Buffets bondholder group objects to proposed DIP financing terms

By Rebecca Melvin

New York, Jan. 23 - Certain holders of Buffets Holdings Inc.'s 12½% senior notes objected to Buffets' motion for approval of debtor-in-possession financing, according to a Wednesday filing with the U.S. Bankruptcy Court for the District of Delaware.

The proposed financing terms generously compensate the DIP lenders for the new funds and unreasonably enhance the rights of the pre-petition lenders at the expense of all unsecured creditors, the filing states.

The bondholders, who hold about $255 million of the senior notes, or 85% outstanding, asked the court to approve at the interim hearing only funds necessary to operate Buffets' business.

Buffets filed for Chapter 11 bankruptcy protection on Jan. 22 and is seeking approval of a $385 million DIP facility that it has secured from several financial institutions in its current bank group. Credit Suisse, Cayman Islands Branch, is the administrative agent.

The DIP facility includes $85 million of new funding to supplement $300 million carried over from the company's pre-bankruptcy credit facility.

Specifically, the bondholders pointed to five "troublesome" terms, saying that while they expect to seek to negotiate with Buffets and its lenders prior to the final DIP hearing, they may seek to propose alternate financing if a resolution can't be reached.

The terms to which the bondholders object are: the roll-up, which they say will roll-up nearly half of the bank debt, $300 million out of about $633 million outstanding, in exchange for the DIP term loan, of which a significant portion will be used to fund adequate protection payments to the prepetition lenders.

They assert that this is unreasonable and without justification since the prepetition lenders aren't providing any new financing and have already received an enhanced contract rate of interest.

They say the DIP financing improperly grants the prepetition and DIP lenders an interest rate of Libor plus 725 basis points, which is 400 bps above the prepetition lenders' interest rate on the revolving credit facility and 425 bps over the interest rate on the prepetition term loan facility.

By calculating the interest rate based on a minimum Libor of 400 bps, the prepetition lenders have locked in an interest rate of at least 11.25%, at a time when Libor is falling, the filing states.

The bondholders say that the court should only authorize adequate protection that is limited to replacement liens, payment of interest of the pre-forbearance agreement rate of Libor plus 300 bps, and payment of fees.

Also the DIP financing improperly provides the DIP lenders with super-priority claims on the proceeds of avoidance actions, which should be preserved for unsecured creditors, the filing states.

Additionally, the DIP financing mandates plan-related milestones, giving the prepetition and DIP lenders veto power over any eventual plan. The DIP facility requires that Buffets submit to the DIP lenders by June 1 a term sheet for a restructuring acceptable to the DIP lenders and use their best efforts to file a plan and disclosure statement by Aug. 15.

Furthermore, the DIP facility provides a carve-out of $400,000, which is insufficient for Buffets and the official committee professionals.

Finally the DIP facility allows the DIP lenders to maximize their interest return by forcing Buffets to draw down on the term loan irrespective of Buffets' cash needs. And it seeks to approve the retention agreement of the lenders' financial adviser, but the motion papers have failed to make the terms of that agreement public.

Buffets, a steak-buffet restaurant company based in Eagan, Minn., is the result of a November 2006 merger of Buffets with Ryan's Restaurant Group. For that merger, the companies borrowed $949 million by entering into a new $640 million credit agreement and issuing $300 million of senior notes, the filing states.

The credit agreement provided for a senior secured term loan of $530 million, with an interest rate of Libor plus 300 bps; a senior secured revolving credit facility of $40 million with an interest rate of Libor plus 325 bps; and a senior secured pre-funded synthetic letter-of-credit facility of up to $70 million.

Buffets' Chapter 11 case number is 08-10141.

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