The Distressed Debt Alert

An operator of 30 television stations located across the U.S. filed for bankruptcy in order to buy time from its secured lenders to complete a sale of all or some of the stations.

Pappas Telecasting filed Chapter 11 on May 10 in the U.S. Bankruptcy Court in Delaware, citing declining advertising revenue in a soured economy for impairing its ability to service $303.6 million owed on a two-year-old loan facility.

Chief executive Harry J. Pappas said in court filings that he made a $15 million payment in "unencumbered cash" to the lenders, led by Fortress Investment Group, in March. Pappas said $10 million of the payment was made out of his own pocket. The company remained in both payment and covenant default on the loan, despite the payment.

When the loan first went into default at the end of 2007, an investment bank was hired to arrange a sale of the stations on a going-concern basis. The sales efforts have been hampered, however, as prospective buyers learned of the covenant default and sought to buy the stations at "distressed" prices. Other would-be buyers were found to be unable to obtain financing because of the deterioration in the credit markets.

Running out of patience, the lenders have recently refused to negotiate financing at reasonable terms during a bankruptcy filing, Pappas said. He said the filing is necessary for him to put in place a $2 million debtor-in-possession loan, again from out of his own pocket, so that the sales process can continue. The proposed DIP would be a second lien loan subordinated to the lenders' facility, would charge interest at LIBOR plus 5%, and mature on Nov. 7.

Fortress representatives couldn't be reached for comment.

Pappas Telecasting listed assets of $459.6 million and liabilities of $536.9 million.

Along with the weak advertising market, Pappas cited other problems diminishing the stations' cash flow. These included a programming switch at several of the stations to the poor-performing CW Network in 2006, and rising energy costs.

A global relocation service is moving from a public company to one privately owned by its secured lenders, according to a plan of reorganization approved by the U.S. Bankruptcy Court in Manhattan on May 7.

The new majority owners of Sirva Inc. will include Bank of America, Blackstone Group, Highland Capital Management and JP Morgan, according to people involved in the case and bankruptcy documents.

The lenders are converting a portion of pre-bankruptcy loans, owed roughly $486 million, into new equity. They had rolled some of that debt into a $150 million debtor-in-possession facility after Sirva filed for Chapter 11 in February. One or more of the four lenders is expected to contribute to a $215 million exit facility to fund the Chicago company's ongoing operations. Terms of the facility will be filed on the date of Sirva's emergence from bankruptcy, which is expected to be May 9 or May 12, according to Marc Kieselstein, an attorney for Sirva with the law firm of Kirkland & Ellis.

The plan will reduce Sirva's outstanding bank debt by approximately $200 million, and annual cash interest expense by roughly $40 million, the company said in a statement.

Morrison & Foerster said on May 5 that it added five attorneys to its national bankruptcy and restructuring practice in New York. All five were previously with the New York firm of Otterbourg, Steindler, Houston & Rosen.

The attorneys include new partners Brett Miller and Lorenzo Marinuzzi, counsel Melissa Hager, and associates Todd Goren and Jordan Wishnew.

Miller and Marinuzzi have represented unsecured creditors committees in such high-profile cases as Northwest Airlines, US Airways, Midland Foods, HomeBanc Mortgage, Fruit of the Loom and RH Macy, Morrison & Foerster said. They are now representing the unsecured creditors committee in the recently filed bankruptcy of New York-based retailer Fortunoff, the law firm said.

A federal judge in Manhattan accused Tama Broadcasting of using the courts to try to stonewall D.B. Zwirn's attempts to foreclose on nine of Tama's radio stations in Georgia and Florida.

Judge Shira A. Scheindlin on April 28 remanded Zwirn's lawsuit against Tama back to New York state court, and advised that court to appoint a receiver for the stations on behalf of the New York hedge fund manager.

Zwirn alleges that Tama owes $40.1 million on a loan secured by the stations that has been in default for nearly two years.

