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Bankruptcy court rejects Momentive noteholders’ bid to change plan votes

The bankruptcy court overseeing the Chapter 11 proceedings of Momentive Performance Materials today denied a motion by the company’s senior secured noteholders to change their votes rejecting the company’s reorganization plan to ones accepting the plan, blocking the noteholders’ effort to realize a cash recovery in the case rather than the replacement debt being distributed to them as a result of their rejection of the plan.

“Noteholders made the choice to vote against the plan,” Bankruptcy Court Judge Robert Drain ruled, “and they have not shown cause now to undo its consequences.”

The denial of the noteholders’ motions cleared away one hurdle to plan confirmation that was before the bankruptcy court this afternoon. Still being argued into this evening were several separate motions seeking to stay confirmation of the reorganization plan until the various appeals of Drain’s make-whole decision, and of his decision last month that the company’s subordinated debt was subordinate to, and not pari passu with, the second-lien debt, could be resolved.

As reported, Momentive’s reorganization plan contains a toggle feature under which, if holders of the company’s first- and 1.5-lien debt ($1.1 billion of 8.875% first-priority senior notes due 2020 and $250 million of 10% senior secured notes due 2020, respectively) voted to accept the plan, they would have received a cash recovery, but if they voted to reject the plan they would receive replacement debt.

The cash-recovery option, however, would not have included a disputed make-whole payment claimed by holders of the debt. As a result, both classes voted to reject the proposed plan, triggering the toggle provision and setting up a cram-down confirmation proceeding, in order to litigate the make-whole dispute.

The confirmation/make-whole hearing was held the week of Aug. 18, but right before Bankruptcy Court Judge Robert Drain was set to deliver his decision on the afternoon of Aug. 25, attorneys for the first- and 1.5-lien noteholders told him that enough noteholders had changed their votes that both creditor classes would now accept the plan. The attorneys argued that the vote change would entitle noteholders to the cash recovery to which they would have been entitled had they accepted the plan in the first place.

The company objected, however, saying, “There should not be a do-over” in plan voting, and the only thing that had changed between the confirmation hearing and the decision to change their votes was that noteholders had “read the tea leaves” and believed that Drain would rule will against them.

Still, the development was enough for Drain – who had previously expressed frustration at the failure of the parties in the case to settle their differences – to delay his ruling for twenty-four hours and give the company and the noteholders one final chance to arrive at a consensual deal (see “Momentive holders revote to accept plan, but co. says it’s too late,” LCD, Aug. 25, 2014).

That did not occur, and the next day Drain read a four-hour decision from the bench ruling against noteholders on the make-whole issue, although at the same time he refused to confirm the cram-down plan on the grounds that the interest rate of the noteholders’ replacement debt was too low to satisfy the cram-down requirement that noteholders receive payment in full.

Momentive filed an amended reorganization plan on Sept. 3, increasing the interest rate for the replacement notes, to comply with the ruling (see “Momentive files amended plan to clear path to cram-down confirmation,” LCD, Sept. 4, 2014).

The noteholders, meanwhile, filed formal motions seeking court permission to change their votes in the case. The motions argued that while the bankruptcy code required “cause” to justify the change in votes, that was a permissive standard that, under applicable case law, allowed creditors to change their votes on reorganization plans as long as they were not seeking to do so for an improper purpose.

But at today’s hearing, during a spirited back-and-forth with Drain, attorneys for the first- and 1.5-lien noteholders struggled to provide a reason for their vote change, beyond their desire to realize a better recovery for themselves in the case.

An attorney for the 1.5-lien noteholders, for example, argued that allowing noteholders to change their votes now would benefit the company because it would end appeals related to Drain’s make-whole and cram-down confirmation rulings, and end other pending litigation in the case. This benefit, the attorney argued, was sufficient to constitute “cause”.

In this context, the 1.5-lien noteholders argued that the attempted vote change did not constitute a “do-over” of the vote, as argued by the company, but rather an acceptance by the noteholders of the settlement offer contained in the plan, namely, the toggle provision that would distribute cash to noteholders if they voted to accept the plan. Noteholders argued that the settlement offer implicit in the plan’s toggle provision remained open until plan confirmation, which has yet to occur, but Drain was having none of it.

“Timing matters,” Drain said, noting at a different point in the proceeding, “It is a do-over. No question it’s a do-over.”

