Momentive Performance Materials is facing a slew of objections to its proposed restructuring-support agreement and a related backstop commitment for its $600 million rights offering that is a key part of its contemplated reorganization plan, court filings show.
A hearing on approval of the RSA and the rights offering backstop commitment is scheduled for June 19.
Objections poured in on Friday from virtually every creditor constituency in the case, save for the second-lien lenders that are already parties to the RSA.
Two objections, one from U.S. Bank, the indenture trustee for the company’s 11.5% senior subordinated notes, and another from the unsecured creditors’ committee in the case, both focused on the issue of whether the subordinated notes are subordinate in right of payment to the company’s second-lien debt.
As reported, U.S. Bank has filed an adversary action in the case seeking a declaratory judgment that the subordinated notes are pari passu with, the company’s second-lien debt (see “Momentive’s subordinated holders sue, claim pari passu with 2nd-lien,” LCD, June 3, 2014).
Another set of objections come from the company’s senior lenders, arguing that the proposed RSA violates the intercreditor agreement between the senior lenders and second-lien lenders by providing a distribution to second lien lenders even though first-lien lenders have not been paid in full, since holders will not be receiving a make-whole payment of some $250 million.
According to the senior creditors, the company failed to make a “single attempt” to forge consensus around a reorganization plan.
In addition, the first lien indenture trustee said it intends to file an adversary action in the case to enforce the intercreditor agreement.
And to come full circle, one objection to the RSA came from Fortress Investment Group, a holder of second-lien debt, asserting that it had been unfairly excluded from participation in the RSA and the rights-offering-backstop commitment.
The proposed plan and RSA
As reported, Momentive filed for Chapter 11 protection in White Plains, N.Y., on April 13, with an RSA in hand supported by holders of about 85% of the company’s second-lien notes.
Under the proposed reorganization plan, the company would repay both its first-lien notes ($1.1 billion of 8.875% first-priority senior secured notes due 2020) and its 1.5-lien notes ($250 million of 10% senior secured notes due 2020) in full, in cash, including accrued and unpaid interest, but excluding any make-whole amounts.
Second-lien lenders ($1.161 billion of 9% second-priority springing-lien notes due 2021 and €133 million 9.5% second-priority springing-lien notes due 2021), are to receive the equity in the reorganized company, along with participation rights 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.
The rights offering is backstopped by the parties to the RSA, of which Apollo is the largest holder, who will receive a premium equal to 5% of the rights offering amount, or $30 million, payable in new common stock. Commitment parties are also entitled to a $30 million alternative transaction fee if the plan contemplated by the RSA is not confirmed.
The company’s senior subordinated creditors, meanwhile, would not see any recovery, due to the right of payment subordination in favor of second lien lenders. Existing equity, needless to say, is to be cancelled.
The subordination dispute
According to the June 6 objection to the RSA filed by the official creditors’ committee, the contemplated subordination of the subordinated debt to the second-lien debt is a “foundational assumption” of the company’s proposed reorganization plan.
Similarly, U.S. Bank noted in its own objection, also filed on June 6, that if the bankruptcy court rules in its favor in the adversary lawsuit, that is, if the bankruptcy court rules that the subordinated debt is not subordinate with respect to right of payment to the second-lien debt, it would render the company’s proposed reorganization plan “facially unconfirmable,” and require the company to “start the plan negotiation, drafting, and solicitation processes back at square one.”
Despite that risk, according to the objections, the company is proceeding with approval of the RSA and the rights-offering-backstop commitment.
“The debtors have decided (and are attempting to bind themselves as debtors in possession) to proceed as planned with a potentially unconfirmable plan,” U.S. Bank said, adding, “Indeed, faced with the choice of a rock (an unconfirmable plan) and a hard place (no strategy for how to exit), the debtors have decided to march on.”
But that tactic presents a timing problem, the objections argue, because the backstop commitment would entitle the backstop parties to a $30 million alternative transaction fee if the reorganization plan contemplated by the RSA is ultimately not implemented, which would occur of U.S. Bank is successful in its lawsuit.
“It is one thing for the RSA parties to pursue a plan of reorganization that may have a built-in confirmation flaw,” the unsecured creditors’ committee said, “it is quite another thing, however, for the RSA parties to seek to impose potentially massive administrative liabilities – which will stand ahead of unsecured creditors – if their RSA plan fails.”
As reported, the company last week asked the bankruptcy court to set a timetable for the case that would, among other things, schedule a plan confirmation hearing for Aug. 14. According to the company’s proposed schedule, the subordination dispute would, along with other adversary actions in the case, be litigated on a schedule that would see discovery completed by July 25.
But U.S. Bank said in its objection that it intends to seek summary judgment in the subordination adversary action “in the near future … so that the subordination issue may be resolved in advance of plan confirmation proceedings.” Summary judgment is a legal proceeding that allows a court to rule on a dispute that doesn’t involve any factual disputes on an expedited basis.
It is unclear the extent to which such a process would speed up litigation of the dispute, given the already compressed timeframe advanced by the company.
Beyond that, it is unclear whether even a speeded-up litigation timetable addresses the core complaint in the objections, namely, the tactical leverage held by the second-lien lenders in the case.
While the first lien lenders’ objection to the RSA was based on different grounds than those advanced by the trustee for the subordinated debt, for example, they also argued that the RSA, in effect, provides second-lien lenders with a free option to implement the company’s current proposed reorganization plan or, failing that, to walk away with a $30 million administrative payment in the case. – Alan Zimmerman