Bloomberg News

Advantage Seeks Bankruptcy on Hertz Talks Collapse: Bankruptcy

November 06, 2013

Advantage Rent A Car, spun off by Hertz Global Holdings Inc. (HTZ:US) to win U.S. approval for its purchase of Dollar Thrifty Automotive Group Inc., filed for bankruptcy after talks with Hertz over vehicle lease payments broke down.

Franchise Services of North America Inc., which operates Advantage, said in a Nov. 4 statement that it failed to reach a deal to restructure vehicle lease agreements after Advantage missed a payment to Hertz. Advantage had acquired 24,000 vehicles from Hertz under the agreements.

The bankruptcy filing puts in jeopardy the Federal Trade Commission’s plan to create a viable competitor to Hertz as part of its agreement to clear the $2.3 billion Dollar Thrifty acquisition. The FTC gave final approval to the purchase in July, ending an eight-month compliance review of the deal.

Advantage filed for bankruptcy after Hertz notified Franchise Services on Nov. 2 that it was terminating the lease agreements and seeking the return of vehicles that Advantage had acquired as part of the Dollar Thrifty deal, according to the statement.

Advantage, based in Ridgeland, Mississippi, listed assets of between $100 million and $500 million in its bankruptcy petition filed yesterday in Jackson, Mississippi.

FTC’s approval followed an investigation into how Macquarie Group Ltd., which bought Advantage in a joint venture with Franchise Services, was running the business, which the agency had provisionally allowed, people familiar with the matter have said.

The commission is monitoring Franchise Services’s bankruptcy “to ensure compliance with the terms” of the order approving the Dollar Thrifty acquisition, FTC spokesman Peter Kaplan said in an e-mailed statement.

The FTC’s investigation had focused on whether Macquarie was following through on its commitments to expand and strengthen Advantage after the Dec. 7 ouster of Sanford Miller, an industry veteran who was hired to run it, two people familiar with the matter said in April. Macquarie had said in an e-mail to Miller that it didn’t have car-rental experience.

Analysts and rental-car executives had said consolidation in the industry was giving unprecedented pricing power to its market leaders, first-ranked, closely held Enterprise Holdings Inc., No. 2 Hertz and Avis Budget Group Inc.

The FTC ordered Hertz to divest locations beyond the Advantage business to protect consumers, citing the $11 billion spent to rent 50 million vehicles at U.S. airports each year. Without the divestitures, the merger would have hurt competition at 72 airports around the U.S., the agency said when it initially approved the transaction on Nov. 15, 2012.

The case is In re Simply Wheelz LLC, U.S. Bankruptcy Court, Southern District of Mississippi (Jackson).

Other Updates

Detroit Bankruptcy Looked ‘Premeditated,’ Ex-Treasurer Said

Andy Dillon, Michigan’s former treasurer, wrote an e-mail while he was still in office questioning the initial justification for Detroit’s $18 billion bankruptcy, saying it made the filing appear “premeditated.”

The e-mail, written eight days before the July 18 filing, was presented yesterday in federal court at a trial over Detroit’s eligibility for bankruptcy protection. In the e-mail, Dillon criticized an early version of the letter that the city’s emergency manager, Kevyn Orr, sent to the governor seeking permission to file the record municipal bankruptcy.

About a month before the filing, Orr had proposed canceling about $3.5 billion in unfunded liabilities (9845MF:US) owed to the city’s two pension funds and $1.4 billion in unsecured pension bonds held by investors. Those debts would be replaced by about $2 billion in new notes the city would issue. Dillon said yesterday that the offer was so low he “became very skeptical” a deal could be reached out of court.

“I don’t think we are making the case why we are giving up so soon to reach an out of court settlement,” Dillon wrote in the e-mail. “Looks premeditated.”

Dillon said at yesterday’s hearing that his comments in the e-mail were incorporated into the final letter that Orr sent the governor. That letter cited the extent of pension and retiree health-care obligations as well as an inability to reach a settlement with creditors among the justifications for the filing.

