the regional airline’s reorganization plan.

Atlanta-based Delta will have unsecured claims totaling $7.265 million and waive everything else.

Mesa’s hopes that it could collect from Delta were dashed in May with an opinion from a federal district judge in Georgia. The two airlines were disputing whether Delta had the right to cancel a contract under which Mesa was flying 22 aircraft as Delta Connection.

When Delta attempted to terminate the contract for substandard performance, Mesa won a preliminary injunction in June 2008. Mesa argued that it was unable to complete the required 95 percent of flights because of bad weather.

The district judge dissolved the injunction in the process of concluding that the contract didn’t make allowance for bad weather in calculating whether the required number of flights were completed. Mesa didn’t appeal.

For details on Mesa’s plan and how it treats creditors of each of the Mesa companies, click here for the Sept. 21 Bloomberg bankruptcy report.

Mesa filed under Chapter 11 in January 2010 with a fleet of 178 aircraft. At the time, 130 were operating to provide 700 daily departures serving 127 cities in 41 states, Canada and Mexico. After rejecting aircraft leases, Mesa in October was operating 76 planes making 460 departures a day.

Phoenix-based Mesa listed assets of $976 million against debt totaling $869 million. Liabilities included $393 million on loans secured by 24 owned aircraft, $26 million on three note issues, and $33.6 million secured by 20 other aircraft. In addition, there was $1.62 billion in potential liability on aircraft leases. Mesa operates regional aircraft under code- sharing agreements with US Airways Group Inc. and UAL Corp.’s United Airlines.

The case is In re Mesa Air Group Inc., 10-10018, U.S. Bankruptcy Court, Southern District of New York Manhattan).

Loehmann’s Prepacked Plan Going to Creditors for Vote

Loehmann’s Inc., the discount retailer, secured approval from the bankruptcy judge yesterday for the disclosure statement explaining the reorganization plan worked out before the Nov. 15 Chapter 11 filing.

The confirmation hearing for approval of the plan was set for Feb. 7.

The official creditors’ committee threw its support behind the plan when the pot for unsecured creditors was increased to $2 million. The disclosure statement say that unsecured creditors with claim of $26.2 million should see a 7.6 percent recovery.

The plan is financed in part with a new $25 million investment from Whippoorwill Associates Inc. and the current owner Istithmar World PJSC.

Whippoorwill is owner of 70 percent of Loehmann’s secured notes. Istithmar, an investment firm owned by the government of Dubai, is to provide 64 percent of the $25 million to buy new convertible preferred stock. The disclosure statement says that the recoveries on the $80.4 million in Class A and the $38 million Class B notes are 37.1 percent and 13.8 percent, respectively. For a summary of the plan, click here for the Dec. 16 Bloomberg bankruptcy report.

The loan for the Chapter 11 case has a Feb. 18 deadline for confirming the plan. Loehmann’s said in a statement yesterday that it expects to exit Chapter 11 protection February.

Loehmann’s had 48 stores in 13 states and the District of Columbia on filing in Chapter. The store count is now 46 in 12 states and the District of Columbia.

Loehmann’s emerged from a 14-month a Chapter 11 reorganization with a confirmed plan in September 2000. It was then operating 44 stores in 17 states. Loehmann’s was acquired by Istithmar in July 2006 in a $300 million transaction.

The case is In re Loehmann’s Holdings Inc., 10-16077, U.S. Bankruptcy Court, Southern District New York (Manhattan).

GSC Group to be Run by Chapter 11 Trustee

GSC Group Inc. will be taken over by a Chapter 11 trustee, as the result of a ruling by the bankruptcy judge at a hearing yesterday. The judge granted the motion for a trustee that was filed by a group calling themselves non-controlling lenders.

To read Bloomberg coverage of the hearing, click here.

The objecting lenders argued that the two top executive of GSC, which calls itself a ‘‘diversified alternative investment manager,” became “quasi agents” of Black Diamond Capital Finance LLC, whose funds hold a majority of the $206.6 million owing to secured lenders. Black Diamond won an auction for GSC with a bid of $235 million.

The minority lenders were opposing court approval of the sale to Black Diamond. GSC has withdrawn its motion for approval of sale Black Diamond.

The objecting lenders include Credit Agricole Corporate and Investment Bank and General Electric Capital Corp.

GSC filed under Chapter 11 at the end of August and held an auction at the end of October. The bankruptcy judge allowed Black Diamond to bid the secured claim rather than cash.

Originally named Greenwich Street Capital Partners Inc. when it was a subsidiary of Travelers Group Inc., GSC became independent in 1998 and at one time had $28 billion of assets under management. Market reverses, termination of some funds, and withdrawal of customer’s investments reduced funds under management at the time of bankruptcy to $8.4 billion.

Based in Florham Park, New Jersey, GSC listed assets of $119.8 million against debt totaling $313.6 million.

GSC also owes $10.2 million to Calyon New York Branch on an interest rate swap agreement.

The case is In re GSC Group Inc., 10-14653, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Tubo de Pasteje Reports Agreement on Restructuring

Tubo de Pasteje SA de CV and subsidiary Cambridge-Lee Holdings Inc. for a third time are seeking an extension of the exclusive right to propose a Chapter 11 plan.

If granted by the bankruptcy judge at a Feb. 24 hearing, the new deadline would be March 7.

The company reports executing a “term sheet outlining the terms of a consensual restructuring.” Tubo hopes the plan will be filed in the “near term.”

The Chapter 11 filing in December 2009 followed a payment default the preceding month on $200 million in 11.5 percent senior notes due 2016.

Tubo is a subsidiary of Mexico City-based Industrias Unidas SA de CV, a diversified manufacturer of copper and electrical products. The U.S. subsidiary Cambridge-Lee is based in Reading, Pennsylvania. IUSA is the issuer of the notes which were secured by a pledge of the stock of Cambridge-Lee.

The case is In re Tubo De Pasteje SA de CV, 09-14353, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Statistics

Bankruptcy Filings Rise 7.8 Percent Last Year Over 2009

The 1.56 million total bankruptcy filings in 2010 represented a 7.8 percent increase compared with 2009.

Last year’s filings amounted to a dramatic decline in the rate of increase. The 1.45 million filings in 2008 were 32 percent more than 2008, according to data compiled from court records by Epiq Systems Inc.

Commercial and Chapter 11 filings in 2010 actually decreased from 2009. The approximately 13,600 Chapter 11 cases in 2010, where companies or wealthy individual reorganize or liquidate their assets, were 10.2 percent fewer than 2009. Commercial bankruptcies under all chapters totaled some 85,000 in 2010, or 5 percent fewer than 2009.

Peter Kaufman, president of Gordian Group LLC, explained the decline in business bankruptcies by saying that “cheap money has enabled companies to delay solving real problems.” Kaufman sees “another wave of bankruptcies” down the road since “eventually companies will have to repay the new debt they raise.”

The states with the most filings per capita were Nevada, Georgia, Tennessee and Alabama. Bankruptcies are increasing the most in Hawaii, Utah, California and Arizona.

Last year had the most bankruptcy filings since 2005, the year bankruptcy laws were tightened. In the last two weeks before the laws changed, 630,000 American filed for bankruptcy protection. For 2005 as a whole, the 2.1 million filings represented an all-time record.

Modifications in bankruptcy law became effective in October 2005 and made it more difficult for individuals to erase debt.

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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