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Bankruptcy: EFIH 2nd-lien noteholders file suit seeking make-whole claim payment


energyfutureholdings
The indenture trustee for the two issues of second-lien notes of Energy Future Holdings’ unit, Energy Future Intermediate Holdings

Litigation over the make-whole claim on the second-lien debt was expected in the case, whether via an adversary action or a motion before the bankruptcy court. A similar issue is also at play in the case in connection with the company’s proposed repayment of $5.4 billion of first-lien debt at EFIH.

The second-lien debt is comprised of about $1.75 billion of 11.75% second-lien notes due 2022 and about $406.4 million of 11% second-lien notes due 2021. The June 16 lawsuit filed by the notes’ indenture trustee, Computershare Trust Co., argues that under the indentures make-whole payments are due if the notes are repaid before March 1, 2017 (for the 11.75% notes) or May 15, 2016 (for the 11% notes).

According to the lawsuit, the company contends that the make-whole payments have not been triggered because the company is not opting to repay the notes early, but rather that the company’s bankruptcy filing on April 29 automatically accelerated the principal to become immediately due and payable.

In response to that argument, however, Computershare argued that bankruptcy law does not require a debtor to repay secured debt upon a bankruptcy filing, and that Computershare, as trustee, has not taken any action to compel repayment of the second-lien notes. Computershare also argued that, even if the bankruptcy filing accelerated payment of the notes, the make-whole payment would still be due under the clear language of the indenture.

As reported, under the company’s proposed reorganization scheme, the second-lien debt is to be paid in full, including accrued and unpaid interest (it’s worth noting that the Computershare adversary action also argues that a higher, default interest rate applies), but excluding the make-whole payment, through the roll-up of a proposed $1.9 billion second-lien DIP backed by certain unsecured creditors of EFIH and Energy Future Holdings.

The bankruptcy court has scheduled a June 30 hearing on approval of the DIP, which is being contested by a group of second-lien lenders that have proposed their own rival second-lien DIP for the company. Which group ultimately wins out as DIP lender is significant because under the company’s restructuring proposal, the facility is slated to be exchanged for equity in the reorganized company.

Meanwhile, as reported, on May 9 the company launched a tender offer to repurchase the second-lien notes incorporating a proposed settlement of the make-whole claim that would pay holders of the 11.75% notes $1,116.22 for each $1,000 principal amount of notes, and holders of the 11% issue $1,073.22 for each $1,000 principal amount of notes, plus an additional $50 per $1,000 principal amount of notes for early participation in the tender offer – amounts which the company said are 50% of the potential second-lien make-whole claims (see “Energy Future launches tender offer for EFIH second-lien debt,” LCD, May 12, 2014).

Holders of 35% of the notes by face value had already agreed to the settlement in a pre-petition restructuring support agreement with the company. Meanwhile, the company said in a filing with the Securities and Exchange Commission on Friday that holders of 43%, or $922.4 million of the total of about $2.2 billion of second-lien debt, have agreed to “early participation” in the settlement, the deadline for which was June 11 (see “EFIH 2nd-lien make-whole settlement nabs 43% early participation,” LCD, June 16, 2014).

The tender offer is set to expire on July 3, the company said, noting that the participation rate is therefore subject to change. A hearing on bankruptcy court approval of the settlement is scheduled for June 30.

Returning to the adversary action, the next step in the litigation process would be for the company to file a response to the adversary action with the bankruptcy court. That will eventually occur, but on a more practical level, now that the issue – which, as noted, both sides agree needs to be litigated – has been placed before the court, look for the parties to either work out a discovery and litigation schedule, as was done with respect to the first-lien debt make-whole claim (see “Parties agree to September trial on EFIH first-lien make-whole claim,” LCD, June 4, 2014), or leave it to the bankruptcy court to set a timetable for resolving the matter. – Alan Zimmerman

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WaveDivision (Oak Hill Partners, GI Partners) outlines price talk on PIK-toggle dividend bond deal

WaveDivision Holdings is shopping a $150 million offering of senior PIK-toggle notes in the 8.375% area, with pricing at par via Deutsche Bank, Wells Fargo, RBC, and SunTrust Robinson Humphrey, according to sources. Books close at 5:00 p.m. EDT this afternoon, and pricing is expected tomorrow morning under Rule 144A for life.

Issuing entities are Wave Holdco, LLC and Wave Holdco Corp., with the company seeking proceeds to fund a distribution to shareholders. The five-year notes are non-callable for one year and include a 40% equity claw during the non-call period at par plus the coupon, according to sources.

