WPS Creditors Battle at Deadline
June 6, 2005,
New York —Less than a week before the bid deadline in the WestPoint Stevens auction, the two leading contenders for the bankrupt mill remain mired in a contentious legal battle challenging one another's rights and standing to prevail or, for that matter, even participate in the asset sale.
In the meantime, legal papers are flying in all directions. Unless those disputes can be resolved quickly and amicably, the possibility of a successful sale within a Chapter 11 voluntary reorganization plan could be in jeopardy, perhaps forcing the June 21 auction to be considered within the context of the “cramdown” terms of a section 363 sale.
While the outcome for the company might be the same, for creditors the differences are more than semantic.
As WestPoint awaits its next incarnation, it continues to put a face of business-as-usual on its day-to-day operations, attempting to stay focused on servicing its accounts and competing in a cutthroat home textiles industry.
The principal fight remains between the Steering Committee of first lien debt holders, Aretex, the Carl Icahn affiliate, and other second lien holders. Ross, who is aligned with the Steering Committee in the bidding process, to date has not been directly involved in this round of legal wrangling.
WestPoint passed its second anniversary in bankruptcy June 1. Here's a summary of what's happening right now:
The deadline for bids is noon, June 10. The auction is scheduled for June 21 and the purchaser selection hearing is slated for June 24.
The first round of legal briefs on the disputed issues was due June 1, with counter-arguments due June 7. The outstanding issues will ostensibly be decided at the purchaser selection hearing, prior to a winner being declared. But already some are suggesting at least two hearings may be required to resolve a number of fairly complicated issues.
A separate lawsuit in which the Steering Committee sought to enjoin Aretex from bidding at the auction, and seeking damages because of its involvement, was put aside until a July 12 hearing, by which time its central issues may be moot, or at least secondary to the outcome of the hearing on the 24th.
Almost lost in the legal maneuvering, WestPoint filed its monthly operating numbers for April showing, among other things, a 2.3 percent gross profit margin with a $12.7 million operating loss. “April was a tough month for the industry as a whole,” Fontenot noted. “And you have to put that in perspective in terms of how we're trying to move out of inventories and exit this process as clean as possible.” (See sidebar.)
Additionally, other second tier lenders, their payouts in jeopardy, are arguing that their interests are senior to a number of administrative claims, including the Key Employees Retention Plan.
In blunt language, the group, represented by the Wilmington Trust Co., urged the court to set aside the KERP, stating that those payments “are simply administrative expense claims also at risk in the event of administrative insolvency. There has been no showing that the continued employment of these executives by a purchaser is necessary … . Given the recent travails of the textile industry, it is difficult to believe that current management is irreplaceable or even that payment of the KERP is necessary to retain management's services.”
But all of the arguments mainly center around two core groups of issues: Who gets paid how much before or after anyone else; and whether the Steering Committee may credit bid the entire first tier debt, even Aretex's portion, while requiring other bidders to make cash-only bids. Indeed, the Steering Committee is even challenging Aretex and Icahn's right to participate in the auction.
Attorneys for the Steering Committee and Ross did not return calls.
The Steering Committee controls 51 percent of the first lien secured debt while Aretex controls 40 percent, according to court documents, which list the total amount at $480 million. Additionally, Aretex controls about 52 percent of the second tier debt, the full amount of which is listed as $165 million. It makes Icahn and Aretex the largest secured debt holder in WestPoint and provides leverage for him to block any voluntary reorganization plan, raising the specter of the 363 sale.
“We don't think it's appropriate for them to credit bid at all, and certainly not out of the debt,” offered Peter Wolfson, Aretex's attorney. “We believe there's enough value here to make some distribution to the seconds. The Steering Committee stops at the first lien debt and we don't think that's fair … The proposition is absurd.”
Credit bidding would permit the Steering Committee to put up, on a dollar-for-dollar basis, the entire first lien debt as part of its bid for the company, thereby eliminating the debt and reducing the amount of cash required in a successful bid.
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