Objections in the THQI Bankruptcy - Distressed Debt Investing

I have been following the THQI bankruptcy very closely over the last few weeks since its filing in Delaware on December 19th. Pursuant to the first day motions of CEO Brian Farrell, the company is to be sold to Clearlake Capital (Clearlake) for an aggregate contribution of approximately $60.5M, comprised of cash, assumption of liabilities, and promissory notes. In addition, Clearlake, along with pre-petition lender Walls Fargo will provide financing to THQ during its bankruptcy process. What surprised me was how fast the process was going especially given the potential large values of? THQ's IP.

Clearlake is the stalking horse bidder in THQ's sale. According to the sales motion on the bankruptcy docket, Clearview will acquire substantially all of the Debtors' operating assets. The exact sale consideration that Clearlake is offering is as follows:

i)?? ?Fund payment in full of secured claims, including repayment of the DIP facility, projected to be approximately $29M?? ??? ??? ??? ??? ??? ??? ??? ??? ??? ???
ii)?? ?Pay $6.65m in cash at closing?? ??? ??? ??? ??? ??? ??? ??? ??? ??? ???
iii)?? ?Assume certain liabilities estimated at approximately $15M?? ??? ??? ??? ??? ??? ??? ??? ??? ??? ???
iv)?? ?Deliver to the debtors a promissory note for $10M (at a 2% rate) due in 7 years for the benefit of creditors?? ??? ??? ??? ??? ??? ??? ??? ??? ??? ???
?? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ???
for a total consideration, on paper, of approximately $60.5M. I view it lower than this due to the fact that a 2% note would be worth far less than 100 cents on the dollar. The DIP here, with 2.5% fee for a January 18th maturity (and a 15% PIK rate to boot), looks overly punitive given the short window here. ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ????

To give you a sense of the valuation, here is the Debtor's projections per the first day filings:

This afternoon, Roberta DeAngelis, U.S. Trustee overseeing the THQ bankruptcy filed an objection to the Motion Of Debtors For Entry Of (I) An Order (A) Authorizing And Approving Bid Procedures In Connection With The Sale Of Substantially All Of The Debtors' Assets, (B) Authorizing And Approving Stalking Horse Protections, (C) Authorizing And Approving Procedures Related To The Assumption And Assignment Of Executory Contracts And Unexpired Leases In Connection With The Sale, (D) Scheduling Auction And Sale Approval Hearing, (E) Approving The Form And Manner Of The Notice Of The Sale Hearing And (F) Granting Certain Related Relief.

In her objection she states the following:

• The timing of the sale is on too short of a window to let interested parties participate in the sales process. In fact she goes on to point that the rush to get the sale process through was a result of the secured lender's actions (who are intended to be paid in full)
• The break-up fee and expense reimbursements ($1.75 and $500k respectively) are excessive when measured against the cash portion of the purchase price ($29M + $6.65M in cash)
• The overbid procedures "may chill bidding". Currently, the minimum overbid must equal $2.75M despite such a small cash component.
• Break up fee is contemplated to be treated as a superiority admin expense. She states "The granting of superpriority status to a break-up fee is not authorized by the Bankruptcy Code."
• The current bidding procedures only allow a small subset of people to attend whereas the Local Rule in the court states that "the auction be conducted openly and all creditors will be permitted to attend.??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ???

While writing this post, another objection similarly hit the docket: this time filed by the Ad Hoc Committee of Convertible Noteholders. The funds listed include:

• Silverback Asset Management
• Third Avenue Focused Credit Fund
• Wolverine

?which hold ~41% of the converts.

The note holders objection is embedded below. Its a fascinating read that deserves its own post. Looks like the main argument here, which I've heard from talking to parties involved: "a requirement that prospective purchasers bid on the Debtors ?as a whole? rather than on a ?piecemeal? or ?title-by-title? basis". Here's a great snippet:

"During August and September, 2012, Centerview and the Debtors? management? began a so-called marketing ?process? focused? on finding an investor to either: (i) fund the? Debtors? business plan or (ii) acquire the Debtors? entire business (as a whole). During this? ?process,? the Debtors and their advisors focused their attention on contacting ?growth-oriented? financial investors (i.e., venture capital and private equity firms) and, by marketing the company as a whole, effectively precluded strategic investors from participating in a sale process. The financial investors that the Debtors and their advisors did approach included only a few firms known for ?distressed? investing, which likely further hindered the process."

Here is the noteholders' objections.

THQI Noteholder Objection

It will be interesting to see how this plays out. If you are following the case, feel free to give me a shout to discuss.

Source: http://www.distressed-debt-investing.com/2013/01/distressed-debt-news-trustee-objection.html

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