Hawaiian Telcom Communications, Inc. ("Hawaiian Telcom" or the "Debtors"), received an unwelcome objection to its Motion to Approve the Use of Cash Collateral one day after it filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  The 125 year-old telecommunications provider filed its motion on an interim basis, seeking authority from the Court to use its cash collateral and provide adequate assurance to its prepetition lenders.  Hawaiian Telcom’s senior noteholders filed the Opposition to Debtors’ Motion to Approve the Use of Cash Collateral on behalf of holders of floating and fixed rate notes maturing in 2013.  The noteholders argue in their opposition papers that the Debtors seek to improperly cross-collateralize the prepetition lenders’ "partially-secured prepetition claims."  The noteholders also object to what they see as the Debtors’ attempt to grant the lenders a veto over the Debtors’ expenditures and require the payment of high fees and bonuses to the lenders professionals.

Events Leading to Bankruptcy

Hawaiian Telcom is a local, long distance, wireless and internet provider for the Hawaiian islands.  Despite the highly competitive telecommunications market in Hawaii and throughout the U.S., Hawaiian Telcom seeks to become the "preferred one-stop provider of telecommunication services" throughout Hawaii.  Unfortunately, Hawaiian Telcom was unable to service its debt and meet capital expenditures without seeking bankruptcy protection.  At the time it filed for bankruptcy, Hawaiian Telcom employed over 1,400 employees.

Debtors’ Financials

As reported in Hawaiian Telcom’s first day motions,  the Debtors generated over $480 million in revenue in 2007 and have assets with an estimated value of $1.35 billion and liabilities estimated at $1.27 billion.  Hawaiian Telcom has a prepetition loan with an outstanding balance of $484 million and $90 million outstanding under a revolving credit facility. 

Purpose Behind the Cash Collateral Motion

Hawaiian Telcom contends that its prepetition lenders have liens on substantially all of the Debtors’ assets, including the proceeds from the collateral.  Through the Motion to Approve the Use of Cash Collateral, Hawaiian Telcom seeks to use the cash from its normal operations to fund working capital, capital expenditures and any of the ordinary expenditures used in running a telecommunications company.  Hawaiian Telcom’s prepetition lenders consented to the use of the cash collateral provided it receives adequate assurance of its liens and "superpriority" administrative claims.

The Dispute With the Noteholders

The noteholders disagree with Hawaiian Telcom’s contention that the lenders have valid, perfected liens on substantially all of Debtors’ assets.  Specifically, the noteholders argue that lenders’ liens do not extend to 163 of the 202 parcels of real estate owned by Hawaiian Telcom.  According to the noteholders, the Debtors own substantial unencumbered assets that may be available for distribution to the senior noteholders and other unsecured creditors.


There is nothing new about noteholders and lenders battling over assets in a bankruptcy proceeding.  Regardless, it will be interesting to see how the parties, or the Court, resolve the issues raised in the intial motions.  Judge Peter J. Walsh, the bankruptcy judge presiding over this case, has already held hearings on the Debtors’ first day motions.  Soon we should know whether the noteholders and lenders can reach an agreement regarding the cash collateral or continue to litigate their claims before the Court.