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New York Bankruptcy Judge Allan Gropper told Granite Broadcasting that he may be ready to approve its plan of reorganization (POR). There’s just one catch, he wants to strip out perks for founder and CEO Don Cornwell first.
The debtor and its preferred shareholders made closing arguments at a confirmation hearing held this week in New York Bankruptcy Court. The preferreds, including Harbinger Capital Partners, GoldenTree Master Fund and MFC Global Investment Management, continued to propose a competing term sheet that would give them control of the troubled broadcaster.
“Can I approve the plan and strike provisions involving Cornwell as inappropriate, can I do that?” Judge Gropper asked both sides at the hearing.
Under the POR, Cornwell would continue to serve as CEO and would maintain his seat on the board of directors, which would be released from any future litigation. In addition, the USD 3.3m loan Cornwell borrowed from the company in 2003 would be forgiven.
Judge Gropper repeatedly asked representatives of the debtor and the preferreds for case law precedent to support a ruling that would approve the plan but eliminate certain provisions for co-founder and CEO, Don Cornwell.
Last month, court-appointed examiner Andrew Hruska of King & Spalding filed a report concluding that Don Cornwell and Granite’s board of directors were potentially liable for breach of fiduciary duty. That possible violation relates to the borrowing of a USD 70m senior secured credit facility from Silver Point in an effort to make a USD 20m 1 June 2006 interest payment on its USD 405m 9.75% senior secured notes due 2011. Those notes were recently quoted at 96, according to TRACE.
Don Cornwell and the board negotiated the current POR with Silver Point in bad faith, argued Mark Bane of Ropes & Gray, counsel to the preferreds. Judge Gropper cannot carve out Cornwell’s self dealing from the POR, rendering the plan unconfirmable, according to Bane.
“The debtor’s plan is tainted by Cornwell’s participation,” said Bane. “The debtors cannot carry their burden of good faith.”
In addition to the good faith controversy, both sides heatedly argued over the television broadcaster’s valuation. Granite’s plan values the reorganized enterprise at USD 493m, and would cut its total debt in half to approximately USD 200m. In exchange, secured creditors stand to receive the vast majority of post-bankruptcy equity. Holders of Granite’s USD 314.4m 12.75% cumulative exchangeable preferred securities would receive approximately 2% of the reorganized debtor’s equity, plus warrants.
In contrast, the preferred’s term sheet sets a minimum USD 635m enterprise value and contemplates reinstating the bulk of pre-petition debt while raising USD 200m - USD 230m of new equity from the preferreds though a two-tiered rights offering.
Under the preferred plan, secured debtholders can either have their debt reinstated or be paid out in full in cash. The preferreds are offering to pay secured lenders default interest but not a make-whole premium because a take out would be voluntary.
Should Judge Gropper deny the debtor’s plan and open up exclusivity, the preferred shareholders would still need to FCC approval to take control of the company. That process could take several months, said Bane. If need be, the debtor could pay current interest to its secured creditors out of a replacement DIP facility provided by the preferreds, according to the term sheet. So far the debtor has not drawn down on its current USD 25m DIP facility, provided by Silver Point.
If a replacement DIP is authorized by the court, the debtor could then convert the facility into an equity exit facility. The exit facility would be subordinated to the debtor’s reinstated senior notes or new senior notes for the same dollar amount, according to the preferred’s term sheet.
All parties of interest will file written summaries of their positions backed by findings and conclusions by tomorrow. Judge Gropper is expected to issue a written decision on confirmation in mid-May.
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