Ratings are B-/Caa1, with stable and negative outlooks, respectively. Additionally, S&P assigned a recovery rating of 6 to the deal, indicating expectation for negligible recovery (0-10%) in the event of default.

Moody’s said the negative outlook is due to the increase in junior capital, but at the same time upgraded the existing loan and bond ratings by one notch apiece, to Ba3 and B3, respectively. The new corporate entity is B2.

In 2012, Oak Hill Partners and GI Partners acquired WaveDivision from an ownership group led by Sandler Capital Management for roughly $920 million. The acquisition was funded with an equity contribution of around $212 million, a $500 million term loan, and $250 million of 8.125% notes due 2020. That paper currently is marked at 107.75, yielding about 6%, according to S&P Capital IQ.

While the dividend will increase leverage slightly, the company states that it maintains strict financial discipline, reducing its leverage from 6.8x at the completion of the 2012 acquisition to 5.8x as of March 31 through the generation of cash flow and organic and acquisition-related EBITDA growth. From 2011 to 2013, total revenue and adjusted EBITDA grew at 17.7% and 18.6%, respectively.

Including the new notes, the company will have total debt of $951.6 million.

This marks potentially a 14th PIK-toggle deal of 2014, for a pro forma total of $3.7 billion in supply, after 32 deals last year for $11.6 billion, according to LCD. Recall that there have also been two plain PIK deals this year.

WaveDivision is a cable and broadband services company that provides television, Internet, and phone services for residential and business customers in Washington, Oregon, and California. – Joy Ferguson/Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and mor

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All Aboard Florida sets talk on upsized $405M of 5-year PIK notes

All Aboard Florida is guiding its $405 million offering of senior secured PIK-toggle notes in the 12% area, via joint bookrunners J.P. Morgan and Morgan Stanley, along with co-manager BMO. The company upsized the deal by $15 million to account for additional interest reserve.

Books close at 2:00 p.m. EDT tomorrow, June 17, with pricing to follow.

Some investor-friendly revisions have also been made to the structure. The 144A-for-life deal is set to mature in 2019, with the first call date pushed out six months, to 2.5 years, from two years, at par plus 50% of the coupon. The notes can also be redeemed at par plus 100% of the coupon with proceeds of a government loan during the first 2.5 years, which is revised from par plus 75% of the coupon during the first two years, and the equity claw is now 25%.

The issue is also now structured to be 50% cash pay/50% PIK initially and after the opening date, the notes must be 100% cash pay if the company has cash sufficient to pay all interest. Initially, the deal was structured with more flexibility on subsequent payments; either 100% cash or 50% cash/50% PIK.

Note the unique senior security of the offering. Historically, just four of 131 PIK toggle deals were secured and sold regular-way, while a three others were secured and issued by a distressed exchange, according to LCD.

The express passenger rail operator is seeking proceeds to finance all or a portion of the design, construction, and development of a rail project extending from Miami to West Palm Beach, and to fund pre-opening expenses and working capital.

Leads are guiding investors toward triple-C ratings. As stated in the offering memorandum, the company is required to get ratings from two of three agencies within 90 days of issuance, otherwise the coupon steps up by 25 bps.

Parent entity Florida East Coast Industries was in market just two months ago with a bond-refinancing deal. An $875 million issue of 6.75% secured notes due 2019 was completed at par, but now trades around 105, yielding about 5.3%, while a $275 million issue of 9.75% unsecured notes due 2020 was also issued at par, but now is pegged at roughly 104.75, yielding about 8.42%, according to sources. Ratings are B/B3 and CCC+/Caa1, respectively. Both were issued under Rule 144A for life, with first call premiums at par plus 75% of the coupon.

Issuance for All Aboard’s offering is via AAF Holdings LLC & AAF Finance Company. All Aboard Florida is an intercity passenger rail project being developed by Florida East Coast Industries (FECI) that will connect Miami to Orlando, with intermediate stations in Fort Lauderdale and West Palm Beach. This rail service will provide Floridians and visitors a viable transportation alternative to congested highways and airport terminals. All Aboard Florida will be the first privately owned, operated, and maintained passenger rail system in the U.S. – Joy Ferguson

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High Yield Bond Issuance Surges To $9.8B Amid Investor Cash Inflow

Amid investor cash inflows to the asset class the U.S. high yield bond market kicked into higher gear last week, posting nearly $10 billion in volume, more than double the amount seen the previous week and the most since the middle of May.

With last week’s volume, high yield bond issuance so far in 2014 is $165.4 billion, slightly above the $162.7 billion recorded at this time a year ago. Full-year issuance in 2013 was a hefty $322 billion, the second-highest yearly figure on record (the highest: $344.8 billion in 2012).