Scheindlin accused Tama of having transferred the lawsuit from state court in late March as one of "numerous tactics that appear motivated by a desire" to delay Zwirn's lawsuit.

"I sympathize with [Zwirn's] frustrated desire to have this case promptly proceed on its merits," she wrote.

Although Scheindlin wrote a decision recommending the receiver, she said she must leave the final decision to the state court. Scheindlin said that she lacks jurisdiction to appoint a receiver.

But Scheindlin rejected Tama's argument that the appointment of receiver would involve the transfer of licenses to operate the stations, issued from the Federal Communications Commission. Other courts have appointed receivers over assets that included FCC licenses without running afoul of FCC rules, she said.

Zwirn and Tama have accused each other of mismanaging the radio stations. But the judge found that both parties acknowledged that the loan was in severe default and that Tama was insolvent and in "imminent danger" of being forced to shut down the stations. A court-appointed receiver would objectively act to preserve the properties for the benefit of all the parties, she wrote.

"There is a strong probability that [Zwirn] will succeed in its underlying action, which is premised on Tama's admitted breach of the financing agreements by failing to fulfill its payment obligations," Scheindlin wrote.

Toy-train maker Lionel LLC said that it emerged from bankruptcy on May 1, after more than three years under Chapter 11.

Guggenheim Investment Management, a New York distressed private equity fund, has become the new majority owner of the company, according to Lionel chief executive Jerry Calabrese.

The former majority owners now hold the remaining minority stakes. Train Acquisition, an entity controlled by former Paramount Communications chairman Martin Davis, had previously held a 75% stake. Prolific toy-train collector Richard Kughn had owned 5%, and musician Neil Young had held 20%.

Data provider Capital IQ indicated that Guggenheim is contributing $37.1 million in new equity cash and is joining with Paramount Communications in providing a $10 million second lien loan. Paramount is also infusing Lionel with an additional $21.9 million in new equity capital.

Guggenheim also provided loans to Lionel prior to the bankruptcy filing. The fund had rolled that debt into an up-to-$60 million debtor-in-possession facility provided with Wachovia Bank in 2005. Wachovia has continued its loan into post-bankruptcy exit financing.

All told, a total of $69 million in financing was used to satisfy creditors in full, according to Capital IQ.

The Chesterfield, Mich., company filed for bankruptcy in 2004 after Mike's Train House won a $40.8 million judgment against Lionel for misappropriation of train designs. The judgment was set aside by a federal appellate court, which ordered a new trial in 2006.

Lionel paid an undisclosed amount to Mike's Train to settle the judgment in 2007, according to the company's bankruptcy documents filed in March with the U.S. Bankruptcy Court in Manhattan.

Global restructuring and investment firm Gordon Brothers Group said on May 1 that it hired Rafael Klotz as a managing director.

He is based in Boston. 

Klotz, a bankruptcy and commercial lawyer for almost the past decade, has provided legal counsel to Gordon Brothers on a number of distressed transactions and acquisitions. Prior to joining Gordon Brothers, Klotz was a partner at Goulston & Storrs in Boston.

Gordon specializes in the retail, consumer products, real estate and industrial sectors.

Babson Capital Management said on April 30 that it hired Benjamin Silver as a West Coast-based managing director in its mezzanine and private equity group. Silver is based in Babson's new office in Los Angeles where he is joining co-managing director Michael Ross, who started with Babson last fall.

Silver was previously with GE Commercial Finance where he was a senior vice president in the corporate lending group in Beverly Hills, Calif. He has spent the last decade in corporate finance origination roles with GE and with Union Bank of California.

Babson's private equity and mezzanine group, initially formed in 1992, now manages about $3.2 billion on behalf of clients, including Tower Square Capital Partners II, a $1 billion mezzanine debt and PE fund. Babson's private equity group also invests on behalf of parent Massachusetts Mutual Life Insurance.

