Propex creditors committee looks to investigate 'clandestine' DIP loan amendment

By Caroline Salls

Pittsburgh, July 22 - Propex Inc.'s official committee of unsecured creditors requested court approval to examine the company, its debtor-in-possession lenders and its pre-bankruptcy secured lenders after a DIP facility amendment was drafted without notice to the committee, according to a Monday filing with the U.S. Bankruptcy Court for the Eastern District of Tennessee.

According to the motion, Propex's final DIP financing order grants the DIP lenders a lien on only two-thirds of the stock of the company's foreign subsidiaries, unless the underlying DIP loan documents specifically say otherwise.

In compliance with the DIP financing order, the committee said the DIP security agreement specifically provides for only two-thirds of the company's foreign stock as being pledged.

However, the committee said the DIP credit agreement contains a covenant that requires Propex to try to enter into foreign pledge agreements under which all of the foreign stock will be eventually pledged to the DIP lenders.

The committee said the DIP loan parties amended the DIP security agreement more than two months after the final DIP facility approval order was entered, in direct violation of the final order.

The amendment pledged the unencumbered remaining one-third of the foreign stock.

In addition, the committee said it was not given the five business days' written notice of the amendment that is required under the DIP agreement.

"The DIP parties appear to have entered into this amendment for no other reason than impermissibly to improve the collateral package held by the debtors' pre-petition secured lenders - not to improve the collateral package of the DIP lenders," the committee said in the motion.

"The committee believes that the amendment was expressly designed to give the pre-petition secured lenders tens of millions of dollars of additional collateral - i.e., the value of the unencumbered remaining one-third of foreign stock - and wipe out what is possibly the most substantial source of recovery for unsecured creditors in these cases."

The committee said it wants to investigate the circumstances, negotiations and drafting of the DIP financing order, the DIP loan documents "and the clandestine putative amendment."

A hearing is scheduled for Aug. 20.

Propex is a Chattanooga, Tenn., producer of primary and secondary carpet backing. It filed for bankruptcy on Jan. 18, 2008, and its Chapter 11 case number is 08-10249.

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