Bloomberg News

Friendly, Chef Solutions, WaMu, Madoff, NewPage: Bankruptcy

October 05, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Updates Borders and adds Friendly Ice Cream as first item; Washington Mutual, Madoff and NewPage in Updates; General Maritime in Watch List; and Liberty Tire and Chukchansi Casino in Downgrades.)

Oct. 5 (Bloomberg) -- Friendly Ice Cream Corp., the owner and franchiser of about 490 restaurants, filed for Chapter 11 reorganization in Delaware to sell the business mostly in exchange for debt to an affiliate of Sun Capital Partners Inc.

The existing owner and holder of second-lien debt are also affiliates of Sun Capital. Friendly, based in Wilbraham, Massachusetts, said today it is closing 63 stores, leaving about 424 operating. Franchise operators have about 230 of the locations.

Debt totals $297 million, the company said. Pension Benefit Guaranty Corp. was listed as the creditor with the largest unsecured claim.

An affiliate of Boca Raton, Florida-based Sun Capital will pay about $120 million for the business. The price includes enough cash to pay first-lien debt and an amount of cash for unsecured creditors to be negotiated with the official creditors’ committee.

Most of the remainder will represent a so-called credit bid from the $267.7 million in second-lien, pay-in-kind notes that a Sun Capital affiliate owns.

If the bankruptcy judge goes along with the proposal, other bids would be due Nov. 24, followed by an auction on Dec. 1. To qualify, a competing bid must be at least $122.6 million in cash.

Wells Fargo Capital Finance Inc. is the first-lien revolving credit lender owed $21.5 million. Existing lenders are offering $71.3 million in secured financing for the Chapter 11 case, including $50.6 million to be advanced on an interim basis.

Friendly blamed the filing on the decline in customer traffic resulting from economic conditions, rising food prices and above-market rents. Comparable-store sales have declined 4.5 percent this year, following a 3.7 percent drop in 2010.

Revenue during the first eight months of 2011 was $329.7 million. Earnings before interest, taxes, depreciation and amortization of $8.6 million in the period resulted in a default on loan covenants.

The case is In re Friendly Ice Cream Corp., 11-13167, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filing

Chef Solutions Files for Sale to Mistral, Reser’s

Chef Solutions Inc., the second-largest North American producer of fresh prepared food, filed a Chapter 11 petition yesterday in Delaware with the aim of selling the business to a joint venture between Mistral Capital Management LLC and Reser’s Fine Foods Inc.

The buyers are under contract to acquire ownership in exchange for $36.44 million cash and $25.3 million in secured debt. They will also assume specified debt.

Based in Birmingham, Michigan, the company has plants in Kansas, Ohio and California. Its brands include Orval Kent and its customers include Wal-Mart Stores Inc., Safeway Inc., and Costco Wholesale Corp.

Sales topped out at $220 million in 2008, declining to $209 million in 2010. The company was a 2004 acquisition from Deutsche Lufthansa AG by Questor Management Co., which recently surrendered control to Mistral.

Liabilities include $23 million owing to Wells Fargo Capital Finance Inc. as agent for first-lien lenders. Mistral has $24.3 million in second-lien debt.

Wells Fargo has offered to finance the Chapter 11 effort with a $28 million secured credit.

If the bankruptcy judge goes along, there would be an Oct. 19 hearing for approval of bidding procedures. Nov. 7 is being proposed as a date for submission of competing bids in advance of a Nov. 9 auction and a hearing on Nov. 11 to approve the sale.

The petition says assets and debt both exceed $100 million.

The case is In re Chef Solutions Holdings LLC, 11-13139, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Updates

WaMu to Propose Confirming Plan Without New Vote

Washington Mutual Inc. will tell the bankruptcy judge at a status conference tomorrow that the proposed full-payment reorganization plan can be modified and approved by the court at a confirmation hearing without having creditors vote again.

WaMu also proposes to move ahead with confirmation while mediation proceeds on a parallel track.