Alvarez & Marsal said May 5 that Gary Barton has joined the firm's turnaround and restructuring practice as a senior director based in Houston.

Prior to joining Alvarez, Barton was a senior managing director with the restructuring practice of FTI Consulting and a partner with the business recovery services practice of PricewaterhouseCoopers. His assignments included Enron, ABB Lummus Global, Dunhill Resources, and Orion Refining.

Consulting industry veteran Erin Wolf joined Alvarez & Marsal's business consulting unit in Atlanta as a managing director. Wolf has more than 20 years of experience in management consulting, investment banking and finance and operational roles in a diverse range of industries, according to Alvarez. Most recently, she was a vice president of strategy and business development for Children's Healthcare of Atlanta. Wolf has also held executive roles at ChoicePoint, Bain & Co., Salomon Brothers Inc. and Goldman Sachs.

A Newport Beach, Calif., investment advisor expects to start soliciting investment for its first distressed control fund in May.

Browndorf PEM LLC wants to focus the Browndorf Founder's Fund on loan-to-own, turnaround, and debt origination strategies for distressed and undervalued companies, according to a source with knowledge of the matter.

An offering memorandum should be distributed to investors soon.

An initial investment planned for the new fund includes debt and equity into SpeechPhone, a California maker of voice recognition technology. Bethany Group, a distressed real estate turnaround specialist, may also contribute investments to the fund, the source said.

Browndorf PEM founder Matthew C. Browndorf repositioned his company as a distressed private equity firm in 2007. Prior to forming the company in 2002, Browndorf was a Manhattan attorney, most notably at Bryan Cave LLC and Buchanan Ingersoll PC, where he represented securities brokers and private clients in securities and white-collar litigation.

Tarpon Industries, a manufacturer of steel racks and tubing, filed for bankruptcy on April 29, after failing to service secured debt provided by Laurus Master Fund.

Tarpon's losses have totaled about $33 million from 2004 through 2007, chief executive James. W. Bradshaw said in filings with the U.S. Bankruptcy Court in Detroit. About half of those losses were generated by a Canadian subsidiary that the company shut down in November, according to Bradshaw.

Tarpon, of Marysville, Mich. has been required twice since December to amend terms of Laurus' loan facilities to avoid default, Bradshaw stated. Tarpon owes $15.8 million on the loans. Under February amendments, the company was required to obtain at least $1 million in debt financing by March 15, and $5 million in new public equity by June 30.

"Although [Tarpon is] generating an operating profit for the first time, the debtors failed to obtain the required financing and faced cessation of operations due to a lack of operating capital," the company said in court filings.

Laurus provided the bulk of its financing to Tarpon in August to refinance loans held by LaSalle Bank.

Tarpon also owes $1.7 million on a junior loan to High Capital Funding, according to Bradshaw.

Tarpon's stock was de-listed by the American Stock Exchange in November.

Laurus has agreed to provide up to $10 million in debtor-in-possession financing.

A former managing director of Stanfield Capital Partners will have to wait at least a year to resolve his lawsuit seeking more than $13 million in back wages from the New York-based distressed asset manager.

On April 29, federal Judge John G. Koeltl in Manhattan threw out the lawsuit Richard Johnson filed against Stanfield on a technicality. Johnson filed the suit shortly after Stanfield eliminated his position in its business development area in March 2006.

In June of that year, Johnson joined Citigroup Alternative Investments as the new head of U.S. institutional sales. Sources said Johnson held the title prior to being caught up in a wave of Citigroup's layoffs a few months ago.

Johnson's attorney Todd Gutfleisch, with the law firm of Wechsler & Cohen in New York, did not return calls. Johnson could not be located for comment.

Both Johnson and at least one of Stanfield's principals resided in Connecticut, so his lawsuit against Stanfield had no legal standing in a federal court handling opposing parties that reside across state lines, Koeltl found.