The surge in activity comes as technicals bolster the corporate high yield debt market. Despite some shakiness in the ETF sector, U.S. high yield funds last week saw their sixth straight period of net inflows, totaling some $2.7 billion, according to Lipper.

That momentum is impacting yields. The yield to worst on the S&P U.S. Issued High Yield Corporate Bond Index was a slim 4.91% last week, according to LCD’s Joy Ferguson, and the average new-issue yield on high yield deals priced over the past 30 days dipped inside 6%, at 5.98%, according to LCD.

The highest-profile deals last week: Dialysis concern DaVita DVA -0.42% Healthcare Partnersissued $1.75 billion of B+/B1 rated notes at 5.125%, backing repayment of bank debt, while Gates Globalissued $1 billion of B/Caa2 notes backing the LBO of  the transmission belts and fluid-power products concern by Blackstone.

 

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Dolan Co. plan goes effective as brouhaha among equity heats up

The Dolan Company said the effective date of its reorganization plan occurred on June 12, according to court filings.

Even so, it appears that a final family dispute among equity holders is yet to be resolved.

As reported, the Wilmington, Del., bankruptcy court approved the adequacy of the company’s disclosure statement and confirmed its prepackaged reorganization plan on June 9, after the company reached a settlement of a valuation challenge by the equity committee in the case under which the company agreed to distribute $2 million in cash and certain other consideration to equity holders (see “Dolan Co. prepackaged reorganization plan nets confirmation,” LCD, June 9, 2014).

The confirmation order, which stated the terms of the settlement, also said the distribution to equity holders would be allocated 20.13% to holders of the company’s preferred stock and 79.87% to holders of the company’s common stock.

As reported, on Wednesday, Nantahala Capital Management, which said it represents holders of preferred stock, filed a motion seeking to amend the confirmation order to eliminate the stated allocation among preferred and common stock holders, to allow equity holders to renegotiate a new allocation (see “Dolan Co. pfd shareholders want bigger slice of equity distribution,” LCD, June 11, 2014).

According to Nantahala, the equity committee, which is comprised solely of common stock holders, intentionally left Nantahala out of the loop in deciding upon the allocation – despite knowledge that Nantahala held preferred shares and had been an active participant in the case previously – because the panel “was afraid that the preferreds would ask for a greater share of the equity consideration because of their liquidation preference.”

Since the distribution to equity was in the form of a trust structure, Nantahala argued that equity holders could work out their differences without affecting the timing or implementation of the company’s reorganization plan. What’s more, Nantahala said, it would not take long to negotiate a new split given the modest sums involved.

But common shareholders don’t seem eager to revisit the matter.

In an objection to the Nantahala motion filed yesterday, the equity committee said Nantahala was not excluded from participation in settlement discussions because of its ownership of preferred stock (of which the equity committee said it was unaware), but because Nantahala – which the committee concedes had participated in some aspects of the case, including seeking the appointment of an equity committee on which it then refused to serve – intentionally “chose to defer entirely to the equity committee presumptively” in connection with the valuation dispute with the company “because it did not want to restrict its trading opportunities.”

Second, the equity panel argued, negotiating the allocation of the equity distribution among equity holders in the confirmation order was clearly within its authority, and given that, “if the [bankruptcy] court then was satisfied that the equity committee did its job appropriately, the [Nantahala] motion offers nothing new to call that conclusion into question.”

“Indeed,” the equity committee added, “the only new fact is that Nantahala does not like the deal.”

Third, the committee argues, despite Nantahala’s assertion that a new allocation could be quickly agreed upon, reopening the issue “would prolong these cases and facilitate further discord and litigation.” The committee argues that while Nantahala would pursue a split of the equity proceeds that it deems to be favorable, other stockholders in addition to Nantahala would likely “favor different split ratios, which further their own parochial interests.”

“The conversation could easily become extended and multifaceted,” the panel said.

In addition, both the company and its primary creditor, Bayside Capital, also objected to the Nantahala motion.

The company said its settlement with the equity panel “should not now be disturbed by a disgruntled shareholder that was fully aware of the dispute with the equity committee, but otherwise did not take part in the substantive fight over confirmation of the debtors’ plan.”

As for Bayview, it stated that the settlement was reached in the context of “a highly contested dispute,” but that “once an agreement was reached to resolve the litigation, the parties moved forward on an expedited basis to ensure that the debtors’ enterprise value was preserved and that the debtors were able to exit Chapter 11 as quickly as possible.”

