BoNY, the indenture trustee for $713.8 million in notes issued by Palco affiliate Scotia Pacific Co., filed notice with the U.S. Bankruptcy Court for the Southern District of Texas that it has arranged a $10 million debtor-in-possession loan from Lehman Commercial Paper Inc. for Scopac. The bank, which proposes to sell the 210,000 acres of California timberlands owned by Scopac, said the financing would fund Scopac's operations during the "presale period" contemplated in its plan.
What's interesting is that it was BoNY that successfully blocked a proposed emergency $51.21 million DIP from Bank of America NA just weeks before confirmation hearings initially began on April 8. In objecting to the DIP, BoNY questioned the need to add so much super-priority administrative expense to the debtor's estate during the final leg of the bankruptcy, calling the request a "blatant abuse of the bankruptcy code."
Ultimately, Scopac withdrew its request for the DIP and instead agreed to fund the remainder of its case with about $11.9 million from a scheduled amortization reserve, or SAR, account, which was collateral for the notes issued by Scopac.
At the time, BoNY's lawyer, Toby Gerber of Fulbright & Jaworski LLP, told The Deal that the funds in the SAR account were "more than enough" to fund the debtor's operations for the remainder of the bankruptcy.
So what happened? Well, according to documents filed by BofA, "a liquidity issue became evident" because the SAR account is "comprised primarily of Auction Rate Securities." As banks who routinely backstop these auctions hoard their capital amid the credit crunch, the securities sold become essentially illiquid when investors decline to bid for them.
It appears Scopac itself became victim of this well-publicized market breakdown. As a result, BoNY is now trying to line up the very financing it only weeks ago argued that the company didn't need. Whether Scopac will need it or not depends on which plan -- BoNY's or Marathon Structured Finance Fund LP's -- is ultimately confirmed. - John Blakeley
