An auction of bus company Coach USA hit a roadblock when a federal judge rejected a financing package and related sale proposal for the bankrupt owner of the Megabus brand and commuter lines connecting New York and New Jersey.

US Bankruptcy Judge Mary Walrath sided with lower-ranking creditors, who accused the bus company’s lenders, led by Wells Fargo, of trying to get repaid by trampling the rights of lower-ranking, unsecured creditors.

“I have a serious concern about having any provision that would adversely affect those” rights, Walrath said Tuesday, referring to the ability of creditors to challenge Wells Fargo’s claim on thousands of buses.

Walrath told the company, Wells Fargo and Renco Group - the company that has made a US$130 million  opening bid for Coach’s main business  - to negotiate with a panel of unsecured creditors. All sides are due to return to court on Wednesday morning.

Wells Fargo was looking to refinance US$180 million of Coach debt and provide US$20 million in fresh cash to fund the bus company’s plan to sell all of its businesses at auction. Walrath agreed with creditors who said the US$20 million was not enough to justify all of the rights Wells was demanding.

Approving that loan would give the bank and other lenders too much power over the auction, said Shari I Dwoskin, an attorney with the unsecured creditors committee.

“It provides the lenders the ability to veto any result that doesn’t satisfy them,” Dwoskin told the judge.

Attorneys for Wells Fargo, Coach and Renco all said they would try to work out a deal with the creditors committee and report back to Walrath.

Renco had agreed to assume US$130 million in Coach debt as part of a binding bid that would start an auction next month. But that money would mostly benefit Wells Fargo, Walrath said, siding with the official committee of unsecured creditors. Creditors say that bid would not bring any cash into Coach.

Company attorneys told Walrath that they have received at least one other potential offer that, if it turns into a binding bid, would be higher than the Renco deal.

The creditors committee had challenged the company’s sale plans and the financing package, arguing the proposals were designed to benefit Wells Fargo and other senior lenders owed more than US$180 million.  

Coach USA operates a number of commuter services in the New York City area, including Rockland Coaches, Short Line, Suburban Transit and Community Coach. 

The company blamed its bankruptcy on a decline in commuter ridership during the pandemic.

Coach USA has said that the bankruptcy is intended to sell certain bus lines to an affiliate of Renco Group, as well as its Megabus intellectual property and retail operations. Avalon Transportation has also agreed to buy some Coach assets, the company said. 

Coach offers bus services in 27 locations in the US and Canada and carries more than 38 million passengers every year, according to its website. Its Megabus service has carried more than 50 million people through more than 280 cities since it was started in 2006. The company employs about 2,700 people. 

The case is Coach USA, Inc 24-11258, US Bankruptcy Court, District of Delaware (Wilmington).

  - Bloomberg