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August 11, 2007

The Landry's bondholders fight back

One of the most irritating aspects for a plaintiff in an inflammatory lawsuit is that the other side eventually gets to tell its side of the story.

As noted earlier here, here and here, Houston-based Landry's Restaurants, Inc recently made the questionable decision, during a period of tightening credit markets generally, to tee off on and sue the holders of a substantial amount of the company's debt.

Even though Landry's finally filed its long-delayed Forms 10-K and 10-Q on Friday, Round Two in the lawsuit has been taking place over the past couple of days in U.S. District Judge Sam Kent's court and it does not appear to be going well for Landry's. The Indenture Trustee of Landry's bonds filed this emergency motion to vacate or modify the temporary restraining order that Landry's obtained last week, pointing out the following:

Simply put, Landry's has breached its contract, the proper notices have been given, and the time to cure the breach has passed. Landry’s seeks to utilize the ex parte relief in paragraph (a) [of the TRO, which requires the Indenture Trustee to rescind the acceleration of the bonds] in an effort to rewrite the contract, thus prejudicing the rights of the Noteholders. Paragraph (a) serves no legitimate purpose, needlessly alters the status quo to the Trustee’s detriment, and should thus be vacated. [. . .]

On July 24, 2007, 126 days after the Trustee sent the Notice of Default to Landry’s, and 129 days after Landry’s was required to file its 10-K, the Trustee sent Landry’s a Notice of Acceleration that informed Landry’s that the default had ripened into an Event of Default and that “[t]he Indenture Trustee, acting upon a direction of a majority of Note Holders given pursuant to Section 6.05 of the Indenture, hereby declares the unpaid principal of, premium, if any, and accrued and unpaid interest on, all the Notes outstanding to be due and payable immediately, all pursuant to Section 6.02 of the Indenture.” . . . In a Form 8-K filed the next day, Landry's publicly admitted that the Acceleration Notice was effective. As Landry’s put it: “[t]he sum total of the Notes are $400 million, which are now due and payable.” . . . Again, this admission squarely contradicts the representations Landry’s has made in its Complaint and ex parte TRO application in this case.

Meanwhile,a couple of the bondholders weigh in with this opposition to Landry's motion to extend the TRO until the preliminary injunction hearing:

This is far from a technical breach of Landry's obligations. The filing of Forms 10K and 10Q are not elective matters. They are requirements both of federal law and the plain terms of the Indenture. The information Landry's was required to file -- but did not file -- is critical to the Bondholders' ability to evaluate Landry's credit-worthiness, and the likelihood that they will be repaid the $400 million they are owed. Landry's failure to timely file this required financial information violates its duties of candor to the investing public, and violates its contract with the Trustee and the Bondholders. The Bondholders rights -- and the status quo ante --should not be altered irrevocably by the TRO before the Bondholders have an opportunity to be heard. Paragraph (a) is not necessary to preserve the status quo, and Landry's claimed rights can be fully protected and preserved without harming the Bondholders in this manner, and without placing them at risk of tens, if not hundreds, of millions of dollars of losses.

Finally, Landry's announced on Friday that it had obtained refinancing of the debt, albeit on far less attractive terms than the existing bonds before their maturity was accelerated.

Round 3 is next Thursday.

Posted by Tom at August 11, 2007 12:00 AM

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