(Bloomberg) -- A fight between lenders of American Tire Distributors Inc. over bankruptcy financing is threatening to derail the company’s path to emerge from Chapter 11.
The current debtor-in-possession financing plan could risk a lawsuit down the road, Judge Craig T. Goldblatt told lenders at a Tuesday hearing in Delaware.
“What will happen if I approve this, is that the minority lenders will sue and they will win and they will be entitled to the damage,” Judge Goldblatt said, referring to the DIP plan.
ATD, an automotive parts distributor, filed for bankruptcy in October. A small group of lenders filed an objection to its financing plan last week.
The dissenting group consists of Oaktree Capital Management LP, AllianceBernstein Holding LP, PenderFund Capital Management Ltd., among others, according to court documents filed Monday.
It’s the second time since 2018 that the company has filed for bankruptcy. At the time, the company was taken over by bondholders, while stakes of former controlling shareholders TPG Capital and Ares Management Corp. shrunk to less than 5%.
The crux of the dissenting creditors’ issue was that some lenders, holding the same loan as the DIP lenders, were excluded from participating the debtor-in-possession financing, according to court papers and letters. The exclusion would constitute a breach of loan agreement, the lender group said, an argument that Judge Goldblatt said he “inclined to believe” at the hearing.
Part of the existing plan is designed as a roll-up, a practice that moves existing debt to the front of the repayment line in lockstep with new money. That would move about $1.1 billion of debt ahead of their ranking of getting repaid and “devastate” their recoveries, the opposing group said in another filing.
In an earlier filing, the major group of lenders said the opposing group “want to benefit from all the hard work the ad-hoc group has done” and there is no alternative option if the current financing plan got rejected.
The judge didn’t make a decision on Tuesday. After receiving comments, a lawyer representing the major group of lenders said he would hold a call to discuss with his clients. The hearing is set to continue on Thursday.
The case is American Tire Distributors Inc, 24-12391, in the United States Bankruptcy Court for the District of Delaware.
(Updates to clarify ATD’s ownership between fourth and six paragraphs.)
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