Stanfield's legal representative Kenneth J. Kelly, with the law firm of Epstein Becker & Green, said Koeltl did not buy Johnson's argument that Stanfield principal Stephen Mark Alfieri had actually lived in a New York apartment where he stayed during the work week. Alfieri was not named as a party in the litigation.

Both Johnson and Stanfield have agreed to move the case to New York state court, where it will likely take at least a year to be assigned a judge, Kelly said. "We're not too happy. My client wants this case over," he said.

Stanfield had filed a motion to dismiss the federal lawsuit. Johnson claims he was stiffed on compensation after having originated $1.2 billion in new investments during his four-year tenure at the fund.

Turnaround specialist Alvarez & Marsal announced on April 29 the hiring of two managing directors: William Fox for the commercial restructuring practice in New York, and Daniel L. Galante for the transaction advisory group in Chicago.

Fox has more than 30 years of senior executive and financial management experience with several companies, including as chief financial officer for cosmetics giant Revlon. Fox last served as executive chairman of Nephros Inc., a medical device research and development company. His experience also includes the role of vice chairman of Barrington Capital, a group of small-cap value investment funds.

Fox will continue to specialize in turnaround and business performance improvement efforts for consumer products, retail, and global manufacturing companies.

Galante will lead the transaction advisory group along with four other managing directors based in New York and Chicago. Galante, who has focused on middle market companies, was formerly a senior managing director of FTI Consulting and a partner with the transaction advisory services practice of Ernst & Young.

The U.S. Bankruptcy Court in Delaware approved the bidding procedures last week for bankrupt auto glass replacement company Diamond Glass to sell substantially all of its assets at an auction scheduled for June 5.

Bidders will have the opportunity to best an offer of stalking horse bidder Guggenheim Corporate Funding, or its designee, which is credit bidding $47 million owed on pre-bankruptcy loans to the Kingston, Pa. company.

Guggenheim, a New York distressed fund, has the option of providing the court-approved bidder, if not itself or a designee, a loan of up to $25 million to support the purchase, according to the bankruptcy Judge Christopher Sontchi's order filed on April 25.

Guggenheim expects to continue Diamond's operations if it's the successful bidder.

Outside of the fund's debt, Diamond owes another $13.1 million to trade vendors.

U.S. Attorney Mary Beth Buchanan in Pittsburgh appears to have ruled out that Wachovia Bank was complicit in the fraud at defunct beverage maker Le-Nature's.

In her first public statement last week pertaining to her office's investigation into Le-Nature's, Buchanan placed all blame on the company's management for defrauding investors of what may have been more than $500 million.

A pending lawsuit against Wachovia accuses the bank of knowing of the fraud during the period it occurred from 2003 through 2006. Wachovia, as Le-Nature's main bank agent, is alleged to have kept quiet in order to hide its own exposure and to continue collecting fees from Le-Nature's.

The lawsuit was filed in U.S. District Court in New York in September by several fund managers seeking recovery on a $260 million loan that Wachovia syndicated in September of 2006. That was just a few months before creditors forced Le-Nature's to file involuntary bankruptcy.

However, Buchanan repeated what has been Wachovia's media defense to the allegations -- that the bank was also a victim.

Buchanan made her comments as part of an April 24 announcement of the guilty plea of Tammy Andreycak, Le-Nature's former director of accounting, on four counts of bank fraud, wire fraud, conspiracy and aiding and abetting in the preparation of false income tax returns. Andreycak is eligible for a maximum sentence of 58 years in prison and a fine of up to $1.75 million. She is scheduled to be sentenced in July.

"The phony financial data compiled by Andreycak was used by Le-Nature's management to defraud lenders, including Wachovia Bank and AIG Capital Equipment Finance," Buchanan's office said in its statement. "Between these two, losses amounted to approximately $305 million, for which Andreycak accepted responsibility in her guilty plea."

Buchanan said the investigation into Le-Nature's was continuing.

