Real Mex final DIP, approval of bid procedures delayed by objections

By Jim Witters

Wilmington, Del., Nov. 3 - Real Mex Restaurants, Inc.'s final order for debtor-in-possession financing and the approval of bid procedures for the sale of substantially all the company's assets were held up by objections from the official committee of unsecured creditors during a hearing Thursday in the U.S. Bankruptcy Court for the District of Delaware.

The hearing on those issues and on the proposed compensation for financial adviser and investment banker Imperial Capital, LLC is scheduled to resume at 8:30 a.m. ET on Nov. 4.

Attorneys for the parties used the five-hour hearing on Nov. 3 laying out for the court their positions on the issues.

At the end, judge Brendan L. Shannon said he remains concerned about several points:

• A proposed rollup of the company's prepetition debt with General Electric Capital Corp.;

• A proposed $1 million financing reserve sought by the majority second-lien noteholders, who are negotiating to become the stalking horse bidder.

Shannon questioned why that provision is in the DIP order and not part of the bid procedures. He said it feels like offering stalking horse protection to a bidder that is not the stalking horse;

• The proposed inclusion of a 506(c) waiver. Section 506(c) allows the debtor to levy surcharge on the collateral of a secured creditor to pay the cost of preserving or disposing of the collateral to the extent of any benefit accruing to the secured creditor.

Shannon said he couldn't recall granting a 506(c) waiver over the objection of a creditors committee; and

• The proposed timeline places the most active period for marketing the company's assets in the holiday season.

Shannon also said he wanted to more deeply review the documents concerning compensation for Imperial before rendering a decision.

Creditors objections

Attorney Eric R. Wilson, representing the creditors committee, said the overall package of DIP financing, bid procedures and Imperial compensation was devised to facilitate the purchase of the company by the majority second-lien noteholders.

The debtors shunted aside a DIP proposal from Z Capital Management, LLC in favor of the GE package, even though the Z Capital facility was economically superior, Wilson said.

The Imperial agreement provides far higher compensation to Imperial if a sale occurs, rather than a restructuring, he said.

In addition, the shortened time frame to obtain bids and stage an auction favors the second-lien noteholders over other potential bidders, Wilson said.

The committee said it wants the court to modify the bid procedures to allow the committee to submit, as a competing bid, its own proposed plan of reorganization.

Counter arguments

Debtors' attorney Mark Shinderman said none of those provisions are part of an attempt to tilt the table in favor of the second-lien noteholders. He said all the provisions were heavily and hotly negotiated and the debtors obtained the best terms they could.

Peter P. Knight, representing GE Capital, said the rollup is an essential part of the DIP financing.

His client was over-secured on its prepetition loan to Real Mex, he said. And he saw "issues brewing" related to the DIP proposals "from potential litigants." His desire was to ensure GE stayed out of the fray.

David M. Hillman, attorney for the majority second-lien noteholders, said Z Capital wants to derail the sale process, because Z Capital's claims in the case are buried and out of the money.

The creditor's committee is seeking to "engage in litigation on hypothetical issues" and wants to cap the noteholders' credit bid at an amount set by "some expert," rather than the market rate.

The second-lien noteholders have the right to a $134 million credit bid if their claim is allowed.

Hillman told the judge that the court would "not be blessing our position" by approving the proposed DIP order and bid procedures. The orders merely acknowledge the existence of the credit-bid rights, he said.

The questions Shannon repeated several times during the hearing were: "What is the deal? What do you want? What do you need from me to move this case forward?"

Sale procedures

Both the debtors and the creditors committee agreed that quick approval of bid procedures is necessary, because a large restaurant convention is scheduled next week. The venue provides an ideal setting for marketing the company's assets.

Under the proposed procedures, the bid deadline would be Jan. 4. The auction would be scheduled for Jan. 9. And the sale hearing would be Jan. 13.

Shinderman said that the company needs to close the deal in February to avoid a liquidity problem.

Real Mex is a restaurant company based in Cypress, Calif. The company filed for bankruptcy on Oct. 4, and its Chapter 11 case number is 11-13122.

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