The status conference in bankruptcy court tomorrow will discuss how to move the case forward in light of the 139-page opinion issued on Sept. 13, where U.S. Bankruptcy Judge Mary F. Walrath ruled for a second time that the WaMu plan has defects that preclude confirmation.

WaMu said in its court filing that the four defects can be remedied without resoliciting votes from creditors because none of the changes affects creditors’ economic recoveries. WaMu produced charts showing that projected recoveries after the changes will exceed what creditors previously were told.

WaMu argues that using the interest rate that Walrath required will harm no creditor group because the judge concluded that the reorganized company’s valuation is higher, thus enhancing projected recoveries.

WaMu says that pausing for another vote will delay confirmation by two or three months and result in a $60 million to $90 million loss for the so-called Piers creditors who are at the bottom of the distribution waterfall. The losses would result from fees and expenses and the continued accrual of interest owing to senior creditor classes.

The bank holding company likewise opposes holding up the confirmation process pending mediation that Walrath required when she denied confirmation last month. WaMu says that mediation should focus on the lawsuit that the judge is allowing equity holders to bring against noteholders who allegedly traded debt using non-public information.

If confirmation were to await completion or failure of mediation, the resulting loss to Piers creditors would be $180 million, WaMu predicted.

For details on Walrath’s opinion rejecting the plan a second time, click here for the Sept. 14 Bloomberg bankruptcy report. For details on Walrath’s opinion early this year rejecting the prior version of the plan, click here for the Jan. 10 Bloomberg bankruptcy report. For details on the plan as revised after the January ruling, click here for the Feb. 14 Bloomberg bankruptcy report. For details on later changes, click here for the March 21 Bloomberg bankruptcy report.

The WaMu holding company filed under Chapter 11 in September 2008, one day after the bank subsidiary was taken over. The bank, once the sixth-largest depository and credit- card issuer in the U.S., was the largest to fail in the country’s history.

The holding company filed formal lists of assets and debt showing property with a total value of $4.49 billion against liabilities of $7.83 billion.

The holding company Chapter 11 case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Appeals Block Madoff Trustee from Distributing All $8.7 Billion

The trustee liquidating Bernard L. Madoff Investment Securities Inc. announced yesterday that he will make a first interim distribution of $313 million to customers, representing 4.6 percent of their claims for principal.

Although the trustee collected $8.7 billion, he can’t distribute the remainder mostly on account of pending appeals, the trustee said on his website. The $8.7 billion represents more than half of the $17.3 billion in customers’ approved claims for return of principal.

The largest part of the holdback, $5 billion, results from appeals two customer are taking from approval of a settlement with the estate of the late Jeffrey M. Picower. Another $1.65 billion can’t be distributed as a result of efforts by some customers to overturn a ruling by the U.S. Court of Appeals upholding the trustee’s method of determining the amount of customers’ claims.

Another appeal is holding up distribution from a separate $220 million settlement.

The distribution is going to 1,230 customers. In May, the trustee estimated he would distribute $272 million. Resolved disputes in the meantime allowed for increasing the distribution, the trustee said.

The $8.7 billion doesn’t include an additional $2.2 billion ultimately flowing to customers from the government’s portion of the Picower settlement. Under arrangements with the government, the trustee will distribute the $2.2 billion.

The Madoff firm began liquidating in December 2008 with the appointment of the trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009.

His bankruptcy case was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.

The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr- 00213, U.S. District Court, Southern District of New York (Manhattan).

Borders Files Liquidating Plan, Hearing November 10

Borders Group Inc., the former bookseller, filed a liquidating Chapter 11 plan arm-in-arm with the official creditors’ committee, together with a disclosure statement containing blanks where creditors eventually will be told how much they can expect to recover.

Borders arranged a Nov. 10 hearing for approval of the disclosure statement. Going-out-of-business sales at the remaining locations were completed on Sept. 20.