“That’s why it [the toggle provision] is called a fish-or-cut-bait provision,” Drain said. “That’s why it’s called a death trap.”

With respect to whether the vote change could constitute the acceptance of a settlement offer at this point in the case, Drain ruled, “It is crystal clear that the vote change is not a settlement. …I do not believe the offer is still open. If it were, the debtors would have accepted it.” In fact, Drain noted, Momentive has said the opposite — that if noteholders were permitted to change their votes the company would amend its plan to remove the toggle option that would pay noteholders in cash. – Alan Zimmerman

 

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Trump Taj Mahal files Chapter 11; could close by mid-November

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Trump Entertainment Resorts filed for Chapter 11 this morning in bankruptcy court in Wilmington, Del., according to court filings.

The Chapter 11 was expected, as media reports circulated last week that a filing was imminent.

The company owns and operates two hotels in Atlantic City, N.J., the Trump Taj Mahal Casino Resort and the Trump Plaza Hotel. As reported, the Trump Plaza has already been slated to close on Sept. 16, and the Taj Mahal may not be far behind.

According to the company’s Chapter 11 filing, the Taj Mahal could close around Nov. 13 if the company is not able to reduce expenses there, primarily through labor concessions that the company has so far been unable to obtain.

It should be noted that the company’s founder, Donald Trump, is no longer associated with the operation of the hotels as a result of the company’s last Chapter 11 in 2009 (although he still holds about 5% of the company’s equity and warrants to acquire an additional 5%). Indeed, Trump recently sued to have his name removed from the company’s two hotels on the grounds that they were not up to his standards and were reflecting badly on his name.

Meanwhile, this is the company’s third trip to Chapter 11, with previous filings in 2004 and, as noted, 2009 (the Taj Mahal also went through a Chapter 11 in 1991, before the company was founded).

The company exited from its most recent Chapter 11 on July 16, 2010, setting the stage for today’s filing.

Under that reorganization plan, a group of second-lien lenders at the time, led by Avenue Capital, provided $225 million in new capital via a rights offering in exchange for 90% of the company’s equity, with 5% of the remaining equity distributed to second-lien lenders and 5% distributed to Trump personally. First-lien debt of some $486 million was exchanged for $125 million in cash and about $356 million in new first-lien debt.

According to an affidavit filed in the case by Robert Griffin, the company’s CEO, roughly $285.6 million in principal amount of the fist-lien debt remains outstanding, plus $6.6 million in accrued but unpaid interest. The debt is held by Carl Icahn.

Griffin attributed the company’s declining financial performance to oversaturation and competition in the Atlantic City casino market; lingering effects of recent weather events, including Superstorm Sandy in 2012, Hurricane Irene in 2011, and the June 2012 derecho; and “disappointing” online gaming results.

Looking ahead, the company said that it failed to generate needed excess cash flows during the past summer to subsidize its non-peak seasons, and the company is “now entering a period of several months where significant operating losses are expected.”

The company said that it missed a property tax payment of $10.8 million that was due on Aug. 28, and that it does not expect to have sufficient liquidity to make a $9.5 million interest payment due to first-lien lenders on Sept. 30.

The company said it had hired Houlihan Lokey in April to explore strategic and restructuring alternatives for the company. According to the Griffin affidavit, Houlihan Lokey reached out to the company’s secured lenders, online gaming partners, significant equity holders, and other parties in interest, but “none of the parties contacted expressed an interest in making an investment or in advancing credit to the debtors or purchasing either of the debtors’ casinos.”

Finally, Griffin said that in an effort to reduce expenses the company had engaged in negotiations with its largest union, and “provided a proposal that would facilitate a feasible business plan premised upon certain modifications” to the company’s labor agreements, but the union was unwilling to make the proposed concessions.

Griffin said the company would continue negotiations with the union, however, adding, “Absent expense reductions, particularly concessions from their unions, the debtors expect that the Taj Mahal will close on or shortly after Nov. 13, 2014 and that all operating units will be terminated between Nov. 13, 2014 and Nov. 27, 2014.” – Alan Zimmerman

 

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Momentive says noteholders’ vote-change tactic won’t alter cash recovery outcome

Momentive Performance Materials is contending that even if its senior secured noteholders are successful in obtaining court permission to change their votes in order to accept the company’s reorganization plan, it still would not result in the cash recovery that noteholders are seeking because the company will simply amend its reorganization plan to eliminate the toggle-distribution option for noteholders completely.

