The unsecured creditors’ committee in the Chapter 11 proceedings of Momentive Performance Materials has objected to final approval of the company’s DIP, saying the facility unfairly benefits Apollo and the company’s other second-lien note holders and unfairly limits the committee’s ability to investigate the validity of liens and prepetition transactions.
The committee said it filed the objection “reluctantly,” and only after more than two weeks of negotiations with the company, the DIP agents, and “certain” pre-petition secured parties, failed to resolve the committee’s concerns. The committee said it intends to continue negotiations, and could yet withdraw its objection “to the extent that the committee is able to narrow the disputes by reaching agreement on at least certain issues.”
The committee’s reluctance notwithstanding, the objection is, to say the least, unusual, given that unsecured creditors are unimpaired under the company’s proposed reorganization plan, slated to see their claims reinstated or paid in full, in cash.
According to the panel, however, the reorganization plan “may turn out to be unconfirmable,” and the objection is aimed at positioning the panel and unsecured creditors in case that scenario comes to pass.
Specifically, the panel expressed concern about whether the company’s plan, which the committee characterized as a “new value” plan in that it cancels existing equity and distributes new equity via both a direct distribution and a rights offering, could be confirmed “without a market test.” The panel said it also had concerns about “whether there is improper disparate treatment of uncertain unsecured creditors, and about the conduct of the debtors in binding themselves to pursue such a plan.”
“To be clear,” the panel said, “the committee is evaluating both the RSA and recently-filed plan of reorganization and needs to conduct its due diligence regarding that and other things.”
What remains unclear, of course, is why a creditors’ committee would try to derail a reorganization plan that leaves its constituents unimpaired.
Leaving aside the low probabilities that, first, the committee even mounts a challenge to the proposed reorganization plan and second, that as a result the reorganization plan is not confirmed, the committee said it was nonetheless concerned with the timing of the case. The hearing on final DIP approval is set for May 23, several weeks ahead of the hearing on approval of the company’s restructuring support agreement, which is set for June 19. The RSA hearing, presumably, would be the bankruptcy court’s first opportunity to evaluate and potentially rule on the non-confirmability of the company’s proposed reorganization plan.
The committee is further concerned that a DIP order entered next week could potentially lock in certain benefits for Apollo and the company’s second-lien noteholders that could, if a new plan is required to be developed, come at the expense of unsecured creditors.
The committee’s objections appear to have two targets. First, the committee wants to prevent the company from paying legal fees for Apollo and other second-lien noteholders as a form of adequate protection, which the committee argues is not justified. Second, the committee objects to limitations the DIP places on the time and resources made available for the committee to investigate the validity of senior lenders’ liens and other pre-petition transactions.
The committee wants at least 150 days to conduct any investigations, and the amount of the carveout for expenses to be doubled, to $500,000.
Again, the committee concedes that if the company’s plan is confirmed, “litigation over the scope of liens would be irrelevant and be superseded by the plan releases.” But the panel further states, “If, however, that plan is not confirmable, the debtors will need to start from scratch and propose a new plan of reorganization, and there will be time in that scenario to sort out actual disputes over such matters as perfection, scope of collateral, and prepetition transfers, before litigation is commenced. – Alan Zimmerman