Separately, the consumer privacy ombudsman reported to the bankruptcy court that the buyer of the customer list, Barnes & Noble Inc., failed to comply with procedures for using customer information.

The plan in substance pays creditors in the order of priority laid out in bankruptcy law. Remaining secured claims will be paid in full, according to the disclosure statement.

The disclosure statement has blanks where the amounts of remaining secured and unsecured claims eventually will be listed. There also are blanks listing the assets to be available for distribution.

Unsecured creditors will be paid after payment in full of secured creditors, expenses of the Chapter 11 case, and priority claims that likewise must be paid in full, such as taxes. There is no guess as yet about the percentage recovery by unsecured creditors.

Even with an agreement with the official creditors’ committee on the plan, Borders is asking the bankruptcy judge to extend its exclusive time for proposing a plan until Jan. 12. Assuming the bankruptcy judge approves the explanatory disclosure statement Nov. 10, Borders projects having a confirmation hearing to approve the plan around Dec. 20. The hearing on the exclusivity motion will take place Oct. 17

Michael St. Patrick Baxter, the ombudsman, said in an Oct. 3 court filing that Barnes & Noble “omitted material information from the opt-out notice” sent by e-mail to Borders customers. Barnes & Noble bought the domestic customer list and other intellectual property for $13.9 million.

Baxter faulted the notice to customers for not saying that Barnes & Noble took e-mail addresses and purchase histories, not only a customer list. He also faults the notice for failing to say that the ability to opt out was required by the bankruptcy court and wasn’t the “result of buyer’s generosity.”

Baxter argued that a “robust” opt-out notice was crucial. Baxter hasn’t yet said whether he will ask the court to require Barnes & Noble to send another opt-out notice. Barnes & Noble has said that the notice it sent complied with the court’s requirements.

Borders began liquidating the remaining stores in July. The creditors’ committee said before the liquidation began that Borders expected to generate $252 million to $284 million in cash from going-out-of-business sales. Separately, Borders sold store leases and intellectual property.

The sale of trademarks and other intellectual property brought in a gross sum of $15.8 million. Hilco Streambank LLC, the adviser in connection with the sale, said in a court filing that its commission on the sale is about $1.1 million.

Borders, based in Ann Arbor, Michigan, had 642 stores on entering bankruptcy in February and was operating 399 when the liquidation began. It listed assets of $1.28 billion and liabilities totaling $1.29 billion.

Debt included $196 million on a revolving credit and $48.6 million on a term loan. Trade suppliers were owed $302 million for inventory.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

NewPage Receives Final Approval for $600 Million Financing

Coated-paper maker NewPage Corp. prevailed over most objections from the official creditors’ committee and won agreement from the bankruptcy judge at a hearing yesterday on final approval for $600 million in secured financing.

The committee didn’t want liens placed on the company’s few unencumbered assets. During the hearing, U.S. Bankruptcy Judge Kevin Gross complimented the company and creditors for cooperating toward the goal of keeping the company operating. Gross said he is committed to helping find a way to save 6,000 manufacturing jobs.

NewPage, based in Miamisburg, Ohio, was acquired in 2005 by Cerberus Capital Management LP. It listed assets of $3.4 billion and debt totaling $4.2 billion. Listed liabilities included $232 million on a revolving credit plus $1.77 billion on 11.375 percent senior secured first-lien notes.

Second-lien obligations include $802 million in 10 percent secured notes and $225 million in floating-rate notes.

In addition to $200 million in 12 percent senior unsecured notes, $498 million is owing on two issues of floating-rate pay- in-kind notes.

NewPage has 16 paper-making machines operating in seven plants in the U.S. and Nova Scotia. The Canadian affiliate filed for reorganization in Nova Scotia.

The company reported a net loss of $229 million in the first half of 2011 on revenue of $1.79 billion, following a net loss of $674 million in 2010 on revenue of $3.6 billion.

