Retail bondholder in Texas bankruptcy objects to majority holder-backed DIP financing

A retail bondholder Wednesday filed an objection to a debtor-in-possession financing offered by institutional holders in a Texas-based metals recycler’s bankruptcy, arguing the financing package shuts out and unfairly subordinates smaller investors.

The objection, filed as an emergency motion, came too late to be taken up by the court, which granted final approval to the DIP package on Tuesday.

Meanwhile, it’s possible that the institutional bondholders, which are acting as the stalking horse bidder for a sale, may end up as owners of the distressed entities, the debtors’ attorney said at a court hearing Wednesday.

The bondholder versus bondholder drama is tied to Aleon Metals, LLC and its two subsidiaries, Aleon Renewable Metals, or ARM, and Gladieux Metals Recycling, or GMR, which filed Chapter 11 in the U.S. Bankruptcy Court for the Southern District of Texas on Aug. 17. 

The companies have $293.6 million of revenue bonds outstanding. A group of institutional bondholders including Invesco, Pimco and Capital Research and Management, have floated a $62.5 million DIP financing that elevates $125 million of their bond debt to a super-priority status and gives them control of the sale process.

Stephen McMullin, who manages Fulcrum Point Capital, which holds about $250,000 of the Gladieux senior secured bonds, filed an emergency objection Wednesday, a day after Judge Christopher Lopez stamped his final approval on the DIP financing.

McMullin asked the court to delay or modify the DIP approval “to allow equal participation by all similarly situated bondholders and “smaller investors like myself.”

McMullin said he and other retail holders were not given the option to participate in the DIP financing.

“Retail bondholders and other non-insiders were never offered the opportunity to participate on these terms, despite being part of the same class of creditors. This is fundamentally unfair,” he wrote. He accused the DIP financing of functioning as a “sub rosa plan,” or a “backdoor reorganization that reallocates estate value to certain creditors without a confirmed plan or creditor vote.”

If the financing and restructuring is allowed, “it could become a dangerous new model where small investors are left out of critical financial decisions,” McMullin said.

The law firm of Arnold & Porter, which represents the majority holders and bond trustee UMB Bank NA, did not return calls for comment.

Meanwhile, the sale process has been delayed by a week to give investment banker Jefferies more time to market the companies, Andrew Kissner, with debtors’ counsel Morrison & Foerster, told the judge Wednesday. The bid deadline is now Sept. 29.

“We have now reached out to over 100 parties, and had detailed calls between the banker and 45 of those parties with at least five site visits from interested bidders,” Kissner said.

While saying that there appears to be “real interest in the market in these assets,” Kissner said the “reality of the debtor’s capital structure” and need for capital investments make it “a very real possibility that this third-party interest doesn’t materialize or bear concrete fruit” until the bankruptcy is over.

“We believe the likely outcome is we will be proceeding with the stalking horse,” Kissner said. “But there’s 10 more days in the bid deadline and we’re going to all continue to try to work that process.”

The companies recycle spent catalysts used in petroleum refining. Among other problems, the parties are trying to figure out how to handle hundreds of tons of hazardous materials that are sitting on the Gulf Coast and being closely watched by Texas environmental regulators.

Norton Rose Fulbright is co-counsel to the debtors. Ankura Consulting Group is restructuring advisor.

Kathie O’Donnell contributed to this story.