Distressed Debt: THQ Bankruptcy Update

After adjourning its first hearing today, THQ reconvened at 3:00PM and announced that a compromised was made among various parties. A form of order has yet to be presented but the general takeaways:

• Bids are due 9am January 22nd
• Auction will be held 3pm on January 22nd
• Sale Hearing January 23rd at 9am
• The auction will allow for bidders to bid on only certain assets (titles, studios, etc) in the auction

Other details from the hearing concerned the minimum overbid which was reduced as well as the extension of Clearlake Capital's DIP term loan to January 25th (as an over-advance line).

In the morning hearing, it was announced that Clearlake Capital's bid would remove the $10M 2% note they originally had offered in exchange for extending the auction deadline. One thing to note: It remains to be seen how much secured debt (and for that matter assumed liabilities) will there actually be on the auction date. It was noted in the hearing this morning the company has begun the "slow pay" its bills which would alleviate need for cash but in theory increased assumed liabilities to a purchaser. As has been noted in the hearing, Clearlake can pick and choose which liabilities its assuming, but their counsel did note that it would be a more concrete number (to determine overbids) at the auction.

Currently bonds are trading in the 15-16 context. I had heard from traders on Friday that bonds were difficult to find (the issue is only $100M) but some bonds have traded this morning.

For bondholders, the only recovery (under Clearlake's stalking horse bids) they were going to receive was the $10M promissory note which seems to have been pulled away. If any of the parties involved (so far EA, Warner Brothers have been named in court) bid for all or just some of the titles, there is a chance bond holders could see a recovery here. Exact bid procedures have yet to be filed so I do not have a good assessment on how bids will be evaluated.

For instance, what happens if two studios are purchased for an aggregate consideration more than Clearlake's bid but the remaining studios need to be wound down? That may actually drain resources from the estate for wind down expenses.

For what its worth, when I first saw Clearlake's bid I wanted to be an LP in their fund because they would make a fortune off their purchase price. Given the way cash flows will begin to pick up (and possibly roll in if they are successful, not to mention cash already overseas) at THQI after their two releases in the first half of this year, with which a lot of developmental costs have been already spent, the return to Clearlake would have been impressive.

A few questions remain: Where are the massive swings in potential unsecured liabilities (from the first day affidavit) from Europe arising from? No one has given me a good answer on that. Why hasn't bond holders (or strategics for that matter) stepped up with their own DIP?

As we get more answers, we will update readers, especially after new items hit the docket.