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