Bloomberg News

Atari Wins Approval to Send Plan to Creditor Vote: Bankruptcy

November 01, 2013

Atari Inc., the bankrupt video-game maker, won court approval to seek creditors’ votes on its plan to exit bankruptcy protection as a going concern.

U.S. Bankruptcy Judge James M. Peck approved the company’s disclosure statement, an outline of the restructuring plan, finding that it contained adequate information for creditors to make an informed vote, according to court documents filed Oct. 29 in Manhattan. The company is scheduled to seek court approval of its reorganization plan at a Dec. 5 hearing.

“The plan effectuates a restructuring transaction under which the sponsor will make contributions to the estates sufficient to ensure a meaningful recovery to holders of general unsecured claims,” the New York-based company said in court filings. Unsecured creditors are projected to receive a recovery of as much as 25 percent.

The company sought bankruptcy protection in January intending to break away from French parent Atari SA (ATA), which hasn’t made a profit since 1999 and sought related relief from creditors under French law, the company has said.

A pioneer in the home video-game console market and maker of classic titles such as “Pong” and “Asteroids,” Atari attempted to sell virtually all its assets earlier this year, according to court documents. Atari, which owned or managed more than 200 games and franchises, failed to get qualified offers for key assets including its namesake brand, for which it was seeking a minimum of $15 million.

Atari, founded in 1972, changed course in September and now plans to reorganize and continue operating with the brands it has left, according to court documents. Its parent is sponsoring the restructuring plan.

Atari and the parent determined the “business and remaining assets have substantial value that would not otherwise be realized in a liquidation.” The video-game maker would reorganize around titles such as “RollerCoaster Tycoon,” “Test Drive” and “Centipede.”

The company moved forward with auctions of seven less-valuable franchises that generated a total of about $5.1 million, according to court papers.

Under the reorganization plan, unsecured creditors, which Atari estimates are owed $5 million to $7 million, would get cash payments for a recovery of as much as 25 percent, according to court documents. The recovery estimate assumes the unsecured creditors aren’t owed more than $7 million and would be reduced if allowed claims exceed that amount.

The official committee representing unsecured creditors supports the plan, according to court papers. The unsecured creditors would get a payment of 8 percent of their claims or $560,000, whichever is less, when the plan takes effect. They would get identical treatment one year later, and then get a payment for the lesser of 9 percent of their claims or $630,000 two years later.

Atari SA is waiving its right to any distribution on its $309.5 million in intercompany claims, according to court documents. Alden Global Capital, which acquired a secured credit facility to Atari SA in February, would be paid in full on the $5 million it loaned to help fund the bankruptcy case.

The case is In re Atari Inc., 13-bk-10176, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Other Updates

AMR-US Airways Said to Be in Merger Lawsuit Talks With U.S.

American Airlines (AAMRQ:US) and US Airways Group Inc. (LCC:US) are in exploratory talks with the U.S. about settling the government’s lawsuit seeking to block their proposed merger, two people familiar with the matter said.

The discussions are taking place between lawyers for the airlines and top officials at the Justice Department’s antitrust division, said the people, who asked not to be named because the conversations are confidential. The airlines are offering to divest gates and landing and takeoff rights at Washington’s Reagan National Airport as part of a settlement package, one of the people said.

The talks are still preliminary may not lead to settling the suit, the people said.

“Any discussions about settlement to resolve this litigation, whether internal, with DOJ directly or through the mediator would be private and we are not going to comment on them in any way,” Jill Zuckman, a spokeswoman for US Airways, said in an e-mailed statement.

The airlines and the Justice Department said on Oct. 28 that they agreed to submit the lawsuit to mediation as suggested by U.S. District Judge Colleen Kollar-Kotelly, who’s overseeing the case. A trial is set to begin Nov. 25.

Rich Parker, an attorney for US Airways, declined to comment on the mediation or settlement prospects when he spoke with reporters Oct. 30 outside federal court in Washington following a status hearing in the case.

“We have always said that our side is open to discussions but I’m not going to talk about any aspect of settlement,” Parker said. He said Kollar-Kotelly “asked for a mediator. When the judge asks us to do that, we do that.”

The Justice Department sued American parent AMR Corp. and US Airways in August, claiming the planned merger, which would create the world’s largest airline, would reduce competition and lead to higher prices.

American, which has been in bankruptcy since November 2011, was set to exit court protection by merging with Tempe, Arizona-based US Airways when the Justice Department and a group of states sued to block the deal Aug. 13.

AMR, based in Fort Worth, Texas, would have to start over in its reorganization if the U.S. wins a court order stopping the tie-up, the committee representing the carrier’s unsecured creditors said in a court filing Oct. 28.

American’s Chief Executive Officer Tom Horton said reaching a “reasonable settlement” of the case would be better for both sides than going to trial, speaking at a conference in New York Oct. 29.

The bankruptcy case is In re AMR Corp., 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The antitrust case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington).

