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Members of Cirque du Soleil train while preparing to resume presentations, in the Riviera Maya in Cancun, state of Quintana Roo, Mexico on July 17, 2020.ELIZABETH RUIZ/AFP/Getty Images

A group of creditors holding about one-quarter of the junior-ranked debt of Cirque du Soleil is challenging in a U.S. bankruptcy court the way the sales process for the entertainment company is playing out, saying its interests are being trampled by larger lenders.

A small ad hoc group of second-lien lenders holding about US$40-million in debt filed an objection in the United States Bankruptcy Court for the district of Delaware late Tuesday, protesting the way Cirque’s restructuring under creditor protection in Canada is progressing and arguing the U.S. court should not recognize certain decisions made here without a fair hearing. They’re being represented by U.S.-based law firms White & Case LLP and Farnan LLP, and by Montreal-based Langlois Lawyers LLP.

Lawyers for the group, which calls itself the Ad Hoc Committee of Independent Second Lien Holders, argue the Delaware court should not automatically rubber-stamp the rulings made by the Superior Court of Quebec, the main jurisdiction in which the case is being heard. They say that under U.S. bankruptcy law, they are being short-changed by terms of the stalking horse bid for Cirque approved by a Quebec judge last month.

“Second-lien lenders will get nearly nothing” for their contribution of approximately US$154-million to the US$1.2-billion credit bid, the group says in its objection to the stalking horse offer. “This makes no economic sense.”

In credit bidding, a secured creditor bids the face value of the debt it holds in order to buy the business of a debtor.

The developments throw a wrench into what has been a speedy trip so far through bankruptcy court for Cirque, which saw its revenue fall to nearly zero in the spring as its acrobatic live shows were shut down by government-mandated bans on public gatherings.

Under the current Quebec court-sanctioned timeline, Cirque suitors have until Aug. 18 to submit bids that top what creditors are offering, with the entire sales process set to conclude by the end of the month. Even if the Canadian court approves the final sale, the new objection could affect its approval in the United States.

Cirque filed for creditor protection June 30 in Canada and shortly afterward in the United States, listing debt owing to secured creditors of about US$1.1-billion. The ad hoc group of independent second-lien creditors is not objecting to the Quebec court’s jurisdiction to hear the case, only to the recognition in the United States of some of the Quebec court’s orders as it relates to certain aspects of the sales process.

The junior lenders’ chief objection centres on the stalking horse bid approved by a Quebec judge, which set a floor price and terms for any subsequent offer for Cirque.

The bid was made by holders of Cirque’s first-lien debt, who have said they also hold two thirds of its second-lien debt. The first-lien group includes Toronto-based Catalyst Capital Group Inc. and U.S. debt funds, such as CBAM Partners, BlueMountain Capital Management LLC and THL Credit.

The ad hoc group of second-lien lenders says first-lien lenders will get a recovery of more than 100 per cent on their claims under the stalking horse bid, while the second-lien holders will get nothing beyond warrants for equity with a strike price that denies them any definitive recovery. They say the first-lien lenders are using an “inflated” credit bid to discourage other potential bidders who might offer more cash for Cirque, and therefore maximize the value for all stakeholders.

The junior lenders also say Cirque has failed to submit several of the most recent Quebec court orders to the Delaware court for review. The group says it is taking legal steps to obtain more information on how the first-lien lenders came up with their valuation for Cirque.

Spokesmen for Cirque du Soleil and Ernst & Young, the company’s court-appointed monitor in Canada, did not respond Wednesday to requests for comment. A spokesman for the first-lien lenders was not available to comment.

The creditor bid replaces a previous stalking horse bid made by Cirque’s current shareholders. Those shareholders, TPG Capital LP, Fosun Capital Group and Caisse de dépôt et placement du Québec, would be wiped out under the first-lien creditor proposal.

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