Judging a Book-Cover Maker by Its Insiders

A proposed debtor-in-possession lender is acting unfairly by serving in a dual role at ICG/Holliston Mills, a creditors petition says.
Stephen TaubJune 19, 2007

Unsecured creditors of ICG/Holliston Mills Inc. filed objections to its debtor-in-possession (DIP) financing terms, claiming that insiders have ties to the lender and thus create a conflict of interest, according to the Associated Press.

Privately-held ICG/Holliston Mills Inc., the nation’s leading maker of cloth book covers, filed in May for bankruptcy protection, listing assets of $28 million and debts of $27.5 million, according to AP. Holliston Mills and ICG (Industrial Coatings Group), founded as separate companies in the late 1800s, merged in 1998 to become ICG/Holliston.

The creditors said that Agarista ICG Lending LLC, the company’s proposed DIP lender, also was serving as a “stalking-horse bidder” for the company’s auction in July — putting up an initial bid in an arrangement with the seller that gives the bidder incentives, but is mainly designed to allow another party to step up and participate in an auction or negotiate a deal. Agarista is an affiliate of buyout firm Chrysalis Capital Partners LP

Disputes over DIP financing arrangements are common. But such battles have been relatively rare of late, given the historically low level of defaults.

Creditors in this case objected that some of ICG/Holliston’s top executives have personal interests in Agarista ICG Lending, according to AP. For example, ICG/Holliston chief executive Lawrence Maston was said to have made a $100,000 investment in Agarista on about May 14.

Under the DIP loan, ICG/Holliston would receive up to $2 million in new financing. However, the arrangement provided for the company to sell its assets to Agarista quickly, without an open sales process, the creditors said, calling the $11.5-million credit-based
arrangement with Agarista a “quick, inexpensive sale to itself,” according to AP.

“These motions appear to be a thinly disguised effort by Agarista, acting as the prepetition secured lender and seller, to convey substantially all of the debtor’s assets in exchange for an apparently low noncash credit bid,” the creditors committee said in its court filing, said AP. The creditors added that the company still has not disclosed what type of recovery it expects after the company pays off its DIP loan.

“The debtors motion provides no indication if, and to what extent, general unsecured creditors may receive a distribution at the conclusion of this case,” the committee said in court documents, according to the report.