BANGOR – With as much as $123 million in debt, Bangor and Aroostook Railroad is at a fork in the road – should it go into bankruptcy protection or should it work on a deal to keep it out of court while it finalizes a $62 million sale?

The railroad has until Monday to decide.

B&A Railroad, along with its interested buyers, apparently failed to meet two of three court-approved benchmarks in its sales negotiations that would have kept the lines out of Chapter 11. The company has tried to avoid bankruptcy court since creditors forced involuntary placement proceedings in August.

Without meeting the benchmarks, attorneys for some of B&A creditors had the right to ask a U.S. Bankruptcy Court judge to order a default, and subsequently put the railroad in Chapter 11.

The creditors’ notice of default was filed Nov. 26, and Chief Judge James Haines Jr. is expected to act on it Monday.

The interested buyers – Rail World Inc. of Chicago, The Wheeling Corp. of Ohio and others – know the sale has been slowed, but they say it has not fallen apart. The consortium has spent more than $400,000 to get its Maine operations in place once the deal is closed, said Larry Parsons, chairman and chief executive officer of Wheeling.

But the consortium, too, apparently doesn’t know which is the best way for B&A Railroad to go. In a letter sent to B&A president Frederic Yocum Jr. two weeks ago, Rail World founder Edward Burkhardt states that B&A should be placed in Chapter 11 so that the line’s assets are cleared of any liens.

In the last two days, however, B&A and the buyers apparently have asked for an extension of the earlier court-approved agreement, which would keep the railroad out of bankruptcy.

Curtis Kimball, the lead attorney for B&A’s creditors, said that late Friday the creditors offered B&A Railroad the extension, if it wants it, under one condition. B&A is accumulating about $500,000 in debt each month, and if the buyers agree to underwrite the debt so that it does not take away from other creditors receiving their money, the default notice would be pulled from the court, he said.

“If they don’t act before Monday, the time has run out,” Kimball said.

Parsons and Jack Manheimer, an attorney for B&A Railroad, were unreachable for comment Friday evening.

Kimball, who shared Burkhardt’s letter with the Bangor Daily News, said he does not know why Rail World is suggesting that B&A go into bankruptcy while also asking for an extension on a deal that would keep them out of it.

“We have a long discussion, until 8 o’clock Thursday night, trying to figure that out,” said Kimball, mentioning the talks were with B&A’s attorneys. “There wasn’t any good clear understanding as to why they want it to be put into bankruptcy and why they want an extension. We hope, we really hope, this deal can go through.”

Deal breaking?

In mid-August, three of B&A Railroad’s creditors, who collectively are owed more than $7 million, asked that the lines be involuntarily placed into bankruptcy because of failure to pay its bills. At the time, Yocum said the action was unnecessary because he was going to sell the railroad by the end of the year and the three creditors would be paid from proceeds of the sale.

At the beginning of October, Yocum announced he found a buyer. Rail World’s consortium had signed a “letter of intent” to buy Bangor and Aroostook System, which B&A Railroad is part of, for $62 million in cash.

The consortium would be buying the stock of the Quebec Southern Railway Co. Ltd., the operating assets of B&A Railroad, the Canadian American Railroad Co., the Van Buren Bridge Co., Logistics Management Systems Inc., the Northern Vermont Railroad Co. Inc., and portions of the Newport & Richford Railroad Co.

Because of the pending sale, B&A and the creditors worked out a deal at the end of October that the railroad would meet certain benchmarks in its sales negotiations to Rail World. If they were met, B&A would be kept out of bankruptcy court.

The benchmarks included that B&A Railroad would submit to attorneys a list of its assets and debts, a letter from Rail World that it actually has the $62 million in cash, and a signed formal purchase agreement from B&A and Rail World.

If any of those benchmarks were not met the attorneys for the creditors would file a “notice of default” with the bankruptcy court, and B&A would be placed into bankruptcy three days after that.

B&A missed two of those marks, Kimball said, and the “notice of default” was filed late Monday. Rail World did not submit a letter stating it has the $62 million, he said, and a formal purchase agreement was not signed.

Parsons disputes Kimball’s claim that Rail World and Wheeling did not show creditors a letter. He said they did, but it did not satisfy the creditors.

