Standard General asked the bankruptcy court overseeing the Chapter 11 proceedings of RadioShack to deny the official unsecured creditors’ committee in the case of the power to conduct Rule 2004 discovery against it, saying it has already provided thousands of pages of documents to the panel and is willing to discuss the scope of the panel’s additional information requests.
In its Rule 2004 motion filed last week, the committee sought court permission to require Standard General, among others, including RadioShack officials, to produce documents and testify at depositions. A hearing on the panel’s motion is set for March 4 (see “RadioShack cred panel seeks to probe Standard General transactions,” LCD, Feb. 18, 2015).
But beyond its willingness to talk with the panel about providing information, Standard General said in a Feb. 23 response to the committee’s motion that it “objects to the committee’s blatant misuse of the Rule 2004 process as a vehicle for its baseless accusations” against it, adding that it would use its response “to correct the record and clarify the facts.”
As reported, in October 2014, Standard General, along with fellow shareholder LiteSpeed and certain other “participating investors,” acquired the company’s then outstanding credit agreement loans under a $535 million asset-backed revolver from GE Capital pursuant to a loan sale agreement. Among other things, that transaction converted certain outstanding revolving loans into term debt, while also increasing the company’s borrowing capacity, ostensibly to allow it to acquire inventory for the upcoming holiday season (see “RadioShack bonds surge on report of financing agreement,” LCD, Oct. 3, 2014).
As also reported, in seeking court authority to, among other things, investigate the October 2014 transaction to determine whether it is potentially avoidable as a fraudulent conveyance, the unsecured creditors’ committee alleged the deal may have been specifically undertaken, in part, to delay the company’s default and Chapter 11 filing until after the fourth quarter of 2014, in order to protect certain participating investors in the transaction that may have sold CDS protection on the company betting it would not default before Dec. 20, 2014.
At the same time, the transaction also allegedly served to position Standard General at the top of the company’s credit structure to pave the way for its acquisition of certain of the company’s stores (to be followed by a co-branding deal with Sprint in the acquired stores) via a credit bid.
The committee cited, among other things, the fact that the transaction, purportedly an effort to help the company, also set certain deadlines to occur early this year that would have required the company to refinance its debt, which was extremely unlikely given the company’s financial condition and which the company was ultimately unable to accomplish, leading to its Chapter 11 filing on Feb. 5.
In its response to the committee’s motion, however, Standard General, described itself as “an investment firm that specializes in investing in and turning around highly levered companies facing challenges,” said it viewed RadioShack as “a perfect candidate for such a turnaround.”
As a result, Standard General said, in August 2013 and May 2014 it acquired both common shares and call options that gave it “a meaningful position in the equity of the company,” and it also established a credit position between July 2013 and June 2014 comprised of unsecured bonds hedged in part with credit default swaps.
Standard General said it continues to hold these positions, and that its “incentives have always been aligned with the other equityholders and bondholders.”
Standard General said there has never been a scenario under which it would benefit “from any outcome detrimental to the company, much less a bankruptcy filing,” and added that its decision to become a secured lender through the October 2014 transaction was ground in its “longstanding [belief] in RadioShack’s potential,” and its desire “to support the management team’s turnaround plan.”
Standard General asserts that the October 2014 deal, which increased the company’s liquidity by $140 million, enabled RadioShack to obtain inventory for the holiday season and “essentially meet its revenue forecasts for the fourth quarter in the retail portion of its business.”
Standard General further denied that it ever traded in the company’s security with inside information, and that contrary to the committee’s assertions that it benefitted from the company’s Chapter 11 filing, said “it was deeply disappointed that the company had to file for bankruptcy protection, and as a result it has suffered losses in its positions in the company.”
Lastly, Standard General characterized the panel’s allegation that the October 2014 deal delayed the company’s financial reckoning to 2014 to placate lenders that had also written CDS protection on the company as “conspiracy theories,” and called them “a red herring and completely misplaced.” – Alan Zimmerman