Bayview concluded, “Under these circumstances, … the confirmation order should not be amended to modify to accommodate Nantahala’s request.” – Alan Zimmerman

 

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Bankruptcy: US Trustee says Momentive disclosure statement lacks information

The U.S. Trustee for the Southern District of New York’s bankruptcy court filed an objection to Momentive Performance Material’s proposed disclosure statement, saying that the document fails to provide enough information to creditors about, among other things, the implications of a subordination dispute in the case.

As reported, the indenture trustee for company’s subordinated notes has asserted that the notes are not subordinate in payment to, but rather are pari passu with, the company’s second-lien notes. If the bankruptcy court upholds that position, the company’s reorganization plan would not be confirmable (see “Momentive’s subordinated holders sue, claim pari passu with 2nd-lien,” LCD, June 3, 2014).

According to the June 12 objection from the U.S. Trustee, William Harrington, the company’s disclosure statement fails to both adequately disclose that absent a settlement of this subordination dispute, creditors will have to cast ballots on the plan before the issue is fully litigated, and, second, the fact that a court ruling that the subordinated notes and the second lien debt are pari passu would doom the company’s proposed reorganization plan.

Among other things, the prospect that the proposed plan might ultimately prove unconfirmable is tied into widespread opposition in the case to the company’s proposed restructuring-support agreement and rights-offering-backstop agreement, which would, in effect, pay certain second-lien lenders a $30 million break-up fee if the company’s proposed reorganization plan is ultimately not confirmed.

Harrington’s filing said that the company has informed him that it intends to file an amended disclosure statement and, according to Harrington, “it appears likely that this revised document will address” his concerns, but he did not state when the new disclosure statement would be filed.

Still, the U.S. Trustee’s objection is one more indication that Momentive’s proposed reorganization plan faces significant headwinds.

A hearing on the adequacy of the disclosure statement, as well as on approval of the RSA and the backstop commitment, is set for June 19 in White Plains, N.Y.

As reported, at the core of the company’s proposed reorganization plan is the exchange of second-lien debt for all of the equity in the reorganized company, and the right to participate in a $600 million rights offering at a price per share determined by using the pro forma capital structure and an enterprise value of $2.2 billion, applying a 15% discount to the equity value.

That proposal, however, has generated opposition from virtually every stakeholder in the case, except for the group of second-lien lenders, led by Apollo Management, that are backstopping the rights offering and are parties to the RSA (see “Momentive plan-support pact faces a slew of objections,” LCD, June 10, 2014).

Objecting parties include not only the subordinated noteholders whom the plan leaves without a recovery, but also the company’s senior lenders ($1.1 billion of 8.875% first-priority senior secured notes due 2020 and $250 million of 10% senior secured notes due 2020, the so-called 1.5 notes), who are slated to be repaid in full, in cash, but contend, among other things, that they are entitled to a make whole payment of about $250 million, as well as Fortress Investment Group, a second-lien lender that says it was excluded from participating in the rights-offering backstop. Indeed, Fortress argues, among other things, that the backstop commitment is a sham, since virtually every holder of second-lien debt is likely to participate in the very favorable deal. – Alan Zimmerman

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Seventy Seven Energy high yield bonds (B/B2) price to yield 6.5%

Chesapeake Oilfield Services late yesterday completed an offering of holding company senior notes via bookrunners Bank of America, Morgan Stanley, and Wells Fargo, sources said. Terms on the B/B2 transaction were finalized at the tight end of talk, and early secondary market indications point to strong performance on the break, with pricing up at least two points, the sources add. As reported, the same trio of banks last week launched the company’s $400 million coordinated covenant-lite B term loan. Proceeds will back a distribution to parent COS Holdings and pay down all RC borrowings as it spins off of Chesapeake Energy into a standalone entity. The new issuer entity will assume the moniker Seventy Seven Energy. The Oklahoma City-based firm provides drilling, hydraulic fracturing, rig relocation, and other services.

Terms:

Issuer Chesapeake Oilfield Services / Seventy Seven Energy
Ratings B/B2
Amount $500 million
Issue senior notes (144A)
Coupon 6.5%
Price 100
Yield 6.5%
Spread T+415
Maturity July 15, 2022
Call nc3 @ par+75% coupon
Trade June 12, 2014
Settle June 26, 2014 (t+10)
Bookrunners BAML/MS/WFS
Co’s. Citi, CAG, CS, STRH
Px talk 6.5-6.75%
Notes first call par+75% coupon
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High Yield Bond Funds See $277M Cash Inflow Despite ETFs

Retail-cash inflows for high-yield funds totaled $277 million in the week ended June 11, according to Lipper. The figure represents an inflow of $437 million to mutual funds that was dented by a $160 million withdrawal from the exchange-traded-fund segment.