Which way to go

Earlier this week, Yocum and the railroad’s attorneys have said it did not make any sense to fight the pending bankruptcy.

Instead of going through a financial reorganization under Chapter 11, B&A Railroad will ask a judge to apply a provision of bankruptcy law that allows for a sale of the company. Under that provision, the system’s assets are wiped clean of any liens and then are sold. After a long, administrative process, the proceeds from the sale are distributed to the system’s creditors, but secured creditors and back taxes are paid off first.

Manheimer said there’s always a possibility a creditor who may feel jilted by the amount, if any, he is getting paid from the proceeds of the sale may try to fight the sale, thus causing a delay in the deal being closed.

B&A, he said Thursday, “needs the protection of a bankruptcy court to proceed with the sale. The sale is not going to pay enough money to cover all the creditors.”

Part of the deal between B&A and the creditors was a plan for how those owed money would be paid from the proceeds of the sale. The deal called for all secured creditors to be paid in full from proceeds of the sale, and unsecured creditors to be paid at least 50 cents on the dollar once the sale was finalized.

Now it appears the interested buyers believe B&A Railroad’s debts are too high. Those who are not paid by B&A Railroad from proceeds of the sale may fight the deal and state that the rail system needs to be sold for more than $62 million so they can try to get the money they are owed, Parsons said.

“We now believe, based on some additional due diligence, that to obtain title it will take a bankruptcy,” said Parsons on Thursday from his office in Ohio. “The bankruptcy is going to occur. Short of a bankruptcy, those claims will follow the assets. Obviously people will not get all they are owed.”

Debt load

In financial documents presented to attorneys, B&A Railroad lists that it owes at the most about $123 million. More than $47.7 million is debt secured with B&A’s property and real estate, and almost $2.3 million is unsecured priority debt, including property taxes to numerous Maine towns, and wages.

Another $63 million is unsecured debt, according to the documents. Of that amount, $31.3 million is being disputed by the railroad.

Manheimer said the $123 million in liabilities is a “worst case scenario” that includes rents on equipment and other debt that won’t carry over if the railroad system is sold. The actual debt could be at least $31 million less than that, he said.

Most of the debt was accumulated before Yocum, the company’s president for almost a year, came on board, according to the financial statements. Yocum repeatedly has said that his intent has been to turn around the railroad’s operations and prepare its assets for sale.

Slowdown

Yocum and Parsons this week both said that the sale has been slowed but it has not been called off. Yocum mentioned that terms of the asset sale are being fine-tuned.

But Kimball said he questions if there isn’t any more than that which is stalling the purchase, including Rail World trying to secure a loan to buy B&A System.

“Rail World’s deal seems to be evaporating,” Kimball said.

In the November letter circulating among the attorneys, Rail World’s Burkhardt writes that he is concerned about his company’s ability to complete the asset sale “to the satisfaction of its lenders.”

“That’s the first time that we have heard that lenders would be involved,” said Kimball, noting that the $62 million was going to be paid in cash. “He has to satisfy his lenders that he’s going to get the assets free and clear of any encumbrances.”

Parsons said Burkhardt’s mention of lenders is “news to me.”

“I can’t comment,” he said. “I haven’t seen such a letter.”

Under the bankruptcy proceeding, other railroad companies will be able to offer bids for B&A System.

Parsons said he’s not worried. For most of the year, railroads were bidding for B&A, he said, and his consortium had the best bid.

“It was an auction to start with,” Parsons said. “We’re the only group to date that’s demonstrated a willingness to buy the entire railroad and operate it.”

Rail World, Wheeling and the others still are committed to buying B&A System even as the bankruptcy action takes place, Parsons said. The consortium has spent more than $400,000 to get its operations lined up for when the asset sale is complete.

Some of that money has been spent on hiring employees. Rail World will be eliminating about 120 of B&A’s current 420 positions. All B&A employees wanting to work for the new company were given first preference in applying for those jobs, Parsons said. The interviewing process for those jobs is “pretty well done,” he said.

Once the sale is finalized, which Parsons said should be done by Feb. 28, the name of the B&A System will be changed to Montreal, Maine and Atlantic railroad.

“We haven’t changed our intent,” Parsons said. “We have lots of optimism.”