As reported, Momentive’s reorganization plan contains a toggle feature under which, if holders of the company’s first- and 1.5-lien debt ($1.1 billion of 8.875% first-priority senior notes due 2020 and $250 million of 10% senior secured notes due 2020, respectively) voted to accept the plan, they would receive a cash recovery, but if they voted to reject the plan they would receive replacement debt.

The cash-recovery option, however, would not have included a disputed make-whole payment claimed by holders of the debt. As a result, both classes voted to reject the proposed plan, triggering the toggle provision and setting up a cram-down confirmation proceeding during which, among other things, the make-whole issue was litigated.

The confirmation hearing was held the week of Aug. 18, but right before Bankruptcy Court Judge Robert Drain was set to deliver his decision on the afternoon of Aug. 25, attorneys for the first- and 1.5-lien noteholders told him that noteholders had changed their votes and would now accept the plan, entitling them to the cash recovery to which they would have been entitled had they accepted the plan in the first place.

The company objected, however, saying, “There should not be a do-over” in plan voting, and the only thing that had changed between the confirmation hearing and the decision to change their votes was that noteholders had “read the tea leaves” and believed that Drain would rule will against them.

The development was enough for Drain – who had previously expressed frustration at the failure of the parties in the case to settle their differences – to delay his ruling for twenty-four hours and give the company and the noteholders one final chance to arrive at a consensual deal (see “Momentive holders revote to accept plan, but co. says it’s too late,” LCD, Aug. 25, 2014).

That did not occur, and the next day Drain read a four-hour decision from the bench ruling against noteholders on the make-whole issue, although at the same time he refused to confirm the cram-down plan on the grounds that the interest rate of the noteholders’ replacement debt was too low, given the cram-down requirement that noteholders receive payment in full (at the same time, it is worth noting, the replacement debt did not have to be at market value, an aspect of the ruling that could potentially have more far-reached effects).

In any event, as reported, Momentive filed an amended reorganization plan on Sept. 3, increasing the interest rate for the replacement notes (see “Momentive files amended plan to clear path to cram-down confirmation,” LCD, Sept. 4, 2014).

The noteholders nonetheless filed motions seeking to change their votes in the case, arguing that while the bankruptcy code required “cause” to justify the change, case law allowed them to do so as long as the votes were not changed for an improper purpose and there was no harm caused to the debtor.

A hearing on the motions is set for tomorrow in White Plains, N.Y.

In a response filed yesterday with the bankruptcy court, however, Momentive said the noteholders “mischaracterized” the law with respect to showing “cause,” arguing that permitting a change in plan voting “is appropriate only in the narrow circumstance that the original vote did not allow the creditor to intelligently express its will due to reasons such as a breakdown in communications internally at the creditor, a misreading of the terms of the plan or execution of the original ballot by someone without authority” – circumstances that, Momentive said, did not exist in this case.

Momentive also took issue with the fact that it would not be harmed by the change in plan voting, noting that it would incur tens of millions of dollars in upfront financing fees, and more than $170 million in incremental interest to fund a cash recovery for noteholders in lieu of the cram-down notes – additional expense of more than $200 million over the next 7.5 years.

Further, Momentive argued, “it would completely defeat the purpose of ‘toggle’ plans of reorganization which courts have consistently upheld as proper ‘carrot and stick’ incentives. If the motions to change votes are sustained, then no toggle option could ever be effectively used in Chapter 11 cases — every creditor could simply choose to change its vote if it later decides in hindsight it preferred the carrot.”

But beyond the legal arguments, Momentive made clear that even if noteholders were permitted to change their votes, it would not change the outcome for the noteholders. Noting that it has the right to change its plan at any time prior to the entry of a confirmation order (and even, under certain circumstances, after the entry of a confirmation “if circumstances warrant”) the company said that if Drain allowed noteholders to change their plan votes, the company “would choose to exercise [its] rights to modify the plan and remove the toggle option.”