U.S. Bankruptcy Judge Steven Rhodes in Detroit has been presiding over a trial to determine whether the city can continue to be shielded from lawsuits and other actions that may interfere with its restructuring efforts. Municipalities temporarily gain such protections when they file for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code.

Municipal unions and retired city workers argue that Orr, along with state officials including Dillon and Governor Rick Snyder, favored bankruptcy over negotiation so they could cut pensions otherwise protected by the Michigan Constitution. They have said the debt swap Orr proposed would have forced cuts in monthly payments to retirees.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

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MF Global Trustee Can Distribute 100% of Customer Funds

MF Global Inc.’s trustee will get court approval to complete distributions to former customers of the failed brokerage, allowing all missing funds to be returned by the end of the year.

U.S. Bankruptcy Judge Martin Glenn said yesterday he’s prepared to approve a plan to make the final determination of what 26,000 former customers are owed and distribute the money to them. The motion will ensure customers are paid by Dec. 31, satisfying all claims more than two years after the brokerage failed.

“That’s quite an accomplishment,” Glenn said at a hearing yesterday in Manhattan. At the outset of the case, nobody thought that customers would recover everything they lost, he said.

MF Global Holdings Ltd., the brokerage’s parent company, filed for bankruptcy on Oct. 31, 2011, after a wrong-way $6.3 billion bet on bonds of some of Europe’s most indebted nations. The company listed assets of $41 billion and debts of $39.7 billion. More than $1.6 billion in customer funds that should have been segregated were missing.

The trustee, James Giddens, marshaled more than $5.3 billion in assets from MF Global’s former exchanges and depositaries, which he said were clearly customer property. He has already made interim distributions to customers. The final distributions will require him to advance funds from the company’s general bankruptcy estate.

Determining what customers are owed will establish the size of the estate for general creditors, allowing them to be repaid as well, Giddens told Glenn, adding that $3 billion in customer claims have yet to be resolved.

The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-bk-02790, in the same court.

Penthouse Owner FriendFinder’s Disclosure Statement Approved

FriendFinder Networks Inc., the owner of Penthouse magazine and thousands of adult-oriented websites, won court approval to seek creditors’ votes on its restructuring plan, which would turn the company over to noteholders.

U.S. Bankruptcy Judge Christopher Sontchi approved the company’s disclosure statement, a description of the reorganization plan, at a hearing yesterday in Wilmington, Delaware.

The disclosure statement provides creditors with “all the information necessary to make an informed decision on whether to accept or reject the plan,” FriendFinder attorney Matthew L. Hinker said at the hearing.

FriendFinder will seek court approval of its reorganization plan to exit bankruptcy at a hearing scheduled for Dec. 16. Objections to the plan have to be filed by Dec. 9.

The Boca Raton, Florida-based operator of websites such as adultfriendfinder.com sought bankruptcy protection Sept. 17 listing assets of $465.3 million and debt of $661.9 million.

The restructuring would cut about $300 million in debt and reduce annual interest expenses by about $50 million, according to a statement. The reorganized company’s estimated enterprise value was between $257.8 million and $285.4 million as of Aug. 31, according to the disclosure statement.

The reorganization plan is supported by about 78 percent of the holders of 11.5 percent non-cash paying second-lien notes and about 80 percent of the holders of 14 percent senior secured first-lien notes, court papers show.

The second-lien noteholders, owed about $330.8 million, would exchange debt for all of reorganized FriendFinder’s equity. The first-lien noteholders, owed about $234.3 million, would get cash and new notes. Current shareholders would receive nothing, according to court documents.

FriendFinder has more than 8,000 websites spanning more than 200 countries with more than 220 million members and over 750,000 paying subscribers, according to court papers. The websites offer social-networking and adult dating, video-sharing and live interactive video entertainment. In addition to publishing Penthouse magazine, the company licenses the brand for content such as pay-per-view programming.

Sales decreased about 10 percent to $293.7 million for the fiscal year ended June 30. Revenue from social-networking websites dropped more than 17 percent while live interactive-video websites generated about 8 percent more.