The case is In re NewPage Corp., 11-12804, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Tribune Has a Bonus Program, Still Awaits Plan Ruling

Since Tribune Co. hasn’t heard whether the bankruptcy judge will confirm a reorganization plan, the company and creditors are going about business as though the Chapter 11 case will continue a while longer.

In connection with a hearing this week, the judge approved a renewed bonus program for 640 managers, court records show. For details, click here for the Aug. 31 Bloomberg bankruptcy report.

The judge also extended the time for the creditors’ committee to serve about 150 lawsuits for recovery of so-called preferences. The suits were technically commenced late last year, just before the two-year time limit for preference suits was about to expire.

The committee wanted to preserve the ability to sue for recovery of preferences, saying that the suits might not need to proceed were a Chapter 11 plan confirmed. By not yet serving the suits, creditors who received alleged preferences aren’t put to the task of defending or going out of pocket to pay settlements.

A preference is a payment within 90 days of bankruptcy that allows the creditor to recover more than it would through liquidation in bankruptcy.

U.S. Bankruptcy Judge Kevin J. Carey heard final arguments on June 27 on the question of whether to confirm Tribune’s plan or a rival plan from a note-holder group led by Aurelius Capital Management LP. The judge said at one point during the trial that he might not approve either plan.

For confirmation of either plan, the judge must use the so- called cramdown process because the note holders were among a handful of classes that voted against the Tribune plan. For a rundown on the company’s plan as modified in April, click here for the April 7 Bloomberg bankruptcy report.

Tribune is the second-largest newspaper publisher in the U.S. It listed $13 billion in debt for borrowed money and assets of $7.6 billion in the Chapter 11 reorganization begun in December 2008. It owns the Chicago Tribune, Los Angeles Times, six other newspapers and 23 television stations.

The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District Delaware (Wilmington).

A&P Evicts Grocery Haulers from Avenel Warehouse

Great Atlantic & Pacific Tea Co., the supermarket operator, won the first round in its effort at evicting Grocery Haulers Inc. from a warehouse in Avenel, New Jersey.

Grocery Haulers provided trucking services for A&P’s Pathmark brand stores. As part of the arrangement, Grocery Haulers rented the Avenel warehouse for $1 a year. Early in the Chapter 11 case A&P rejected the contract with Grocery Haulers.

When Grocery Haulers refused to vacate the warehouse, A&P sued, seeking a declaration that there was a violation of the so-called automatic stay in bankruptcy. Grocery Haulers responded by arguing that rejection of a lease doesn’t oust a tenant from the right to occupy the premises for the remainder of the term of the lease.

U.S. Bankruptcy Judge Robert D. Drain didn’t buy the argument. In an Oct. 3 ruling, Drain said it wasn’t a “true lease.” He directed Grocery Haulers to “vacate the premises as promptly as practicable.”

Drain said he would hold a hearing later to decide if damages should be imposed for violation of the automatic stay. A&P said it intends to lease or monetize the value of the warehouse once Grocery Haulers is gone.

Montvale, New Jersey-based A&P filed for reorganization in December with 395 supermarkets. There are now 330 locations, the company said in a court filing. The stores are mostly in New York, New Jersey, and Pennsylvania. A&P listed assets of $2.531 billion and debt totaling $3.211 billion. Along with A&P, store brands include Pathmark, Food Emporium and Waldbaum’s.

The case is In re The Great Atlantic & Pacific Tea Company Inc., 10-24549, U.S. Bankruptcy Court, Southern District New York (White Plains).

Nebraska Book Reports Five-Month $6.2 Million Net Loss

College bookseller Nebraska Book Co. filed an operating report with the bankruptcy court showing a $6.2 million net loss for five months ended Aug. 31 on revenue of $264.4 million.

Operating income for the period was $24.1 million. Reorganization costs totaled $9.65 million. Interest expense was $19.1 million for the period, the operating report said.

The company has been unable to secure the $250 million loan required for confirming and implementing the Chapter 11 plan largely worked out before the Chapter 11 filing in late June.

