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