KKR to Gibson Bidders: ‘We Own the Company’ Until Debt Is Repaid

(Bloomberg) -- At least one bidder is looking to challenge KKR & Co.'s efforts to take control of bankrupt guitar maker Gibson Brands Inc., but the private equity firm warned rivals that they have to pay off at least $375 million of the company's debt first.

The unidentified potential buyer surfaced Wednesday during a court hearing to complain that KKR and allied noteholders wield too much influence over Gibson's reorganization process. In response, the noteholders insisted that their senior debt gives them control of Gibson's future.

“In the absence of par plus accrued, then we own the company,” Brian S. Hermann, a bankruptcy attorney representing KKR, told the judge overseeing Gibson's bankruptcy during a court hearing Wednesday.

Holdout creditors, including Blackstone Group LP's GSO credit unit, oppose a KKR-backed reorganization, saying in court that a number of potential buyers have contacted Gibson about making formal bids. Hermann said one of those bidders is a well-funded entity that senior holders have already talked to.

Bankruptcy attorney Thomas Kreller, who is representing that unidentified potential bidder, asked the judge to ensure that KKR and the other noteholders don't use their influence to block competing offers. GSO has told the bidder it may be willing to finance its offer, Kreller said.

Possible Rejection

U.S. Bankruptcy Judge Christopher Sontchi said that if Gibson managers cannot justify their deal with KKR when the reorganization plan comes before him later this year, then he may reject the proposal. If the proposal fails to win his final approval, any potential bids for the company will drop, Sontchi said.

“If they are making dumb decisions, Congress has given them the right to be stupid,” Sontchi said. “Ultimately this is going to come down to a dispute over value.”

The competing creditor groups were in federal court in Wilmington, Delaware to argue about the next steps in Gibson's reorganization. Sontchi sided with the company, KKR and its allies when he authorized Gibson to send its reorganization proposal to creditors for a vote. Sontchi will take that vote into consideration when he decides whether to approve the plan.

GSO and its supporters, including electronics maker Koninklijke Philips, had asked Sontchi to delay the vote and force Gibson to hold an auction. Sontchi rejected that request. Absent clear evidence of wrongdoing, Gibson had a right to try to win approval of its debt-for-equity plan, he said.

KKR Factor

After creditors finish voting in September, Sontchi will hold a hearing to decide on the reorganization proposal. Before then, bidders are free to try to persuade Gibson to sell them the company. Buyers will have a difficult time unless they can satisfy KKR and the other senior noteholders.

Noteholder lawyer Hermann said the unnamed “well heeled” bidder already tried.

“The thrust of the conversation was, ‘would you take less than par plus accrued,' ” Hermann said.

In bankruptcy, senior creditors who hold liens on assets can typically elect to take ownership of a company if they are not paid in full. KKR holds $198.3 million of Gibson's 8.87 percent senior secured notes, more than any other investor. Other holders include Silver Point Capital LP, which controls $26 million, and Wilks Brothers LLC, which holds $34.5 million.

The case is Gibson Brands, Inc. 18-11025, U.S. Bankruptcy Court, District of Delaware (Wilmington)

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Dan Wilchins

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