Suntech Power to Fight Involuntary Bankruptcy by Bondholders

Suntech Power Holdings Co. (STP:US), the Chinese solar company whose main unit was pulled into bankruptcy, said it will fight an attempt by bondholders seeking to force it into court protection in the U.S.

The company had involuntary Chapter 7 bankruptcy proceedings initiated against it on Oct. 14 in U.S. Bankruptcy Court in White Plains, New York, by holders of more than $1.5 million of defaulted securities under a 2008 $575 million indenture.

Suntech “intends to challenge the petition for involuntary bankruptcy,” and has until Nov. 6 to respond, the Wuxi, China-based company said in a statement yesterday.

Suntech’s main unit was pulled into bankruptcy proceedings in China after the panel maker missed a bond payment in March. It was the world’s biggest solar manufacturer by 2011 shipments.

Suntech defaulted on $541 million in bonds, according to the Chapter 7 filing.

Bondholders claim that that Suntech has failed to satisfy judgments of more than $560,000 they won in September.

Wall Street investors funneled $1.28 billion into Suntech, including the bonds and $742.6 million of stock sales in 2005 and 2009, according to the filing.

The company had $2.26 billion in debt at the end of the first quarter, the last time it reported earnings.

The involuntary petition case is In re Suntech Power Holdings Co., 13-bk-13350, U.S. Bankruptcy Court, Southern District of New York (White Plains).

NE Opco Wins Court Extension of Bankruptcy Plan Filing Period

NE Opco Inc., which was the largest closely held envelope maker in North America before selling virtually all its assets, won court approval of an extension to Jan. 6 of its exclusivity period, which gives it the sole right to propose a bankruptcy restructuring or liquidation plan.

U.S. Bankruptcy Judge Christopher Sontchi approved the requested extension, according to court documents filed Oct. 30 in Wilmington, Delaware.

The company said in court papers that it was seeking the extension out of an “abundance of caution” because it has spent most of the early part of the bankruptcy process negotiating and completing sales and hasn’t yet been able to turn its attention to winding down the estates.

“Because the sales closed very recently, the debtors require additional time to analyze the path toward winding down the debtors’ estates,” NE Opco said in court filings

The company’s exclusivity was set to run out on Oct. 8, court papers show. Under Delaware bankruptcy law, the company automatically receives an extension of its exclusivity after a request is made, until a judge rules.

The company won court approval in September to sell substantially all its assets to three separate buyers for a total of about $70 million.

Cenveo, based in Stamford, Connecticut, paid about $33 million for the envelope business. Hilco Receivables paid about $22 million for NE Opco’s accounts receivables and Southern Paper LLC acquired inventory for about $15 million.

The envelope maker sought Chapter 11 protection June 10 for the second time as mailings dwindle and the Internet keeps growing as the favored method for communications. The Frisco, Texas-based company listed as much as $500 million in both assets and liabilities.

Private-equity firm Gores Group LLC bought virtually all of National Envelope’s assets in its first bankruptcy at an August 2010 auction for about $208 million.

NE Opco had eight plants and two distribution centers capable of producing 37 billion envelopes a year, giving it a 15 percent share of the U.S market.

The case is In re NE Opco Inc. 13-bk-11483, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filings

Topaz Capital & Investment Files Second Bankruptcy

Topaz Capital & Investment Inc., which owns property planned for residential development, sought bankruptcy protection from creditors for the second time, less than a year and a half after its first case was dismissed.

The company listed debt of about $17.3 million and assets of $5 million in Chapter 11 documents filed Oct. 28 in U.S. Bankruptcy Court in San Diego, where it is based.

Topaz’s only asset is 28.55 acres in Victorville, California, which it values at $5 million, according to court papers.

The company sought Chapter 11 bankruptcy in March 2010 and had the case dismissed at its request more than two years later, according to court document. The company said it resolved a disputed creditor claim that had prompted Topaz to make the bankruptcy filing to prevent a foreclosure sale of the property.

The U.S. Trustee, a branch of the justice department that monitors bankruptcy cases, asked for the first bankruptcy to be dismissed about seven month after the filing, saying little progress had been made in the case and the company didn’t show a reasonable likelihood of rehabilitation.

Topaz said in court documents filed in the first case that it was pursuing a Housing and Urban Development loan to commence construction of residential project, with 236 units planned for the first phase and a total of 428 “market rate multifamily apartments” which would possibly include affordable housing.

The company owes most of its debt to Integrated Financial Associates Inc., which has a claim of about $16 million secured by the property.

The case is In re Topaz Capital & Investment Inc., 13-bk-10467, U.S. Bankruptcy Court, Southern District of California (San Diego). The first case was In re Topaz Capital & Investment Inc., 10-bk-04983, U.S. Bankruptcy Court, Southern District of California (San Diego).

