Protocol Services' bank lenders call reorganization plan 'wildly optimistic,' disclosure 'cursory'

New York, Oct. 24 - Protocol Services, Inc.'s senior bank lenders criticized the company's proposed plan of reorganization as "wildly optimistic" and the accompanying disclosure statement as "extremely cursory."

"The plan's deficiencies are so obvious that if the disclosure statement describing the plan were approved and the debtors allowed to solicit votes, precious estate and court resources would be wasted and time would be squandered," the senior lenders said in a filing with the U.S. Bankruptcy Court for the Southern District of California on Friday.

Those failings, they added, are enough for the disclosure statement to be rejected.

In addition, they said, the disclosure statement in itself is inadequate, "either glossing over or totally ignoring many of the key issues."

Overall the plan is a "non-consensual cram-down plan of reorganization," the lenders, represented by Canadian Imperial Bank of Commerce as administrative agent, said in their filing opposing the disclosure statement.

The senior lenders would be forced to accept $124 million of debt subject to negative amortization and below-market interest rates that would "significantly under-compensate the senior lenders for the risks they would be forced to bear," the banks said.

In addition, the plan leaves Protocol Services over-leveraged and is based on "wildly optimistic projections that the debtors do not really believe, for these robust projections are inconsistent with the structure of the new senior notes proposed to be forced on the senior lenders."

Furthermore, the proposed plan would treat Protocol's current series B subordinated notes as secured claims even though the company considered them equity for tax purposes and they accrue interest at a 30% "equity-type rate."

The U.S. Trustee in the case previously has opposed the disclosure statement, saying it calls for "overly broad and burdensome" third-party liability releases, does not define paid-in-kind in relation to the plan's new senior tranche B notes and does not explain why the plan's governing law should be that of the state of Illinois, rather than California.

The bank lenders echoed the objection about the liability releases.

A hearing on approval of the disclosure statement is scheduled for Oct. 27.

Protocol, a Deerfield, Ill.-based integrated direct marketing company, filed for bankruptcy on July 26. Its Chapter 11 case number is 05-06782.

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