An ad hoc group of senior noteholders at NII Holdings unit NII International Telecom slammed the company’s recently announced proposed reorganization settlement and plan support agreement in a Nov. 30 court filing, calling it “the product of an inherently flawed process that improperly shifts significant value away from … the senior creditor constituency in this bankruptcy to a more junior creditor constituency.”
While the approval of the proposed settlement is not yet technically before the Manhattan bankruptcy court – the ad hoc group’s filing addresses certain preliminary issues of corporate governance related to the plan support agreement, or PSA, as opposed to the PSA itself – the filing nonetheless clearly suggests that the company’s reorganization proposal faces significant opposition.
According to court filings, the ad hoc group is comprised of Golden Tree Asset Management, Benefit Street Partners, Empyrean Capital Partners, Whitebox Advisors, KLS Diversified Asset Management, and JMB Capital Partners. In the aggregate, the group holds almost $300 million of NII International Telecom’s $900 million of 11.375% senior unsecured notes due 2019, issued in February and April of 2013, and about $212 million of NII International Telecom’s 7.875% senior unsecured notes also due 2019, $600 million of which were issued in May of 2013.
According to the term sheet for the company’s proposed reorganization plan, which is premised on a reorganized equity value of $2.421 billion, holders of the NII International Telecom notes (sometimes referred to in court filings as the “LuxCo notes”) would receive 63.51% of the reorganized company’s new stock (subject to dilution from a rights offering and a management incentive plan), along with participation rights in a $250 million rights offering with an exercise price calculated at a 40% discount to the plan equity value.
Meanwhile, holders of about $1.36 billion of notes at NII Capital due 2016 and 2019, respectively, would receive 25.43% of the new equity, while holders of about $1.5 billion of NII Capital notes due 2021 would receive 11.06% of the equity. Holders of all three issues would also have participation rights in the rights offering.
The reorganization proposal also settles certain litigation claims that have been asserted against the company by NII Capital noteholder Aurelius Capital Management, most notably the claim that the parent guarantees granted in connection with the 2013 issuance of notes by NII International Telecom could be avoided by the company as a fraudulent conveyance.
According to an 8-K filed by the company last week with the Securities and Exchange Commission, the PSA, is supported by holders of roughly 65% of the NII Capital notes, including the largest holder, Capital Research and Management, or CRM, and holders of about 35% of the NII International Telecom notes, as well as the unsecured creditors’ committee in the case.
But according to the ad hoc noteholders group, “although the debtors describe the PSA as a ‘settlement,’ it is no such thing.” According to the filing, “The PSA ignores the priority upon which the company raised its capital and re-routes hundreds of millions of dollars around [International Telecom] for the benefit of [NII Capital] creditors. The parties to the PSA justify this re-ordering of the absolute priority rule based on litigation claims suggested by [NII Capital] creditor Aurelius Capital Management. But these claims are meritless.”
According to the court filing, the $1.6 billion of notes issued by NII International Telecom in 2013 were by their terms expressly senior to the company’s prior debt. The ad hoc group said the proceeds of the notes were used to pay down debt at the company’s operating units (which are not debtors in the case) and to fund the build out of a 3G network for the company, uses which benefited the entire company, including existing noteholders at NII Capital.
As the ad hoc group sees it, the PSA was not driven by the settlement of Aurelius’ litigation claim, but rather by CRM which, as the company’s largest creditor, holds a blocking position at NII Capital. “Without [CRM],” the ad hoc group said, “the company cannot confirm a [NII Capital] plan and, therefore, cannot obtain releases and other protections for the officers and board members of [NII Capital]”.
But, the ad hoc group continues, the company could not settle the guarantee claims without Aurelius, “the consequence of which would require a plan to put substantial amounts of equity in a reserve pending the outcome of litigation on the guarantee claims.” CRM, which would wind up the largest owner of the reorganized company, did not want a substantial part of its recovery tied up in a reserve pending the guarantee litigation.”
The ad hoc group argued that the only way to thread this needle and gain Aurelius’ support for a proposed reorganization plan – given the position of the company and, according to the ad hoc group, virtually every other party in the case that the Aurelius litigation claim was weak – “was to end run the absolute priority rule and strip value from LuxCo by assigning higher probabilities to the Aurelius claims than they merit, or that [CRM] or the company had ever espoused before.”
As noted, the proposed settlement is not before the bankruptcy court at this time. Rather, the ad hoc group’s filing is a response to an oral motion made by the company at a status hearing on Nov. 24 for the appointment of an independent director at NII International Telecom to review the proposed settlement.
According to the ad hoc panel, however, the request was too late – the time for an independent director was prior to the company signing off on the settlement. What’s more, the group said, the limitations the company would place on such a director even at this point, in terms of allotted time for a review of the deal and the scope of authority, are too strict and not in compliance with Luxembourg law governing the fiduciary duties of directors.
“The governance process outlined by the debtors,” the ad hoc group said, “is an attempt at window dressing.”
Alternatively, the group asked the bankruptcy court to set a schedule that “will permit the parties to litigate expeditiously the disputed issues in conjunction with plan confirmation,” noting that “there is no question that these issues must be resolved before a plan can be confirmed.”
Indeed, the group argues, resolving these plan issues now would eliminate the need for an independent director, adding, however, that if the court determines an independent director is needed, he should be “truly independent” and able to act in accordance with Luxembourg law.
“What cannot happen,” The group said, “is the blessing of a PSA whereby two junior creditors agree to a ‘settlement’ of worthless litigation claims so that they can flip the capital structure to maximize their recoveries by taking value away from the unrepresented (but senior) creditor group, and the debtors go along without any proper fiduciary review of that agreement.” – Alan Zimmerman