Robert S. Loigman is the legal representative of funds including Harbinger Capital Partners, Latigo Master Fund and BlackRock, who are suing Wachovia. He said that Buchanan's comments would not deter the litigation against Wachovia. Loigman, with the New York law firm of Quinn Emanuel Urquhart Oliver & Hedges, noted that Andreycak agreed to testify against other Le-Nature's officers. That could lead to inquiries of CEO Gregory Podlucky and perhaps others with more direct knowledge of Wachovia's involvement. Loigman said.

The implosion of the commercial paper and structured investment vehicle markets has put an asset manager of those products into bankruptcy court.

Ceres Capital Partners filed for Chapter 11 on April 18 in Manhattan with a prepackaged reorganization plan.

Bank of Montreal would obtain a 25% recovery on $31.2 million owed on a secured loan, under the plan. An affiliate of XL Reinsurance America would receive nothing on $13.6 million outstanding on subordinated notes. BMO would also put up $50,000 to pay a fraction of the more than $500,000 owed to unsecured creditors.

Ceres of New York used the BMO and XL financings it received in January of 2007 to finance its $61 million buyout of Stanfield Capital Partners, which had held a majority stake in the company. The buyout occurred prior to the CP and SIV liquidity crisis of summer 2007 that decimated Ceres' ability to issue new notes or collect management fees needed to service the new debt, managing director David Oston said in bankruptcy court filings.

The six-year-old company's vehicles sold notes and paper backed by a variety of structured products, but had no exposure to subprime mortgages, Oston said.

After making distributions of assets and reserves under the prepackaged plan, any remaining assets of the company would be sold to Ivy Square Ltd. for $50,000, Oston said.

Two former principals of bankrupt Axium International are required to face GoldenTree Asset Management and other creditors that they allegedly defrauded out of tens of millions of dollars.

Judge Sheri Bluebond of the U.S. Bankruptcy Court in Los Angeles ruled on April 21 that Axium's former chief executive John Visconti and former chief operating officer Ronald Garber must attend the first meeting of creditors to be held on May 13.

Bluebond ruled in favor of court-appointed Chapter 7 liquidation trustee Howard M. Ehrenberg who represents the creditors of the defunct employment staffing and payroll services firm.

Visconti and Garber had failed to persuade Bluebond that they should be allowed to avoid the meeting -- and by extension the questions to be directed at them by creditors -- under their Fifth Amendment rights against self-incrimination.

Visconti and Garber can still assert their rights against self-incrimination to decline to answer questions at the hearing, however, their legal representatives told Distressed Debt Alert.

GoldenTree is facing the loss of more than $75 million on a secured loan the New York fund provided to Axium in November of 2004.

Visconti and Garber are concerned that statements they make in the bankruptcy proceedings could be used against them in separate litigation GoldenTree filed against them in a state court in Los Angeles, and possibly in criminal proceedings. GoldenTree's lawsuit accuses the executives of evading taxes and diverting Axium's assets.

Ehrenberg said in recent court filings that Visconti and Garber had not advised him of any pending criminal investigations or proceedings. They are therefore not prevented from answering questions about the nature and extent of Axium's assets and liabilities, Ehrenberg said.

Ehrenberg sold Axium's staffing business and payroll business to two former competitors in February for a total of $15 million, a portion of which has been set aside for administrative expenses and for GoldenTree.

Visconti's attorney Jonathan B. Cole, with the law firm of Nemecek & Cole, denied the allegations against his client and declined further comment. Garber's attorney Ellyn S. Garofalo, with the law firm of Liner Yankelevitz Sunshine & Regenstreif, declined to comment.

Babson Capital Management of Springfield, Mass., said it acquired Murray Capital Management, a distressed focused asset manager.