The company hasn’t made a profit (FFNT:US) since at least 2006 and reported a second-quarter net loss of $10.3 million, or 32 cents a share, on Aug. 15.

The lead case is In re PMGI Holdings Inc., 13-bk-12404, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Velti Wins Court Approval of Interim Bankruptcy Financing

Velti Inc., a provider of technology for marketing on mobile devices, received court approval of a loan to help fund operations while it’s in bankruptcy.

U.S. Bankruptcy Judge Peter Walsh approved the interim financing at a hearing yesterday in Wilmington, Delaware.

The company, which filed for bankruptcy Nov. 4, will return to seek court approval of the rest of the $25 million in bankruptcy financing from units of GSO Capital Partners LP, the credit division of Blackstone Group LP. (BX:US)

The $6.3 million in interim financing will be split between the businesses. The U.S. units will receive about $2.2 million and the remainder will go to the U.K. units.

Velti, a San Francisco-based unit of Velti Plc (VELT:US), listed assets of as much $50 million and debt of as much as $100 million in Chapter 11 documents filed this week. Its Air2Web Inc. unit, based in Atlanta, also sought creditor protection. Velti Plc, which trades on the Nasdaq Stock Market, isn’t part of the bankruptcy process.

The company plans to auction some assets with an affiliate of GSO Capital Partners acting as the initial, or “stalking-horse,” bidder.

While the business lines of Air2Web’s India unit and Velti’s U.K. operations, including Mobile Interactive Group Ltd., are included in the proposed sale, those entities aren’t part of the bankruptcy and are continuing normal operations, Velti Chief Executive Officer Alex Moukas said in a phone interview before the filing.

A hearing to approve a sales process for the business lines and approve GSO as the stalking-horse bidder in the bankruptcy auction is scheduled for Nov. 18.

Operations in the U.K., Greece, India, China, Brazil, Russia, the United Arab Emirates and elsewhere outside the U.S. didn’t seek protection and business there will continue as usual.

The case is In re Velti Inc., 13-bk-12878, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filings

Archetype, Personalized Content Website, Files Bankruptcy

Archetype Inc., the creator of a website that delivers personalized content to users derived from their individual “personas” based on Carl Jung’s philosophy of archetypes, sought bankruptcy protection after a fundraising effort failed.

The New York-based company listed debt of as much as $50 million and assets of as much as $10 million in Chapter 11 documents filed Nov. 1 in U.S. Bankruptcy Court in Wilmington, Delaware.

Archetype was forced to enter bankruptcy after a liquidity crisis left it it unable to and pay debt and fund operations, according to court documents.

The company said in court papers it hasn’t generated any revenue and “was unable to obtain additional debt and equity financing,” and therefore couldn’t “service its debt, satisfy its obligations to creditors or otherwise operate in the ordinary course of business, necessitating the commencement of this Chapter 11 proceeding.”

Archetype, which was listed as one of Time Inc.’s 10 New York startups to watch in 2013, attempted to generate $20 million through an equity offering earlier this year.

Cristina Carlino, the founder of Philosophy Inc., the maker of the eponymous cosmetic products line, owns most of Archetype’s equity and debt. Carlino is also the company’s executive chairman.

Carlino gained a 50 percent equity stake in the company after contributing her “archetype"-related intellectual property portfolio, court filings show. The company scrapped its original website idea and introduced the current version in September.

After the company failed to gain investor interest in its Series A preferred stock offering, a Carlino affiliate provided Archetype with bridge financing of about $7.3 million to maintain operations through the end of October, court papers show. The Carlino affiliate also owns part of the company’s $19 million junior secured notes.

Archetype plans to sell virtually all its assets to Carlino or one of her affiliates through a court-supervised auction, according to court documents. Carlino’s affiliate would act as the ‘‘stalking-horse,” or lead bidder, offering to forgive the debt owed on the secured bridge loan in what is known as a credit bid.

The company is seeking court approval to borrow $1.25 million from the Carlino affiliate to help fund operations as it pursues the sale.

