School Specialty wins battle for interim access to $25 million DIP

By Jim Witters

Wilmington, Del., Jan. 30 - School Specialty, Inc. won the battle for interim access to $25 million in debtor-in-possession financing through Bayside Finance LLC, but an informal steering committee of convertible noteholders promised to continue fighting against what they view as Bayside control over the debtors' bankruptcy case.

Judge Kevin J. Carey overruled five objections from the noteholders in granting interim approval of the DIP facility during a Jan. 30 hearing in the U.S. Bankruptcy Court for the District of Delaware.

But the judge told all parties they should continue negotiations on bidding procedures, the asset sale process and a Chapter 11 plan as the case moves forward.

The DIP approval includes interim approval of a $175 million revolving asset-based loan through Wells Fargo Capital Finance, LLC and General Electric Capital Corp.

The company, which had $20,000 to $25,000 in its bank accounts as the hearing began, needs the funding to build up inventory before the peak shipping season begins in May.

DIP changes

As Carey prepared for a break in the hearing, he told the parties he was unprepared to approve financing that included the fees, a make-whole provision, rollup provisions and increased interest rates that the proposed Bayside DIP contained.

At the same time, he said, he was unlikely to approve any financing on the first day of a case that was tied to the outcome of a Chapter 11 plan.

A $50 million DIP facility proposed by the steering committee of convertible noteholders was contingent upon confirmation of a plan that would convert the notes into equity, resulting in the noteholders owning the company.

After an afternoon of negotiation, the parties returned to court offering compromises from Bayside.

But noteholders attorney Carmen H. Lonstein said her clients would not drop its objections, because the DIP still contained a requirement that the company be sold within 56 days.

In the interim order that Carey said he would sign Jan. 31, Bayside and the debtors eliminated the $95 million rollup, waived a 3% termination fee in its term loan and waived its $2.85 million breakup fee tied to its stalking-horse bid for the debtors' assets.

Bayside attorney Michael S. Stamer said the make-whole provision was triggered by the debtors' pre-petition default and is "completely valid." But, he said, it only becomes an issue if his client needs to use it as currency in a credit bid at auction.

Stamer said the interest rate for the DIP loan is the same as the pre-petition default rate.

Moving forward

Debtors attorney Pauline K. Morgan told the court the company hopes to conduct an asset sale and emerge from bankruptcy through a post-sale plan of liquidation in the spring.

A final DIP hearing is scheduled for Feb. 25.

A hearing on bid procedures is scheduled for Feb. 11.

Under the proposed bid procedures:

• The bid deadline would be March 19;

• An auction, if needed, would be March 25; and

• A sale hearing would be March 27.

Bayside affiliate Bayside School Specialty, LLC has proposed a purchase price for the assets of $95 million plus cash equal to the amount outstanding under an asset-based credit agreement and assumption of specified liabilities.

Bayside would pay the $95 million portion of the purchase price in the form of a credit bid.

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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