As a result, the company said, “whether or not the motions to change votes are granted, the treatment for holders of first lien notes and 1.5 lien notes will be the same: they will receive replacement notes at the court-approved cram-down rate of interest, not cash.” – Alan Zimmerman

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Leveraged Finance Fights Melanoma: support yields FDA drug approval

melanoma_optProceeds of this year’s annual Leveraged Finance Fights Melanoma (LFFM) benefit to support the Melanoma Research Alliance (MRA) helped propel FDA approval of a key treatment for patients with advanced melanoma.

The FDA yesterday approved Keytruda, the trade name of an anti-PD-1 immunotherapy treatment developed by Merck for patients who are no longer responding to other drugs, according to an agency statement. Keytruda is the first approved drug that blocks a cellular pathway known as PD-1, which restricts the body’s immune system from attacking melanoma cells, according to the FDA.

The FDA action was taken under the agency’s accelerated approval program, which is tied to clinical data showing the drug has an effect “reasonably likely to predict clinical benefit to patients.”

Since the Leveraged Finance Fights Melanoma benefit was launched in 2012, the leveraged finance community has funded more than $3.5 million of cancer research, accelerating advances in immunotherapy treatments that have led to breakthroughs now being tested for melanoma, lung, kidney and other cancers.

A Team Science Award given by LFFM-MRA was given this year to Bert Vogelstein, M.D., and Drew Pardoll, M.D., Ph.D., at Johns Hopkins University for their studies developing the therapy.

Funds raised from last year’s Leveraged Finance Fights Melanoma’s event were used for the LFFM-MRA Academic Industry Partnership Award, which supported researchers at Memorial Sloan-Kettering and Johns Hopkins working on the combination of two cutting-edge immunotherapy cancer treatments. These therapies are part of a group of new drugs that appear to lead to long-term benefits – virtual cures.

MRA was founded in 2007 by Debra and Leon Black under the auspices of the Milken Institute. Every dollar donated to the MRA – including the millions raised from LFFM benefits in recent years – goes directly to support research programs working toward a cure for melanoma, the most deadly type of skin cancer.

For further information, please visit the MRA’s website www.curemelanoma.org . Those seeking information about donations and sponsorship opportunities can contact Lauren Leiman of the MRA at (202) 336-8938 or lleiman@curemelanoma.org. –Staff reports

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Trump Taj Mahal could file Chapter 11 ‘within days’ – report

trumptajTrump Entertainment Resorts last remaining casino, Trump Taj Mahal, could be headed to Chapter 11, according to a report yesterday afternoon in the New York Post.

According to the report, which cites anonymous sources, the company recently violated some of its loan covenants, and negotiations with lenders have not produced a restructuring solution. The report said that the company had hoped that Carl Icahn, who holds a significant chunk of the debt, would agree to a debt-for-equity exchange, but hopes for that “have faded.”

The Post said the filing could come “within days.”

Meanwhile, online news site Philly.com reported that the Taj Mahal said in a financial filing on Aug. 22 that it could run out of cash needed to pay its bills, and it needed to either find additional borrowings or restructure its existing debt. The report did not specifically identify the filing or provide further details.

As reported, Trump Entertainment Resorts exited Chapter 11 for the third time on July 16, 2010, with Avenue Capital as the company’s largest shareholder (see “Trump Entertainment exits Ch. 11; no A/C in Atlantic City,” LCD, July 16, 2010). The reorganization featured, among other things, a $225 million rights offering backstopped by second-lien lenders, and led by Avenue, to fund distributions under the plan. The company’s first-lien lenders at the time, Beal Bank and Icahn, received a combination of cash proceeds and new secured debt, after the court rejected their rival plan proposal that would have exchanged their first-lien debt for equity.

Several months after its emergence, the company sold its Trump Marina Hotel Casino for $38 million (see “Trump Entertainment in pact to sell Trump Marina for $38M,” LCD, Feb. 15, 2011) leaving it with the Taj and the Trump Plaza.

The Trump Plaza is slated to close down on Sept. 16.

The news, if true, is just the latest blow to Atlantic City, which has seen numerous casinos close down recently. – Alan Zimmerman

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Momentive files amended plan to clear path to cram-down confirmation

Momentive Performance Materials filed an amended reorganization plan yesterday providing for an increased fixed interest rate on replacement debt to be distributed to holders of the company’s first-lien and 1.5-lien notes, according to court filings, clearing the way for confirmation of the company’s cram-down plan.

