School Specialty disclosure statement hearing delayed amid objections

By Jim Witters

Wilmington, Del., April 22 - School Specialty, Inc.'s hearing for approval of its disclosure statement was delayed April 22 after four parties objected to the statement itself and to the lack of time provided to review substantial changes made to the company's plan of reorganization on April 19.

Debtors attorney Jeffrey D. Saferstein told the U.S. Bankruptcy Court for the District of Delaware that he worked with the informal group of consenting noteholders and the official committee of unsecured creditors through the weekend, reaching a deal in principal.

That deal includes increases in recoveries for general unsecured creditors (to 20% from 10%) and for trade creditors (to 45% from 20%).

However, objections from an informal group of objecting noteholders, the creditors committee, American Art Clay Co., Inc. and the U.S. Trustee's office derailed the scheduled disclosure statement hearing.

The objecting noteholders include Varana Capital Master, LP, Singer Children Management Trust and Koyote Trading, LLC.

The objections, and any resulting delay in the case, could cause School Specialty to begin missing deadlines associated with its debtor-in-possession financing, Saferstein said.

The deadline for approval of the disclosure statement is April 23.

Juliet Sarkessian, representing the trustee, said the April 19 filing of amended documents with a "radically changed treatment of creditors" left parties with less than one business day to review them.

The May 9 DIP deadline for creditor voting and for objections to the proposed Chapter 11 plan also is "extremely short," she said.

"Creditors who have not been involved in these negotiations should not bear the burden of the DIP milestones because negotiations with the noteholders took longer than expected," Sarkessian told the court.

Judge Kevin J. Carey said he agreed with the trustee.

He favored a delay for the disclosure statement hearing and a one-week delay of the plan confirmation hearing.

Scheduling changes

After a four-hour recess in the hearing, Saferstein told the judge the debtors are "very close to a deal" with the creditors committee, the consenting noteholders and the objecting noteholders.

He suggested the filing of a revised disclosure statement on April 23 and the scheduling of a hearing to approve the revised statement on April 24.

Saferstein also suggested moving the plan confirmation hearing to May 16 from May 13. The later date still falls within the milestones embedded in the DIP order.

But Sarkessian said the new plan "compounds the problems" she outlined in her original objection.

Creditors who are not involved in the negotiations will not have access to the revised disclosure statement until late in the day on April 23, leaving no time to review and object before the April 24 hearing.

Judge Carey said the DIP milestones are pressuring the parties in the case and the court.

"There comes a time when you have pushed the court too far," he told Saferstein.

Carey said he preferred an April 29 disclosure statement hearing and a May 20 plan confirmation hearing.

After a short break to allow the debtors to discuss the changes with their DIP lenders, Saferstein told the court he preferred a hearing on the disclosure statement on April 24, and the lenders would consent to the May 20 confirmation date.

Carey agreed to that schedule, but said that objections to the disclosure statement may be made at the May 20 hearing.

Noteholder objections

In addition to the compressed time to consider the plan changes, the objecting noteholders also oppose the company's plan to abandon an asset sale and reorganize as a going concern.

School Specialty had been pursuing a dual track during bankruptcy.

The new proposed plan would turn over 95% of the company to the DIP lenders, the objecting noteholders say.

The plan modifies the DIP facility to allow the DIP lenders to "effectively foreclose on all the debtors' assets without even holding a foreclosure auction that allows the borrower to repay the loan," according to the filing.

Under the proposed amended plan, the DIP lenders would receive $103 million of their $155 million loan back on the plan effective date and "perhaps as much as an additional $25 million depending on the outcome of the make-whole litigation with Bayside (Finance LLC)."

The net exposure of the DIP lenders could be as little as $27 million, "for which they are to receive 95% of the equity ownership of the reorganized debtors," according to court documents.

"The debtors now propose a private sale to the ad hoc DIP lenders without an auction, without disclosing what the ad hoc DIP lenders are giving management to go along and without allowing the objecting noteholders and others similarly situated to participate in the acquisition by purchasing interests in the DIP loan or refinancing it," the filing states.

The noteholders also object to the classifications of creditors under the amended plan.

Amended plan

Under the amended plan,

• All asset-based debtor-in-possession financing claims, Bayside Capital, Inc. DIP financing claims, administrative claims, priority tax claims, other priority claims, pre-bankruptcy ABL facility claims, pre-bankruptcy term loan claims and other secured claims will be paid in full in cash;

• Holders of ad hoc DIP loan claims will receive $103 million in cash and 95% of the equity in the reorganized company;

• Holders of noteholder unsecured claims will receive 5% of the equity in the reorganized company;

• General unsecured creditors who do not make a convenience election will receive a delayed cash payment equal to 10% of their claim with 5% paid-in-kind interest. The payment will be made six months after the maturity of the company's exit facility;

• Holders of convenience claims of $3,000 or less will recover 5% in cash; and

• No distribution will be made on account of equity interests.

Original plan

Under the previous plan,

• All asset-based DIP financing claims, Bayside Capital DIP financing claims, administrative claims, priority claims and pre-bankruptcy secured claims would have been paid in full in cash;

• The informal steering committee of convertible noteholders was slated to receive cash and equity in the reorganized debtors in satisfaction of their DIP facility claims;

• Holders of general unsecured claims and holders of noteholder unsecured claims were to receive equity in the reorganized company;

• If School Specialty elected to complete a sale in lieu of reorganizing, all or substantially all of its assets would have been sold to a third-party purchaser.

In that circumstance, the informal steering committee of convertible noteholders as DIP lenders, the holders of general unsecured claims and holders of noteholder unsecured claims would have received cash proceeds from the sale in lieu of equity; and

• Holders of equity interests in School Specialty were slated to receive no distribution.

School Specialty, a Greenville, Wis.-based education company, filed for bankruptcy on Jan. 28. The Chapter 11 case number is 13-10125.

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