Murray specializes in distressed debt, transitional and stressed high-yield, special-situation equities and private claims investing, Babson said in an April 22 statement. Murray, based in New York, was founded in 1995 by Marti P. Murray, its current president, portfolio manager and senior research analyst. Murray manages roughly $500 million in assets.

Marti Murray and her investment team will join Babson's New York office and continue pursuing a distressed-investment strategy. Babson will no longer use the Murray Capital Management name.

CIT Group said it priced offerings of $1 billion in common stock at $11 a share, and $500 million in convertible preferred stock.

The proceeds of the offerings are to be used for debt service, payments due on preferred stock and general corporate purposes, CIT said.

The common stock was offered at a 13.7% discount to where CIT shares closed on April 21. CIT's shares fell $1.99, or 15.6%, to $10.75 on April 22, following the offering.

The preferred stock is convertible into common stock at $12.65 a share. 

Facing a liquidity crisis due largely to subprime mortgage investments, CIT tapped a $7.3 billion line of credit in March to keep up operations through the end of the year. The company also recently announced plans to sell at least $4.6 billion in assets.

Troubled asset-based lender SageCrest is negotiating an agreement with Fortress Investment Group that would involve a quick sale of SageCrest's assets.

SageCrest and its asset management affiliate Windmill Management of Greenwich, Conn., are negotiating for a new $150 million loan facility that would refinance an existing loan held by Deutsche Bank, according to a March 25 letter from SageCrest to its investors. The Distressed Debt Alert obtained a copy of the letter.

People familiar with the negotiations identified Fortress as the prospective new lender.

Under terms of the proposed refinancing, SageCrest would effectively be required to sell its assets to pay off the new facility within 18 months, the letter states.

"The absence of financial covenants and the ability to defer payments of interest in effect gives us 18 months to sell assets in an orderly manner --hopefully under improved market conditions," the letter states. "Selling assets to generate liquidity remains the primary priority."

The two-year loan would charge interest at the greater of one-month LIBOR plus 10%, or 14%. The lender would also be paid an upfront fee representing 2% of the loan balance, the investor letter states.

Fortress spokeswoman Lilly Donahue declined to comment.

The refinancing is needed to reduce the risk that SageCrest will default on its existing facility with Deutsche Bank, the fund said in the letter. SageCrest said it is at risk of violating covenants relating to loan-to-collateral coverage and debt-service coverage.

"One of the most significant issues facing the SageCrest fund is the risk of default on our facilities with Deutsche Bank," the letter states.

SageCrest spokesman Richard Tauberman confirmed that an agreement was being negotiated with Fortress to deleverage Deutsche Bank's facilities, but declined to comment on specific details described in the investor letter.

SageCrest reportedly manages more than $600 million. The fund, which specializes in high-return novel assets and speculative real estate developments, is run by brothers Phillip and Alan Milton.

For more details about SageCrest's situation, read the April 22 issue of The Distressed Debt Report. 

The Wornick Co., a provider of instant food products to the U.S. military, received court approval for the disclosure statement of its bankruptcy reorganization plan. The plan, which is still subject to creditors' approval, would include an auction of the company on May 21.

Holders of $140.2 million in senior secured notes issued in June of 2004 would act as stalking horse bidder in the auction. DDJ Capital Management holds 85% of the notes. If the noteholders group is not the winning bidder, the buyer would be obligated to pay the noteholders a minimum of $50 million from the sales proceeds.

The disclosure statement was approved April 10 by the U.S. Bankruptcy Court in Cincinnati.

DDJ also has the option of providing exit financing under the plan. The Waltham, Mass.-based firm rolled its secured loans to Wornick into a debtor-in-possession facility shortly after the company filed for bankruptcy in February. Wornick now owes $35 million on the secured facility, the reorganization plan states. If the noteholders including DDJ are not the successful bidders, the buyer would be required to pay DDJ Capital in full and in cash to satisfy the debt.

The reorganization plan leaves nothing for holders of $38 million in unsecured notes issued in February 2005.