SmileDirectClub’s DIP loan draws objection from creditors committee

By Sarah Lizee

Olympia, Wash., Nov. 3 – SmileDirectClub Inc.’s proposed $80 million debtor-in-possession financing package drew an objection from the official committee of unsecured creditors on Thursday, according to documents filed with the U.S. Bankruptcy Court for the Southern District of Texas.

“While the committee does not contest the need for financing to run these cases and operate the debtors’ business, the DIP facility must not come at the undue expense of general unsecured creditors,” the committee said in the objection.

“As currently proposed, the terms of the DIP facility fail to strike the appropriate balance of maximizing value and preserving the rights and protections typically afforded to unsecured creditors.”

The group said the terms of the DIP facility are “designed to impede” an appropriate investigation into any potential wrongdoing by the debtors’ insiders, some of whom are also acting as DIP lenders.

The committee also said the facility doesn’t permit the debtors to run an appropriate sale or restructuring process because the founders will obtain the right to credit bid their DIP loans, which will include $5 million of purportedly secured claims that would ordinately be subject to challenge.

The founders have also negotiated the right to withhold the additional $30 million in financing that could be made available under the DIP facility if they determine that a bid is not acceptable for any reason.

“The DIP facility thus establishes the potential for a scenario where the founders could submit a credit-bid to buy back the debtors’ assets (including claims against themselves) and refuse to fund the remaining draw under the DIP facility to consummate any other transaction, even one that promises to satisfy the DIP facility in full,” the committee said.

Cluster Holdco LLC is administrative agent and collateral agent for the DIP lenders.

SmileDirectClub is a Nashville-based oral care company. It filed bankruptcy on Sept. 29 under Chapter 11 case number 23-90786.

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