Creditors filed an objection to the debtors' recent request to access up to $10 million in debtor-in-possession (DIP) financing. They argued that the terms of the deal reflect too much high-risk [image-nocss] borrowing. In a preliminary objection filed Monday in the U.S. Bankruptcy Court for the District of Delaware, the unsecured creditors committee said that the loan, which the debtors claim will facilitate the company's sale of the winter mix fuel that must be unloaded by April, should not be approved because its terms are not in the best interest of Flying J's unsecured creditors and estate, said a report by Law360.
As reported in CSP Daily New, Ogden, Utah-based Flying J filed for Chapter 11 bankruptcy relief on Dec. 22, 2008. The filing would allow the truckstop chain company to address near-term liquidity needs brought about by the precipitous decline in oil prices coupled with the disruption in the credit markets.
The debtors of Flying J Inc. filed a motion February 18 with the Bankruptcy Court seeking financing for Flying J so that its affiliated debtor, Longhorn Pipeline Inc. could ensure the flow of the product through the pipeline before the end of the season. If the debtors were not granted access to the DIP funds, they will lose the ability to sell the product, the motion said. The documents said that at current prices, the sale could generate $9 million in profit. The debtors added that such financing would keep the pipeline operating and would avoid costs associated with shutting it down, increasing its value should Flying J seek to sell it, Law360 added.
But the creditors committee argued that the proposed terms of the financing are unreasonable, said the report, and that it has requested modifications to the DIP loan and proposed use of cash collateral that it believes are necessary to protect the interests of creditors. Specifically, the committee claimed that the product "swap" proposed by the debtors to push the winter mix out of LPI's pipeline and replace it with "summer mix" involves significant commodities market risk to Flying J.
In addition, the committee said that the primary beneficiaries of the transaction are the Merrill Lynch prepetition lenders, which are affiliates of Merrill Lynch Commodities, because the swap preserves the value of their collateral and reduces the risk associated with holding a seasonal product, the report said.
"ML Commodities is only financing the transaction at 50% loan to value, and is receiving interest and fees that provide it a rate of return of more than 36%," the committee said in the objection.
Further, the committee argues, the estimated $9 million profit that the debtors claim could be generated from the deal is "grossly overstated." Even after the debtors revised that projection to a conservative estimate of $1.4 million, the committee still believes the figure is too high.
The committee said it would support the transaction in order to protect the equity in the pipeline product, or linefill, which will ultimately benefit the Flying J creditors, "only if very stringent risk management measures are put in place to limit the transaction risk."
Even with modifications to internal measures that Flying J has agreed to implement to manage the deal's inherent risk, the committee argued that the proposed terms of the financing, which include the "draconian remedy" of granting the prepetition lenders automatic relief from stay to foreclose on the linefill if its market value falls below $55 million for five consecutive days, are unacceptable, said the report.
Also, the committee claimed that Merrill Lynch's proposed "success" fee for the DIP loan of $50,000 plus 20% of Flying J's profits from the sale of the pushed product is "onerous and offensive under the context of this DIP loan."
Flying J operates more than 240 retail locations, including travel plazas, convenience stores, restaurants, motels and truck service centers in 41 states and six Canadian provinces. In addition to the usual truckstop services such as food, diesel and gasoline and showers, the company offers banking, bulk fuel programs, communications (WiFi) fuel cost analysis insurance and truck fleet sales. It also explores for, refines and transports petroleum products.Click herefor previous CSP Daily News coverage.
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