Currently, the confirmation hearing for approval of the plan is set for Oct. 24. The company said there is a “substantial possibility” of further delay. For details on the plan after a settlement with shareholders, click here for the Sept. 9 Bloomberg bankruptcy report. For details on the original plan, click here for the July 19 Bloomberg bankruptcy report.

Based in Lincoln, Nebraska, the company sells used textbooks and operates more than 290 college bookstores. The company said $598 million in sales during fiscal 2011 resulted in a net loss of $98 million, including an $89 million writedown of intangible assets.

The case is In re Nebraska Book Co. Inc., 11-12005, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Watch List

General Maritime Moves Closer to Formal Restructuring

General Maritime Corp., the owner of 31 crude oil and petroleum product tankers, moved closer to a restructuring when it signed a standstill agreement on Sept. 30 with affiliates of Oaktree Capital Management LP, lenders on three credits totaling $1.12 billion.

The agreement requires delivering an acceptable restructuring proposal. The standstill expires Nov. 10.

Moody’s Investors Service said in September there is an “increasing prospect” for “a restructuring of the terms of certain of its credit facilities, if not the entirety of its debt.”

The majority of General Maritime’s charter agreements expire in the next 15 months.

For the six months ended June 30, New York-based General Maritime reported a $55.5 million net loss on revenue of $208.1 million. The operating loss in the period was $20.2 million.

The $300 million in 12 percent senior unsecured notes due in 2017 traded yesterday at 23.3 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The shares closed yesterday at 18.5 cents, down 1.5 cents in New York Stock Exchange composite trading. The three-year closing high was $12.94 in December 2008.

Downgrade

Liberty Tire Recycling Demoted to B3 Corporate

Tire recycler Liberty Tire Recycling Holdco LLC was lowered by one notch yesterday to a B3 corporate grade by Moody’s Investors Service.

Moody’s cited the effects of opening a new plant and four acquisitions in 2011. The $200 million in senior unsecured notes went down by one grade as well, to Caa1.

“Without higher demand for Liberty Tire’s end products, net losses could continue,” Moody’s said. Likewise, Moody’s does “not anticipate much in the way of sustainable free cash flow generation.”

Liberty recycles 180 million tires a year into crumb rubber and feedstock for molded products. Revenue last year for the Pittsburgh-based company was almost $250 million, Moody’s said.

Indian Casino in Coarsegold, California, Downgraded

The Chukchansi Economic Development Authority, formed to operate the Chukchansi Gold Resort & Casino near Coarsegold, California, was downgraded two clicks yesterday to a Caa2 corporate rating by Moody’s Investors Service.

The new Moody’s rating is two steps lower than the ding issued last month by Standard & Poor’s.

Moody’s focused on the two issues of senior notes that mature in November 2012 and 2013. The notes, totaling $310 million, also are now rated Caa2.

Like S&P, Moody’s noted the possibility of increased competition resulting from a positive determination by the Interior Department for what would be a competing Indian casino 30 miles away in Madera County, California.

The development authority was created by the Picayune Rancheria of Chukchansi Indians.

Podcast

Dodgers, Solyndra Trustee, Eastman Kodak: Bankruptcy Audio

The schedule for the Los Angeles Dodgers baseball club and the commissioner of Major League Baseball to hold a trial over whether the team can sell broadcast rights is the first topic on the bankruptcy podcast with Bloomberg News bankruptcy columnist Bill Rochelle and Bloomberg Law’s Lee Pacchia. Rochelle explains why it took the U.S. Trustee a week to seek appointment of a trustee after two top executives from Solyndra LLC declined to answer questions at a congressional hearing by invoking Fifth Amendment rights. The conditions in the credit markets may force Nebraska Book Co. to come up with a new reorganization plan, Rochelle says. The podcast wraps up with a look at volatile trading in stock and bonds of Eastman Kodak Co. resulting from news reports that bankruptcy is among the company’s alternatives. To listen, click here.

--With assistance from Dawn McCarty, Steven Church and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Fred Strasser

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.


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