Regardless, it’s a net positive reading for a sixth straight week with inflows now totaling $2.8 billion over that span. The trailing-four-week reading, however, slips to positive $481 million per week, from positive $529 million last week and positive $546 million two weeks ago.

The full-year reading now shows inflows of $6.1 billion, and it’s roughly 17% related to the ETF segment. In contrast, one year ago, which included the single largest one-week outflow on record – $4.6 billion for the week ended June 5, 2013 – the full-year reading was negative $6.3 billion, with 45% tied to ETFs.

The change due to market conditions was positive $372 million this past week, or barely a 0.5% gain against total assets, which were $190 billion, of which 20% is tied to ETFs, or $38.2 billion. Total assets are up $8.7 billion in the year to date, reflecting a gain of roughly 5% this year.

– Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, and trading news

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Bankruptcy: Two Exide shareholders seek appointment of equity committee

Two individual shareholders in the Chapter 11 proceedings of Exide Technologies have asked Bankruptcy Court Judge Kevin Carey to appoint an official equity committee in the case.

The two shareholders are Alfred Shams, whom court papers state is from Atlanta, and Landon Romano, of Pretoria, South Africa.

According to separate letters from Romano and Shams sent to Carey last week (dated June 4 and June 6, respectively), the two shareholders had been represented by law firm Pillsbury Winthrop in seeking the appointment of an equity panel by the U.S. Trustee for the Wilmington, Del., bankruptcy court. According to Romano’s letter, however, the U.S. Trustee twice declined to appoint an equity panel, most recently in late May.

According to both Shams and Romano’s letters, the shareholders are unable to disclose the information that they submitted to the U.S. Trustee that would demonstrate Exide’s alleged equity value due to confidentiality requirements, but Romano’s letter said that equity was in the money by $388 million, and that one analysis “suggests there could be as much as $600 million in value at this moment.”

Romano does ask Carey to review the documentation, however, asserting that it is “very revealing with regard to equity being in the money and clearly evidence the facts of Exide shareholders obtaining a meaningful recovery.”

Romano states that he and Shams “are not Wall Street attorneys or bankers,” but rather “businessmen with substantial and credible backgrounds.” Shams, he said, is a non-practicing CPA for more than 45 years “with a university degree and decades of corporate finance experience,” while Romano described himself as have earned an MBA from Baylor University in 2008 and “investing in equities securities from that year.”

Romano’s letter plays a populist card, asserting that he and Shams are acting on behalf of “Main Street investors” that “believed in good faith that corporate America and the United States of America’s justice and legal systems will act in goodwill in our behalf.”

While it is easy, given the complexity of large corporate Chapter 11 cases, to simply dismiss such letters from aggrieved shareholders as unsophisticated and having little chance of success, it is worth noting that bankruptcy courts have not always been so quick to dismiss such efforts out of hand. If anything, bankruptcy court judges often go out of their way to ensure that such parties have their proverbial day in bankruptcy court.

That said, and with the proviso that it is always risky predicting how a bankruptcy court might rule on any particular issue, it would be surprising to see Carey appoint an official equity panel in this case. One key factor supporting the appointment of equity committees is typically evidence that financial markets support the view that a bankruptcy company has residual equity value, and that is not present here.

Exide’s debt trades at distressed levels, with is 8.625% secured notes due 2018 mired in the mid-50s. Meanwhile, Exide’s stock, which trades over the counter, was at $0.22 per share this morning, implying a market cap of only $17.4 million, a level indicating no equity value. – Alan Zimmerman

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Men’s Wearhouse places 8-year high yield bonds (B-/B2) to yield 7%; backs Jos A Bank buy

Men’s Wearhouse this afternoon completed its $600 million offering of senior notes via Bank of America and J.P. Morgan, according to sources. Terms were finalized at tight end of talk. Proceeds from the retailer’s debut in market, along with a loan financing, will support the $1.8 billion acquisition of rival Jos. A. Bank Clothiers.

Terms:

Issuer Men’s Wearhouse
Ratings B-/B2
Amount $600 million
Issue senior (144A)
Coupon 7%
Price 100
Yield 7%
Spread T+461
Maturity July 1, 2022
Call nc3 @ par+75% coupon
Trade June 11, 2014
Settle June 18, 2014 (T+5)
Joint books BAML/JPM
Px talk 7.125%
Notes first call par+75% coupon.