The revised rates are a fixed rate calculated at T+200 for first-lien noteholders, and T+275 for holders of the 1.5-lien notes.

That compares to the interest rate initially proposed in the company’s reorganization plan – which Bankruptcy Court Judge Robert Drain ruled was not sufficient for him to confirm the proposed plan via a cram-down process – of T+150 for first-lien holders and T+200 for the 1.5-lien holders, respectively.

According to court filings, the Treasury Rate to be used in the calculation would be based on the yield to maturity of U.S. securities with a constant maturity that becomes available in the two days prior to the effective date of the plan. Court filings have previously estimated this rate at 2.2%, meaning that the fixed rate of the replacement debt would equate to 4.2% for the first-lien notes and 4.95% for the 1.5-lien notes (versus all-in rates of 3.7% and 4.2%, respectively, in the earlier plan).

As reported, in a bench ruling last week, Drain ruled against holders of the company’s first-lien and 1.5-lien notes ($1.1 billion of 8.875% first-priority senior notes due 2020 and $250 million of 10% senior secured notes due 2020, respectively) with respect to their claim for make-whole payments. But he also refused to confirm the company’s cram-down plan on the grounds that the interest rate for the replacement debt to be issued to the senior noteholders was too low to constitute the requisite payment in full to support a cram-down.

But while requiring a higher rate for the replacement debt, Drain rejected arguments from noteholders that the rate on the replacement debt should equal the market rate that Momentive was otherwise willing to pay for a new exit facility under the plan.

As reported, had senior noteholders voted to accept the proposed plan, they would have received cash in the amount of 100% of their claims plus accrued and unpaid interest, but excluding the disputed make-whole claim. That and other distributions under the plan were to be funded, in part, by a new $1 billion exit facility comprised on new seven-year first-lien notes at L+400, with a 1% LIBOR floor, and for the 1.5-lien noteholders, a $250 million second-lien bridge facility at L+600, with the spread increasing 50 bps after three months and at each three-month interval thereafter.

In court filings seeking to block the cram-down, BOKF, the indenture trustee for the first-lien notes, had argued, “The [company’s] exit financing…constitutes indisputable evidence of the appropriate rate of interest, tenor, and other terms for the replacement first-lien notes. … It is indisputable that the cram-down rate is not fair and equitable and that the plan cannot be confirmed.”

But Drain, in essence, ruled that market rates included also included other elements, such as profits for lenders, that need not be included in determining whether the distribution was full payment of the noteholders’ claims. At the same time, Drain ruled that the rate offered by the company was too low to compensate noteholders for the additional risk of the new notes, leading to the amended plan.

Meanwhile, although the company’s amended plan addresses that aspect of Drain’s ruling, the company is not out of the woods yet.

As reported, both the first-lien and the 1.5-lien noteholders have filed motions with the bankruptcy court seeking to change their votes from rejecting the proposed plan to accepting it. The noteholders argue that the change makes the plan a consensual one, and entitles them to the cash recovery that they would have received had they accepted the plan in the first place. As reported, it is because of the noteholders’ rejection of the plan that their recovery toggled to replacement debt in lieu of cash.

The company, however, opposes the noteholders’ attempts to change their votes, arguing that there is no legal basis to justify a change at this point, beyond the noteholders defeat at the confirmation hearing.

In addition, the company still has to navigate appeals of Drain’s ruling. More specifically, subordinated noteholders have appealed Drain’s finding that their claims are subordinate to, and not pari passu with, the company’s second-lien debt. The subordinated noteholders are seeking, among other things, to stay the confirmation ruling until their appeal can be heard on an expedited basis.

The next hearing in the case is scheduled for Sept. 9 in White Plains, N.Y. – Alan Zimmerman

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Gannett 2-part high yield bonds deal (BB/Ba1) prices at tight end of talk

gannett_logo_detailGannett this afternoon placed its two-part offering of senior notes via Citi, J.P. Morgan, Barclays, RBC, MUFJ, Mizuho, SunTrust Robinson Humphrey, and US Banc. Terms on both tranches were finalized at the tight end of talk. Proceeds will be used to partially finance the acquisition of Cars.com, and for general corporate purposes. The remainder of the financing for the deal will come from cash and revolver borrowings, according to sources. Gannett in early August agreed to buy the shares in Cars.com that it does not already own – namely 73% of the company – for $1.8 billion. Terms:

