Musicland unsecured creditors, secured trade creditors object to DIP

By Caroline Salls

Pittsburgh, Feb. 2 - Musicland Holdings Corp.'s official committee of unsecured creditors and informal committee of secured trade creditors objected to the company's debtor-in-possession financing request, according to Wednesday filings with the U.S. Bankruptcy Court for the Southern District of New York.

According to the unsecured creditors' objection, the company is "offering up a proposed DIP loan which eviscerates almost all of the protections provided to a debtor in possession by the bankruptcy code, in favor of a financing which is both unnecessary and overreaching."

The committee said the DIP gives lenders and the secured trade creditors, "who stand to once again elevate their position at the expense of unsecured creditors under the terms of the DIP loan," so much control over the case that the company "may just as well turn the keys over to the DIP lenders and secured trade vendors."

In addition, the committee said Musicland has agreed to a significantly large rollup that carries excessive real fees; has overreaching control provisions; includes a mandated liquidation, a waiver, a lien on avoidance actions and a $25 million "gift card reserve" and grants additional and expansive adequate protection liens to the secured trade creditors.

The unsecured creditors said a cash collateral facility should be ordered, without the onerous DIP terms.

The secured trade creditors said their objection is based on the contention that the estates may potentially have claims against the lenders, which should be reviewed and investigated.

The trade creditors also objected to the DIP's proposed blanket lender release, an attempt to keep the trade creditors from bringing actions, which they said would not burden the estate and may enhance recovery prospects.

A DIP approval hearing is scheduled for Feb. 7.

Musicland, a Minnetonka, Minn., specialty retailer of pre-recorded entertainment software products, filed for bankruptcy on Jan. 12. Its Chapter 11 case number is 06-10064.

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