Statistics

Canadian Companies Lead Foreign Chapter 15 Bankruptcy Filings

Thirty-three foreign companies have sought to protect their assets in the U.S. with Chapter 15 bankruptcy filings so far this year. Canadian companies have accounted for 39 percent of the total.

Chapter 15 of the U.S. Bankruptcy Code is used by foreign companies to shield U.S. assets from creditors’ claims and protect them from lawsuits, if it can persuade a U.S. bankruptcy judge to recognize its insolvency proceedings abroad as the foreign main proceeding.

If OGX Petroleo & Gas Participacoes SA, which filed for bankruptcy Oct. 30 in Brazil in the largest corporate debt debacle on record in Latin America, seeks Chapter 15 bankruptcy protection, it will be the second Brazilian company to do so this year. Banco Pontual filed for Chapter 15 on Oct. 22.

Twelve foreign companies filed their Chapter 15 bankruptcy petitions in New York’s Southern District Bankruptcy Court this year, making it the busiest venue for such cases. Seven companies have filed for Chapter 15 protection in Delaware’s Bankruptcy Court during that period.

Defaults

Next Corporate Default Cycle to Have More Losses, Moody’s Says

The next corporate default cycle could result in higher investor losses than the one just experienced in the U.S. and is expected to have a lower default rate over a longer period, Moody’s Investors Services said in an Oct. 30 statement.

“Assuming the next default cycle is driven by a more traditional economic downturn that does not prompt U.S. Federal Reserve intervention, it is likely to resemble those of 1990-92 and 1999-2004,” Moody’s Senior Vice President David Keisman says in a report titled “Next Default Cycle May Feature Lower Default Rate, but Higher Investor Losses” according to the statement.

“If so, the default rate will be lower and the duration longer, but average firm-wide recoveries could also be lower” Keisman says in the report.

The previous default cycle in 2009 and 2010 was softened by a multitude of distressed debt exchanges and so-called prepackaged bankruptcies, where restructuring terms were already worked out with creditors who pledged their support for the reorganizations before the companies sought bankruptcy protection.

“The next default cycle could include a higher proportion of court-supervised Chapter 11 filings, which tend to have weaker recoveries,” Keisman says.

The report authors question whether the recent distressed debt exchanges provided enough capital or merely bought the companies some time before a default or bankruptcy.

About 100 companies executed distressed exchanges during 2009 and 2010 and so far 14 have defaulted again, with most resulting in bankruptcies.

There is no clear sign yet of when the next default cycle may occur, Moody’s says. While there has been deterioration in speculative-grade credit quality it hasn’t reached levels that would see the default rate surge in the next year.

The New York-based credit grader expects a 2.7 percent default rate among U.S. speculative-grade issuers at the end of this year. The riskiest corporate borrowers have been buoyed by the Federal Reserve’s unprecedented monetary stimulus, which has pushed bond yields to the lowest ever.

Even as the default rate holds below a two-decade average of 4.5 percent, credit quality has started to decline, leading to an increase of downgrades to the B2 and B3 categories, five and six levels below investment grade. Companies have increased their ratios of debt to earnings, lowered interest coverage and issued more covenant-light securities that have fewer investor protections.

Yields on bonds issued by the riskiest U.S. companies fell to a record low of 5.98 percent in May, according to the Bank of America Merrill Lynch U.S. High Yield index. Borrowing costs have since risen to 6.44 percent, below the average of 9.05 percent during the past 10 years.

Watchlist

Caesars Poised for Distressed Debt Exchange, CreditSights Says

Caesars Entertainment Corp. (CZR:US), the casino operator with more than $24 billion in debt, will probably need to coerce bondholders to exchange their holdings for new securities to cut its borrowing costs and avoid bankruptcy, according to researcher CreditSights Inc.

The owner of Caesars Palace and Harrah’s Las Vegas, which hasn’t had a profitable (CZR:US) quarter since at least 2010, may seek to swap a portion of its operating unit (CZR:US)’s second-lien debt for payment-in-kind, or PIK, securities, analysts led by Chris Snow wrote in an Oct. 30 report. PIK notes allow borrowers the ability to pay interest with additional debt.

“Our base case is that an exchange occurs, which will free up cash flow” and “stabilize the bleed,” the analysts wrote. “An inability to execute an exchange will potentially increase the odds of a filing.”

The largest owner of casinos in the U.S. said Oct. 29 that its net loss widened to $761.4 million after the company wrote down properties in Atlantic City and gambling revenue shrank. Caesars is burning through cash (CZR:US) almost six years after Apollo Global Management LLC and TPG Capital took the company private in 2008. It sold shares to the public in February 2012.

Caesars Entertainment Operating Co.’s $3.3 billion of 10 percent, second-lien bonds due 2018 traded at 50.5 cents on the dollar to yield 29.2 percent at 12:53 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes have plunged from 70.5 cents in January.

To contact the reporter on this story: Michael Bathon in Wilmington at mbathon@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net


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