Issuer Gannett Co, Inc
Ratings BB+/Ba1
Amount $350 million
Issue senior (144A-life)
Coupon 4.875%
Price 98.531
Yield 5.125%
Spread T+301
Maturity Sept. 15, 2021
Call nc3
Trade Sept. 3, 2014
Settle Sept. 8, 2014
Bookrunners Citi/JPM/Barc/RBC/MUFJ/Mizuho/STRH/USB
Co-Managers FT/PNC/CapOne/TD/COME/SMBC/RBS/RJ
Price talk 5.25% area
Issuer Gannett
Ratings BB+/Ba1
Amount $325 million
Issue senior (144A-life)
Coupon 5.5%
Price 99.038%
Yield 5.625%
Spread T+321
Maturity Sept. 15, 2024
Call nc5
Trade Sept. 3, 2014
Settle Sept. 8, 2014
Bookrunners Citi/JPM/Barc/RBC/MUFJ/Mizuho/STRH/USB
Co-Managers FT/PNC/CapOne/TD/COME/SMBC/RBS/RJ
Price talk 5.75% area
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Bankruptcy: In cram-down fight, Momentive loses the battle, but wins the war

The bankruptcy court overseeing the Chapter 11 proceedings of Momentive Performance Materials yesterday afternoon issued a lengthy bench ruling turning back most of the objections to the company’s proposed cram-down reorganization plan filed by both senior and subordinated noteholders in the case, but nonetheless stopped short of confirming the plan.

White Plains, N.Y.-based Bankruptcy Judge Robert Drain wouldn’t confirm the plan because he found that based on at least one measure of the value of recoveries for senior noteholders, the interest rate on the replacement debt that is to be issued to the company’s first-lien and 1.5-lien noteholders under the plan is too low.

According to Reuters, an attorney for Momentive said the company would file a revised plan next month.

The proposed interest rate on (and calculation of the present value of) the replacement debt was significant because Momentive was seeking to “cram down” the plan on senior noteholders, requiring, in effect, that noteholders be paid in full. As reported, the replacement notes for first-lien lenders carried a proposed interest rate of the T+150, and for the 1.5-lien lenders a rate of the T+200. With the Treasury rate estimated at 2.2%, that equated to an all-in rate of 3.7% and 4.2% for the first-lien and 1.5-lien notes, respectively, according to court documents.

But according to Wilmington Trust, the indenture trustee for the 1.5-lien notes, “[i]t is incontrovertible that the replacement notes, as issued at this time…will have a fair market value substantially less than the face amount of the notes, and will therefore be worth far less than the amount of the allowed claims.”

Losing the battle, winning the war
Even though the company’s reorganization plan failed to gain confirmation last night, Momentive clearly came out the winner from Drain’s ruling, prevailing in the two key disputes that have dominated the case.

First, Drain rejected the arguments of the first-lien and 1.5-lien noteholders ($1.1 billion of 8.875% first-priority senior notes due 2020 and $250 million of 10% senior secured notes due 2020, respectively) that they were entitled to make-whole payments in connection with the early repayment of their debt.

As reported, the crux of the issue between noteholders and the company came down to an interpretation of the language – similar in each of the respective indentures – governing the early redemption of the notes. Noteholders argued that make-whole payments were due because the repayment of the notes’ principal pursuant to the reorganization plan constituted an optional prepayment ahead of the notes’ scheduled maturity dates in October 2015. The company, however, argued that under the indentures, the company’s bankruptcy filing caused an acceleration of the notes’ maturity dates, and the recovery under the proposed plan does not therefore constitute a prepayment ahead of maturity.

One question addressed by Drain was whether as a general matter a bankruptcy filing that accelerates maturities could trigger an enforceable make-whole premium. Drain ruled that while it was permissible under New York law for parties to agree to the payment of a make-whole premium even in a case where maturity was automatically accelerated due to a bankruptcy, such an agreement needed to be spelled out – typically in the indenture – in detail and explicitly.

Drain said that standard was not met in this case.

“Absent specificity, which is here lacking,” Drain ruled, the first- and 1.5-lien noteholders “do not have an enforceable claim” for the make-whole premium.

“Case law requires that much more is required upon acceleration to trigger such a provision under New York law,” Drain ruled.

