Rdio's Bankruptcy: A Labyrinth of Financial Winners, Losers and Lawsuits Both Threatened and Real
This article takes a close look at the financial winners of losers of Rdio's bankruptcy, which was imposed on the company as a condition of Pandora's purchase. Head here for the story of how Pandora came to buy the company, and the characters involved.
The Rdio Chapter 11 reorganization plan -- basically a payout from the liquidation of the company following an asset sale to Pandora -- will have its day in court on Sept. 27. Votes on the plan from creditors were due Sept. 20, and Judge Dennis Montali will hear the outcome of that vote and decide on whether to approve the plan in U.S. Bankruptcy Court of Northern California in San Francisco.
While that seems straightforward enough, the path from the initial Chapter 11 filing on Dec. 23 to the reorganization filing on Aug. 18 was fraught with twists and turns.
According to Rdio Chapter 11 court documents, the unsecured creditors -- who are owed about $25 million -- are expected to receive anywhere from 16.9 cents to 19 cents on the dollar from the plan, which calls for them to be paid a total of about $5.5 million.
While that may be disappointing to some creditors, at the beginning of the process it appeared they could have ended up completely shut out from receiving anything, because the secured creditors -- who had provided funding to Rdio under a loan agreement secured by the company's asset -- had a claim that amounted to much more than the estate's assets.
The sale only brought in $75 million, which has since dwindled to about $65 million due to court-approved payouts to finance the Chapter 11 process and other expenses. In a typical Chapter 11 proceeding, where the secured lender is owed an amount larger than the estate, all proceeds would theoretically go to that lender.
But the Rdio Chapter 11 proceeding isn't typical. The process happend over a year of high drama, brinksmanship, anti-trust accusations, lawsuits -- some threatened and one real -- to forge a compromise between the unsecured and secured creditors.
The big problem turned out to be Pulser, the main secured lender (to the tune of $184 million) and the majority equity owner of the company. Pulser and another equity owner, Iconical, are collectively owed $188.5 million, with both controlled by Janus Friis, the billionaire co-founder of Skype.
That Pulser loan started out small with $26 million in funding; and that was subsequently amended on Jan 8, 2013 to allow for Rdio to draw down up to $48.85 million. The company had tried to bring in other investors but none were found. With the company losing about $2 million a month, the majority owner had to provide loans to keep the company operational, in hopes of growing Rdio large enough to become profitable; or find another investor; or do a public offering.
Over the next 23 months, Pulser went through all $49 million and drew down an additional $87 million, without any amendment to the loan agreement. It wasn't until Dec. 17, 2014 that the loan agreement was amended to allow for Rdio to draw down up to $178 million, and thus cover the overdraw. Ultimately, the loan was amended to allow for $208 million. At the time of the filing, Rdio had drawn down $184 million, and claimed all of it was secured by the company assets.
As is often the case in Chapter 11 filings, the amount Rdio said it owes and the amount claimed by the various unsecured creditors rarely matched up. So the debtor claimed it owed them $25.6 million but if all of their claims were verified it adds up to $49.2 million, according to the documents. The creditors included Universal Music Group, which according to the debtor was owed $1.11 million -- UMG claimed $1.3 million; Warner Music Group, with $570,000 versus $620,000; Sony Music Entertainment, with $4.57 million versus claimed $17 million. Other unsecured trade creditors include ASCAP at $1.2 million; BMI at $1 million; INgrooves, $131,000 to $1.91 million; Merlin at $272,000; Music Reports Inc. at $380,000 to $1.2 million; and Shazam at $2.6 million to $4.1 million.
Looking at those numbers, the question emerges as to why Sony was owned so much more than all the other unsecured creditors, let alone the other majors. This was, it turns out, due to the fact that WMG and UMG were nearing the end of their licensing agreements, while Sony had just signed a new deal with Rdio. The amount owed apparently also included a large advance, also known as minimum payment, or minimum revenue guarantee.
Even though Pulser's equity was wiped out by the Chapter 11 filing, things were tense from the beginning since it looked like all the estate funds were going to them and Iconical as the secured lenders. Typically, the equity owners lose out completely when a company goes belly up. Yet here, the equity owners looked like they would finish with some cash in hand, while the unsecured creditors would get nothing.
"This case was almost over before it started because Pandora bought the assets for much less than what was owed to the unsecured creditors, let alone the secured creditors," says a lawyer for one of the unsecured creditors. "It was an uphill battle, checking to see that all the i's were dotted and the t's were crossed."
The unsecured creditors committee decided to explore the possibility of filing a lawsuit to have the Pulser secured loan "re-characterized" as equity or, failing that, to challenge Pulser's secured status. They felt that even if they couldn't win the lawsuit to have the secured debt converted to equity and get it wiped out, at least they could have $87 million of the secured debt re-cast as unsecured. But that would still leave Pulser secured to the tune of $97 million, and leave the unsecured out of the money.
Meanwhile, in response to what the committee was up to, Rdio accused the major labels of collusion and price-fixing their licensing agreements, according to sources. The company then hired an anti-trust lawyer in preparation of following up on that strategy.
With that accusation, the three majors resigned from the secured creditor's committee and on April 4, Sony went a step further and filed a lawsuit, alleging fraud among other things. Eventually, cooler heads prevailed and settlement talks began on all sides.
By early August the settlement was coming together, with a key element being that for most creditors the estate would not seek reclamations. That means any payments made three months before the filing (regarded as preferential payments that can usually be reclaimed by the estate) wouldn't be eligible. So, Sony wouldn't have to return $154,000 paid to it on Sept. 4, 2015; UMG wouldn't have to return $553,000 paid to it in four installments between Sept. 4 and Oct. 7; while other music creditors look like they are in the clear for a good chunk, if not all, payments that fell in the preferential payment category, according to Exhibit 4 of the court filing.
As part of that settlement, Pulser made major concessions too, agreeing that only $47.2 million of the $184 million it was owed would be considered secured; and the balance of $136.8 million would be considered unsecured. Further, it agreed that its unsecured claim would not receive any distribution, meaning that the total payout to Pulser would be $47 million. So in the end, the settlement sets unsecured claims at $21.35 million to $29.6 million, with about $5.5 million in payments, which means that each of the unsecured creditors will be getting 16.9 cents to 19 cents on the dollar.
WMG settled for $100,000, 16.1 percent of the nearly $620,00 it claims it is owned. UMG will receive $125,0000 out of the agreed upon claim of $1.1 million, or 11.2 percent. Sony's settlement, meanwhile, is between it and Pulser. That settlement calls for Pulser to use an undisclosed portion of the $47 million it will get from the estate to buy Sony's claim.
The upshot is: none of the majors' payments are coming out of the unsecured creditors' pool.
And Sony and UMG get one more thing, according to the court documents. All agreements made between the debtor and each of those majors retain their confidential obligations so the estate trust must return all such documents to the respective major, or destroy them within five days after the plan is approved.