By Dow Jones Business News, October 24, 2013, 02:05:00 PM EDT
By Stephanie Gleason
Lenders including BlackRock, KKR & Co. and Oaktree Capital Management are suing Cengage Learning Inc., claiming the
textbook publisher wrongly funneled away $430 million of the lenders' cash prior to filing for bankruptcy.
Cengage "orchestrated a scheme to mislead those lenders" into funding the credit facility draw when it was already
insolvent, the lenders said in a lawsuit filed with the U.S. Bankruptcy Court in Brooklyn, N.Y., Wednesday. The unused
portion of the draw, $273.9 million, has since been set aside to compensate unsecured creditors in the case, according
to court documents.
The lenders argue that it was Cengage's intention all along to use this money to pay unsecured creditors and that it's
unlawful for the company to act in the interest of one creditor group over another.
To back up this argument, the lawsuit quotes a transcript of the company's first court appearance on July 3 when
Cengage's lawyer said, "because we drew down on the revolver, the entire revolver, and because we didn't make it part of
the collateral package, we, in essence, created value for our unsecured creditors."
The lenders are asking the bankruptcy court to put the cash in a trust out of Cengage's reach.
A lawyer representing Cengage couldn't immediately comment Thursday. Cengage has filed its own lawsuit in the Chapter
11 case to protect its right to grant this cash to unsecured creditors.
In addition to the cash, Cengage has identified two other potential sources of recovery for unsecured creditors, owed
$514.1 million. Those assets include 15,750 copyrights--representing the intellectual property of thousands of
individual textbooks published by Cengage--and a 35% equity stake in its foreign subsidiaries. Second-lien lenders are
also slated to share in that recovery.
The lenders, however, claim the copyrights weren't properly disclosed to them, in violation of their agreement with
The lenders--KKR, Oaktree, BlackRock, Searchlight Capital Partners, Oak Hill Advisors LP, Franklin Mutual Advisors LLC
and Deutsche Bank Trust Co. Americas.--together hold Cengage first-lien loans worth $3.9 billion.
Cengage, based in Stamford, Conn., filed for Chapter 11 protection in July after negotiating a restructuring deal with
the first-lien lenders that would eliminate more than $4 billion in debt from its balance sheet by handing them 100%
equity in the restructured Cengage. They'd also get a new note worth $1.5 billion. Unsecured creditors haven't agreed to
the restructuring proposal.
Cengage is in mediation with the lenders and unsecured creditors, under the direction of U.S. Bankruptcy Judge Robert
D. Drain, designed to reach an agreement on a restructuring plan by early next year.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to
Write to Stephanie Gleason at firstname.lastname@example.org.
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