Fraud Accusations, Noteholder Nix Claims Lobbed At LBI

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It’s been a very busy 48 hours in a Delaware federal bankruptcy court, which is reviewing a Chapter 11 restructuring petition filed on Nov. 21, 2018, by LBI Media.


Much like the ongoing matters involving the emergence from debtor-in-possession status of the nation’s No. 1 owner of radio stations, iHeartMedia, LBI Media — also known as Liberman Broadcasting — is engaged in a major tussle with a group of noteholders.

They say they’re owned millions, and this made made their views known to the court.


 

In the last 12 months, four Chapter 11 restructuring plans gained a perhaps unwanted spotlight by business publications and media industry trade journals eager to give a juicy story to leaders at these companies’ competitors, as well as nervous employees at the impacted radio broadcasting corporations.

One of these companies has been relatively quiet with respect to how things are progressing. That would be privately held, Burbank, Calif.-based Hispanic media operation LBI Media Inc., also known by the name Liberman Broadcasting.

In a textbook move by public relations professionals designed to bury bad news, LBI Media announced on a busy getaway day before the Thanksgiving Day holiday that it was filing for Chapter 11 bankruptcy protection. Since Nov. 21, nothing further has emerged regarding LBI’s plan.

Fast-forward to Tuesday, when a series of claims from a group of second-lien noteholders was lobbed at LBI Media in the Delaware court. In a 46-page document, the plaintiff group of noteholders filed a motion asking the judge overseeing LBI’s restructuring petition to “commence and prosecute” a series of claims it is bringing against the company.

Citing a long series of past cases to bolster its arguments, Paige Topper of Wilimington-based Morris, Nichols, Arsht & Tunnell — joined by attorneys from Boies Schiller Flexner — asserts that LBI engaged in the fraudulent transfer of at least $87 million to HPS Investment Partners. The firm is led by five principals: Scott Kapnick, Scot French, Michael Patterson, Purnima Puri and Faith Rosenfeld.

This, the Plaintiff Group of Noteholders claims, impaired the value of LBI. The group of noteholders possesses Second Lien Notes issued by LBI, which are due next year.

The noteholders point fingers specifically at President/CEO Lenard Liberman and co-founder Jose Liberman and COO Winter Horton.

Also noted in the filing: DLA Piper Partner Rocky Delgadillo, known for his eight years as Los Angeles City Attorney during the 2000s; “debt optimation” professional Peter Connoy, Managing Member of Entrepreneur Consulting Services (ECS); financier Neal Goldman; and the company’s directors.

In the eyes of the Second Lien Noteholders, HPS, Lenard Liberman and LBI directors conspired “to entrench Liberman and the director’s ownership and/or control of LBI” and “to fraudulently transfer all of the value” from the Second Lien Notes to HPS, “the only creditor willing to keep Liberman in power despite his central role in driving the company into financial ruin.”

Further, the Second Lien Noteholders claim Lenard Liberman and LBI directors orchestrated “this fraudulent scheme” because they knew the noteholder group “was unwilling to reward them for their mismanagement with an outsized equity stake in a restructured LBI.”

HPS, however, “was perfectly willing to oblige in return for the windfall economic benefits that the scheme presented.” This included control of a reorganized LBI, the Second Lien Noteholders claim.

The Second Lien Noteholders then took aim at how LBI Media, owner of Liberman Broadcasting radio stations include Los Angeles-based regional Mexican network “Qué Buena” and the Estrella TV broadcast TV network, saw its balance sheet get “decimated” in recent years as LBI borrowed “substantial sums of money to finance a series of misguided acquisitions and bad investments. The net result is that LBI owes more to its creditors than the company is worth, rendering it at all relevant times insolvent and unable to service its debts.”

At issue is some $129.5 million the Second Lien Noteholders say is theirs.

That was made clear in an advisory proceeding was filed Tuesday in the Delaware federal bankruptcy court by a group of plaintiffs led Kildonian Quebec Fund Ltd., a hedge fund operated by Kildonan Castle Asset Management that has approximately $258.9 million in assets founded in 2011 by Srinivas Dhulipala, a former co-Head and Head Credit Prop Trading at Merrill Lynch/Bank of America.

The defendants: HPS, Lenard Liberman, and the aforementioned company officers and directors.

This filing details a 2014 debt exchange “to help turn around” LBI Media’s business, and intended to serve “as bridge financing” until LBI Media successfully auctioned off spectrum in the FCC’s first incentive auction.

LBI successfully took in $142,337,137 for auctioning off the spectrum associated with KRCA-TV, which used digital VHF channel 7 and has a PSIP channel reflecting its historical analog dial position of Channel 62.

The noteholders claim that second lien indenture “expressly required that the proceeds of any such sale be used to retire the company’s first lien debt and not for any other purpose.”

LBI is accused by the noteholders of violating this contractual prohibition.

The remedy the Second Lien Noteholders seek is a the awardance of compensatory damages at trial, upon declaration that LBI engaged in fraudulent transfers to HPS.

As stated in the Form 201 Voluntary Petition for Non-Individuals Filing for Bankruptcy filed Nov. 21, LBI Media is seeking to implement a financial restructuring that incorporates Estrella TV, the original Liberman Broadcasting radio stations and Fenomeno Studios LLC, the digital media and short-form video arm of LBI Media designed to bring Estrella TV into the on-demand video entertainment world.

LBI Media’s decision to move forward with its voluntary petition in U.S. Bankruptcy Court is simple: It wishes to implement an agreement with 100% of the company’s senior lenders to reduce its debt by “more than $350 million.”

Compared to iHeart’s still-to-be-signed off plan to reduce its debt from $20 billion to a newly revised — and highly welcomed — level of $5 billion, information shared by Chairman/CEO Bob Pittman to Forecast 2019 attendees earlier this month, LBI’s restructuring is much smaller.

It also comes concurrent to a commitment for a new $38 million loan from LBI’s senior lenders, designed to support continued operations during the restructuring process.

LBI has between 1,000 and 5,000 creditors. By far, its largest is TMI Trust Company, for which there is an unsecured claim of $27.95 million. The second largest, also an unsecured note, is with U.S. Bank and valued at $8.46 million.

Trade creditors owed money include ASCAP ($1.98 million), Nielsen Media Research ($1.06 million), Nielsen Audio ($532,798), and Broadcast Music, Inc. ($439,493).

A peek at the petition affirms the fiscal reality of LBI Media: It has estimated assets of between $100 million and $500 million, but has estimated liabilities of between $500 million and $1 billion. “LBI’s financial performance peaked in the mid-to-late 2000s,” the company declared in the petition.

In 2006 LBI achieved adjusted EBITDA of approximately $48 million. “Unfortunately, like many broadcasters, LBI was adversely impacted by the 2008 recession,” LBI noted. This resulted in an adjusted EBITDA slide. By 2012, LBI’s adjusted EBITDA had declined 61% to approximately $19 million.

LBI in Q3, according to unaudited financial information provided to the court, saw total revenue of $33.1 million and a net loss of approximately $8.8 million.

As such, LBI in recent years “has proactively tried to address its balance sheet.”

Enter HPS Investment Partners, which in April 2018 committed to provide new first lien financing to LBI. LBI’s second lien noteholders — the group that made the Jan. 15, 2019 filings — protested. But, LBI successfully closed on this financing in May 2018.

Undaunted, the junior noteholders pressed on, through litigation, leading up to its newest fight.

Per company policy, an LBI Media spokesperson declined to comment “on pending litigation” when contacted Wednesday morning by RBR+TVBR.