The case is In re Archetype Inc., 13-bk-12874, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Briefly Noted

Ex-Lehman Officers to Pay $9.75 Million to Municipalities

Former Lehman Brothers Holdings Inc. officers of the failed investment bank agreed to pay $9.75 million to resolve claims by California municipalities over alleged investment losses, lawyers for the plaintiffs said.

The San Mateo County Investment Pool, the city of Burbank and five other government entities settled a lawsuit against ex-Lehman Chief Executive Officer Richard Fuld and nine other former officers and directors, according to an e-mailed statement yesterday.

The California plaintiffs accused the executives and directors a 2009 lawsuit in federal court in Manhattan, of misleading investors about Lehman’s risk-management policies before its 2008 collapse.

John Maltbie, San Mateo’s county manager, said the county south of San Francisco lost $155 million on its Lehman bond investments and has recovered about $62 million.

New York-based Lehman was the world’s fourth-largest investment bank on Sept. 15, 2008, when it filed the biggest bankruptcy in U.S. history. It had assets of $639 billion and listed $613 billion in debt when it filed.

The case is In Re Lehman Brothers Securities and ERISA Litigation, 09-cv-02017, U.S. District Court, Southern District of New York (Manhattan).

Downgrades/Other Ratings Actions

Avon Long-Term Ratings Downgraded One Level by Fitch to BB

Avon Products Inc., the world’s largest door-to-door cosmetics seller, had its ratings cut one level to BB from BB+ by Fitch Ratings.

The downgrade “is due to deteriorating operations and intensifying business model risk as reflected in continued double digit declines in revenue, volume and representative counts in North America and Asia Pacific through the first three quarters of 2013,” the ratings firm said in a Nov. 4 statement.

Avon’s direct-selling business model faces challenging market conditions in Latin America, Europe, Asia and emerging markets, Fitch said in the statement.

“The direct selling channel is growing but early indications are that it is not as fast as other channels,” and the “build-out of alternative channels in emerging economies could have negative implications for direct sellers,” according to Fitch.

Latin America accounted for more than half of Avon’s operating profit in 2012 before other expenses. Low single-digit growth in representatives in the region signals that the market has matured, the ratings firm said.

Avon had more than $1.8 billion in liquidity as of Sept. 30, according to Fitch.

Watchlist

Batista’s OSX Said to Plan Bankruptcy Filing by Early Next Week

OSX Brasil SA (OSXB3), the shipbuilding company controlled by former billionaire Eike Batista, is planning to file for bankruptcy protection by early next week, according to two people familiar with the matter.

The decision to file has already been made, the people said, asking not to be identified because it hasn’t been announced yet. While a petition for judicial recovery, as it is known in Brazil, may be lodged as soon as this week, it is more likely to take place next week, one of the people said.

A filing would put $500 million of dollar bonds into default after Batista’s oil company and OSX’s biggest client, OGX Petroleo & Gas Participacoes SA (OGXP3), sought protection on Oct. 30 in Latin America’s largest corporate debt debacle. OSX’s total debt was 5.3 billion reais ($2.3 billion), according to its second-quarter earnings release.

In an Oct. 31 statement, the shipbuilder said it was ready to seek bankruptcy protection if management decided that was the most adequate way to protect its interests. OSX continues to study the measure, a press department official said by phone yesterday, asking not to be named in line with company policy.

OSX and OGX were the only two of Batista’s six publicly listed companies that had issued bonds in international markets. Batista either relinquished control of, or agreed to sell key assets and stakes in, the four other start-ups. OSX was building three vessels for OGX before the explorer’s tests uncovered an absence of oil in a series of non-commercial wells.

The shipbuilder is in talks to extend the maturity of a 400 million-real loan from state-run Caixa Economica Federal, Rio de Janeiro-based OSX said by e-mail yesterday. Since Aug. 18 Brazil’s state development bank BNDES has been pushing out maturities on a loan for 518 million reais.

OSX bondholders hired AlixPartners LLP to advise on the possible restructuring of $500 million in bonds, according to two people with knowledge of the matter.

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

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


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