Orchard Supply DIP financing draws objection from creditors committee

By Jim Witters

Wilmington, Del., July 11 - Orchard Supply Hardware Stores Corp.'s proposed $176.33 million of debtor-in-possession financing drew objections from the official committee of unsecured creditors, who say the facility is unnecessary and the fees are excessive, according to a July 10 filing with the U.S. Bankruptcy Court for the District of Delaware.

Lowe's Cos., Inc. has agreed to acquire the majority of the debtor's assets for $205 million in cash, plus the assumption of payables owed to nearly all of Orchard's supplier partners.

The DIP facility from existing ABL lender Wells Fargo Bank and Orchard's term loan lenders is scheduled for final approval at a July 15 hearing.

"It is apparent that the DIP loans are the product of an arrangement under which the DIP lenders agreed that they would not credit bid against Lowe's in exchange for all of the debtors' unencumbered assets together with the millions of dollars of interest, fees, costs and expenses charged in connection with the DIP facilities, an expedited sale and plan timeline, and a full roll up of the ABL DIP lenders' pre-petition debt - all at the expense of unsecured creditors who lacked any chance for a seat at the negotiating table until the committee was formed," the objection stated.

DIP terms

The DIP financing comprises a $164.33 million ABL facility and a $12 million term loan facility.

The court granted interim access to $124.33 million of an asset-based-loan facility and $6 million of a term loan facility at a June 18 hearing.

The ABL facility consists of a $140 million senior secured superpriority revolving credit facility, a $7.1 million senior secured superpriority first-in last-out term loan facility and a $17.2 million senior secured term loan facility from ABL term DIP lenders.

The ABL facility will mature on the earliest of one year from the effective date, 10 days after entry of a sale order, 14 days after confirmation of a plan of reorganization and the plan effective date. The term loan facility will mature on the earliest of 120 days from the bankruptcy filing date, 10 days after the sale order, 14 days after plan confirmation and the plan effective date.

The ABL revolving loans will bear interest at the Base Rate plus 75 basis points. Each protective advance owed to a revolving lender will bear interest at the Base rate plus 300 bps.

The FILO term loan will bear interest at the Base Rate plus 175 bps, and the supplemental term loan will bear interest at 925 bps plus the greater of the adjusted Libor rate or 0.75%.

Debtor's attorney Chun I. Jang said the $12 million term loan will be used to pay down the Wells Fargo ABL to provide more borrowing capacity.

Coupled with other provisions in the DIP agreement, there will be a full rollup of prepetition secured debt at the final DIP hearing, Jang said.

The term loan lenders also formally agreed to support an acquisition agreement with Lowe's as the stalking horse bidder.

Committee objections

"The DIP loans are, for the most part, unnecessary. Moreover, they impose onerous terms that have less to do with providing the debtors with financing than with the DIP lenders paying themselves fees, expenses and interest while shoring up their pre-petition collateral with significant unencumbered assets, all at the expense of unsecured creditors," the creditors committee said in its filing.

Only two of the three debtors - Orchard Supply Hardware Stores Corp. and Orchard Supply Hardware LLC - were obligors under the pre-petition financing facilities. OSH Properties LLC was not.

OSH Properties holds real property assets, including fee properties and leases, that were unencumbered by liens as of the petition date, the committee said.

"Based on the committee's initial investigation, the value of the debtors' unencumbered real property is significant and will provide a sizeable distribution to unsecured creditors. The consequence to unsecured creditors of the debtors' encumbering these assets is devastating, as all potential value to be realized from the sale of such assets will be shifted from debtors' general unsecured creditors to their secured creditors," the objection stated.

The debtors also intend to grant additional liens to junior secured lenders to secure pre-petition debt pursuant to an intercreditor agreement "that is nowhere in the court's record," the committee said.

"The debtors, who are net cash flow positive, possess significant unencumbered assets that would support a stand-alone DIP loan without ever priming the collateral of the existing pre-petition lenders, are granting the full panoply of extraordinary and inappropriate concessions under the DIP loans," the objection stated.

In addition to the significant fees and interest, and liens on unencumbered assets, the first lien lenders are receiving a full roll-up of their prepetition debt, new collateral, superpriority administrative claims and validation of their secured debt while imposing severe constraints on the ability of creditors to investigate the lenders' liens and claims.

Orchard Supply, a San Jose, Calif.-based hardware retailer, filed for bankruptcy on June 17. Its Chapter 11 case number is 13-11565.

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