Drain also rejected a challenge from holders of the company’s 11.5% senior subordinated notes, who had argued that their claims were not subordinate to, but pari passu with, those of the company’s second-lien lenders.

As reported, the company’s proposed reorganization plan provides for second-lien lenders, led by Apollo Management, to receive 100% of the reorganized company’s equity, after giving effect to the subordination provisions of the subordinated notes. Holders of subordinated notes would not see any recovery under the proposed reorganization plan. Given the plan’s dependence on the subordination provision to effectuating the second-lien recovery, a ruling favor of subordinated noteholders would have obviously torpedoed the proposed plan.

The subordination dispute also revolved around an interpretation of indenture language, in this case the definition of “senior indebtedness” in the subordinated notes indenture.

As reported, the subordinated notes indenture excluded from the subordination provision any debt that “by its terms is subordinate or junior in any respect to any other indebtedness or obligation of the company.” The subordinated noteholders argued that the second-lien debt fell within the exclusion from subordination based on the “junior in any respect” provision, because of the junior secured ranking of its liens.

In ruling in the company’s favor, however, Drain found that under the applicable law governing interpretation of contracts, “It is clear from the [indenture’s] definition of indebtedness [that the language “junior in any respect” applies to] subordination of debt and subordination of payment of debt,” not to the priority of the liens that might secure the debt.

It ain’t over ’til it’s over
Still, despite yesterday’s detailed four-hour decision read aloud from the bench by Drain, there could be one more round of key litigation to come before this case is finally completed.

As reported, following last week’s contentious cram-down confirmation hearing, Drain was set to deliver his ruling Monday afternoon. Before he could do so, however, attorneys for both the first- and 1.5-lien noteholders announced that some noteholders had changed their votes and now wanted to accept the plan – enough, in fact, to change the vote of the class from rejecting the proposed plan to accepting it.

As the noteholders saw it, that change of heart entitled them to the recoveries provided for them in the reorganization plan had noteholders accepted the proposed plan in the first place, comprised of a cash payment of 100% of principal and accrued but unpaid interest, but excluding the make-whole payments.

But the company opposed the noteholders’ attempts to change their votes, saying the noteholders had already rejected the plan and that their recovery should consist of the toggle distribution specified for them if they rejected the plan, namely, replacement debt.

“There should not be a do-over” in plan voting, an attorney for the company told Drain at Monday’s hearing, saying all that had changed since last week’s contentious confirmation trial and this week’s ruling was that noteholders had “read the tea leaves” (correctly, as it turned out) and believed Drain would rule against them.

That was not sufficient cause to permit a change of votes at this point in the process, the company’s attorneys argued.

Regardless, the disclosure of the changed votes clearly threw a monkey wrench into Drain’s plans on Monday afternoon, and rather than issue his ruling he brought the parties back into his chambers – and ultimately postponed his decision by a day – to give the parties one last shot at a consensual deal.

A deal was not reached, however – a fact ruefully pointed out by Drain at the start of yesterday’s hearing by his noting of the “stony faces” of the attorneys before him waiting to hear his ruling.

At yesterday’s hearing, however, an attorney for the first-lien noteholder said that he would be filing a motion seeking to change the votes of senior lenders, so more litigation on that issue could lie ahead. – Alan Zimmerman

 

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As Energy Future extends reorg timetable, NextEra withdraws proposal


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NextEra Energy has withdrawn its proposal to purchase the portion of Energy Future Holdings that controls the company’s 80% interest in regulated utility Oncor, according to a court filing.

As reported, the NextEra proposal was made jointly with a group of second-lien bondholders at unit Energy Future Intermediate Holdings, the intermediate holding company that directly controls the Oncor interest (see “NextEra, noteholder group up offer for Energy Future Holdings,” LCD, July 17, 2014, for a description of the NextEra proposal).

“After submitting the [proposal],” NextEra said in a court filing yesterday afternoon in Wilmington, Del., “NextEra and EFH engaged in discussions regarding the terms on which NextEra would serve as the stalking-horse bidder in an auction process for the equity of reorganized EFH….the debtors filed [yesterday] with the court their plan to run an auction process for the equity of reorganized EFH. As a result, NextEra hereby withdraws the strategic proposal.”

