U.S. Bankruptcy Court Judge Robert Drain denied a motion by two shareholders of bankrupt RCN Corp. — including the investment vehicle of Charter Communications Inc. chairman Paul Allen — that would have blocked a planned $460 million exit facility for the overbuilder, and set the stage for a possible sale.
Wells Fargo & Co. and Vulcan Ventures Inc. (the Allen investment vehicle) filed their objection in U.S. Bankruptcy Court for the Southern District of New York on June 18.
The exit financing could be costly to creditors and makes a sale of the company impossible, they claim in the filing.
Wells Fargo and Vulcan each own a considerable amount of preferred shares in RCN. Vulcan, which invested about $1.6 billion in RCN in 2000, unloaded a portion of its holdings in the overbuilder in December 2003 at a substantial loss.
Wells Fargo bought 251,332 shares of RCN's preferred stock from Vulcan in December 2003 as part of a deal in which Vulcan (which still owns 1.2 million RCN preferred shares) sold 11.4 million shares of RCN common stock on the open market. The two deals brought in about $2 million to Vulcan.
In the June 18 filing, Wells Fargo and Vulcan state that RCN seeks approval of the exit facility, led by Deutsche Bank AG, prior to submitting a reorganization plan.
Because of the penalties the loan agreement would incur if the deal does not go through — at least $14 million, according to Wells Fargo and Vulcan — the parties said it would be highly prejudicial to approve the exit facility.
“This is especially true where there are parties for whom a potential sale of the company or a valuation dispute might result in recoveries substantially higher than those provided for in the outline plan,” Wells Fargo and Vulcan stated in the filing.
In his four-page order dated June 22, Drain denied the objection, ruling that the exit facility should go through as planned because it is RCN's best interests.
According to RCN's outline plan, filed in conjunction with its Chapter 11 petition on May 27, the company would pay its secured creditors in full in cash and offer stock in the newly reorganized company to unsecured creditors. Existing RCN shareholders would receive warrants exercisable into 2% of the new company's shares.
RCN said it expects to emerge from bankruptcy in the fourth quarter and its bondholders appear to be on-board for the plan.
In its response, RCN called objections to the financing plan a matter of sour grapes for Wells Fargo.
According to RCN, Wells Fargo was one of four companies in line to participate in the exit financing facility, but was rejected by the overbuilder.
“Wells Fargo's opposition to the new senior exit financing is motivated by nothing other than its own parochial agenda and self interests and, for that reason … should be given little, if any, weight,” RCN wrote in its reply.