“Since you delivered papers to my house at something like 3:30 in the morning and I had, was it, sunrise injunction papers – literally the world’s worst morning coffee commercial.” – Judge Shannon (United States Bankruptcy Court for the District of Delaware.)
Recent events in the chapter 11 cases of Trico Marine, a Woodland, Texas based supplier of services and vessels to oil and gas companies that filed for chapter 11 on August 25, 2010, have shown that Bankruptcy Courts appear to be more willing to push back on existing lenders that attempt to use the debtor in possession (DIP) financing process as a vehicle for acquiring control over a debtor’s chapter 11 proceedings.
Prepetition, Trico Marine negotiated a DIP financing arrangement with its existing senior lenders, affiliates of Tennenbaum Capital Partners. After Trico Marine commenced its chapter 11 cases, it sought approval of the DIP financing package from Judge Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware on September 7, 2010.
The proposed DIP financing package involved a $35 million DIP facility of which $25 million was rolled-up prepetition senior loans and $10 million was new money to fund postpetition operating expenses and other working capital needs. The initial DIP facility negotiated between the parties provided for a tight timeline that required a final DIP order (including approval of the roll-up) to be entered approximately three weeks later, by September 24, 2010.
Judge Shannon authorized Trico Marine to borrow on an interim basis the additional $10 million that it needed to fund the initial stages of its restructuring. Although Trico Marine was not seeking approval of the roll-up at the interim hearing, Judge Shannon noted at the interim hearing that he wasn’t satisfied with the evidentiary record that had been developed with respect to the roll-up. Accordingly, he invited the parties to schedule another hearing to present their case as to why the refinancing of the senior lenders’ prepetition loans by the DIP facility should be approved at the final DIP hearing.
Judge Shannon’s decision to request the parties to go back to the drawing board was undoubtedly premised in part on his inability or reluctance, so early on in the case, to adjudicate the disputes among the parties with respect to the competing values presented with respect to the Debtors’ assets. The existing senior lenders’ attempt to improve their position through the roll-up, while taking on very little additional risk or exposure to the debtors, probably didn’t help either. Indeed, as Trico Marine explained in its motion to approve the DIP financing on an interim basis, the new money being provided to the debtors would not even be sufficient to finance the debtors’ operations during the entire restructuring:
“The Amended DIP Facility will provide much needed liquidity to the Debtors’ estates and will allow the Debtors to operate in chapter 11, but is not expected to provide the liquidity necessary to accomplish a complete restructuring of the estates through confirmation of a Plan.”
With the parties failing to reach agreement on DIP financing by the September 24 deadline, the senior lenders waived the event of default and extended the deadline for entry of the final DIP order and the roll-up to October 1, 2010 and then to October 20, 2010. The October 20 deadline came and went without the parties reaching agreement on the structure of the final DIP facility and the final DIP order, and the debtors subsequently commenced using the senior lenders’ cash collateral without a final DIP order being in place.
As a result of the lack of consensus on the final DIP, and to avoid their collateral being further used by the debtors, Trico Marine’s senior lenders then issued a termination notice to Trico Marine, with the objective of terminating the debtors’ access to cash collateral. The termination notice demanded turnover of outstanding loans, or repayment of existing collateral by Trico Marine, a move that, if successful, would have pushed Trico Marine into immediate liquidation.
Supported by the unsecured creditors’ committee in its chapter 11 cases, Trico Marine sought permission from the Bankruptcy Court by emergency motion to use the cash collateral of its senior lenders for a 19-day period from November 10, 2010 to November 29, 2010, the date on which certain asset sales were scheduled to close, and which had the potential to bring in sufficient funds to pay off the debtors’ senior lenders in full.
Appearing before the Court to argue the emergency motion, the debtors took the position that their senior lenders were oversecured and adequately protected, and that as a result, the Trico Marine debtors should be granted permission to tap $2.5 million in cash collateral that they needed to fund their operations through November 29.
Arguing against the use of their cash collateral, the lenders noted that a host of covenant violations under the DIP already had occurred. The lenders also argued that, even though the debtors had $35 million in asset sales keyed up that could pay off the senior lenders entirely, the debtors had a history of failed asset sales that meant that their future asset sales could not be relied on to repay their loans. The senior lenders further argued that the emergency was a manufactured one, conceived to shift the risk of failure of asset sales on to the senior lenders, at a time when none of the asset sales that the debtors had previously scheduled had been able to be consummated.
Pointing out that this was the first actual default hearing to come before him, Judge Shannon noted that he would decide the issue on the merits and would not limit himself to a technical reading as to whether a subclause of the interim DIP order, or the DIP credit agreement, had been violated.
While the Court noted that it was sensitive to the burden assumed by the senior lenders as secured creditors, it did not find that a 19-day delay was a material risk to the senior lenders, in particular because sales for assets with substantial value already had been scheduled. Despite having seen previous asset sales in the case fail, Judge Shannon noted that these were not hypothetical transactions – the Court already had approved a bidding and sale process with a stalking horse, and as a result, the assets were likely to be sold in the near future.
As a result of Judge Shannon’s remarks from the bench, the senior lenders eventually consented to the debtors’ use of their cash collateral through November 29, 2010. The Court acknowledged that, while asset sales may fall through, the Court was often asked by debtors to take a leap of faith on the value of assets, and in this case was satisfied that senior lenders were adequately protected. In a concession to the senior lenders, the Court noted that the Debtors would file a sale motion with respect to operating assets that were “bleeding cash” if the senior lenders requested such a step, though would not sign-off on the sale of non-operating assets that were not diminishing in value or that would not require or benefit from a rushed sale.
The events in Trico Marine may reverse, at least for now, a trend that seemed to favor lenders being able to use DIP financing to obtain control over a debtors’ chapter 11 proceedings. By indicating that the parties would have to develop a more substantial evidentiary record in order for the roll-up to be approved, and subsequently authorizing the debtors to use their senior lenders’ cash collateral to fund the liquidity crunch that resulted from the parties’ inability to reach a consensual deal on the DIP and roll-up, one interpretation of the events in these cases is that bankruptcy judges are increasingly less willing to allow restructuring proceedings to be dominated by DIP lenders that are not prepared to provide reasonable financing to fund the debtors’ restructuring proceedings through to their natural conclusion.