The NextEra statement refers to a filing, also yesterday afternoon, made by Energy Future with the bankruptcy court, stating, “Given the interest in reorganized EFH expressed by potential strategic and financial bidders, the debtors have decided to extend the time frame for determining the highest and otherwise best bid for reorganized EFH and seek early court approval of the process for doing so.”

The company said it intends to file in September a motion seeking approval “for the procedures and deadlines that will govern the marketing process,” adding that during the process the company “also intends to further advance [its] ongoing discussions with creditor groups regarding a value-maximizing plan of reorganization.” – Alan Zimmerman

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No ‘do-over’s’: Momentive noteholders revote to accept plan, but co. says it’s too late

At a hearing this afternoon in the Chapter 11 proceedings of Momentive Performance Materials, holders of both the company’s first-lien and 1.5-lien notes, which had previously rejected the company’s proposed reorganization plan, sought to change their votes in order to accept the plan.

As the noteholders see it, that would make the proposed a plan a consensual plan and thus entitle noteholders to the cash recoveries, comprised of 100% of principal and accrued but unpaid interest – but excluding some $250 million of disputed make-whole payments – to which noteholders would have been entitled had they accepted the plan in the first place.

But the company opposed the noteholders’ attempts to change their votes, saying they had already rejected the plan and, therefore, the noteholders’ distribution should consist of the replacement debt specified in the toggle feature of the plan.

“There should not be a do-over” in plan voting, an attorney for the company told Judge Robert Drain at this afternoon’s hearing in White Plains, saying all that has changed between last week’s contentious confirmation hearing and today’s change of heart is that noteholders “have read the tea leaves” and believe that Drain will rule against them with respect to the key make-whole issue in the case.

Besides noting that the company had already extended the time and resources for last week’s trial, and was ready to take Drain’s ruling in the dispute “in whatever form it comes,” the attorney noted that if noteholders were permitted to change their votes at this point in the process, simply after determining that the legal tide was against them, creditors facing a toggle vote in a reorganization plan would never have any incentive to vote in favor of a plan.

The development sent the parties to an off-the-record conference in chambers to sort out the matter.

As reported, last week’s cram-down confirmation hearing was set up after the company’s senior secured lenders overwhelmingly rejected the company’s proposed reorganization plan.

According to a voting report with the bankruptcy court earlier this month, first-lien noteholders ($1.1 billion of 8.875% first-priority senior notes due 2020) rejected the plan, with nearly 92% by amount of debt held and 89% by number of holders, voting against it. The story among holders of the 1.5-lien notes ($250 million of 10% senior secured notes due 2020) was similar, with 80% by amount held and 81% by number of creditors, voting against the proposed plan.

Neither result was close to the Bankruptcy Code’s required two thirds by amount of debt and a majority by number, respectively, for approval of a reorganization plan.

As reported, at issue between both tranches of noteholders and the company is whether make-whole payments, totaling in the aggregate about $250 million according to court filings, are due on the secured debt. The legal dispute comes down to an interpretation of the language in the indentures governing the notes, with noteholders arguing that make-whole payments are due because the proposed repayment of the notes’ principal under the reorganization plan constitutes an early payment ahead of the notes’ scheduled maturities, and the company arguing that the bankruptcy filing accelerated the maturities under the indentures, and thus do not constitute a prepayment.

According to news reports, Drain last week lost patience with the case and the parties’ inability to reach a settlement, saying at one point, according to Bloomberg, “This is just stupid.”

In that context, Drain said he would issue his rulings today.

Also at issue in the case has been an adversary action filed by the company’s 11.5% senior subordinated noteholders, arguing that their claims are not subordinate to, but pari passu with, those of the company’s second-lien lenders.

As reported, the company’s proposed reorganization plan provides for second-lien lenders, led by Apollo Management, to receive 100% of the reorganized company’s equity, after giving effect to the subordination provisions of the subordinated notes. Holders of subordinated notes would not see any recovery under the proposed reorganization plan.

That dispute also revolved around an interpretation of indenture language, in this case the definition of “senior indebtedness” in the subordinated notes indenture. The indenture excludes from subordination any debt that “by its terms is subordinate or junior in any respect to any other indebtedness or obligation of the company.” The subordinated noteholders argue that the second-lien debt falls within the exclusion of “junior in any respect” because of the junior secured ranking of its liens, while second-lien holders contend the language does not include the priority of liens. – Alan Zimmerman