The bankruptcy court overseeing the Chapter 11 proceedings of Momentive Performance Materials yesterday afternoon issued a lengthy bench ruling turning back most of the objections to the company’s proposed cram-down reorganization plan filed by both senior and subordinated noteholders in the case, but nonetheless stopped short of confirming the plan.
White Plains, N.Y.-based Bankruptcy Judge Robert Drain wouldn’t confirm the plan because he found that based on at least one measure of the value of recoveries for senior noteholders, the interest rate on the replacement debt that is to be issued to the company’s first-lien and 1.5-lien noteholders under the plan is too low.
According to Reuters, an attorney for Momentive said the company would file a revised plan next month.
The proposed interest rate on (and calculation of the present value of) the replacement debt was significant because Momentive was seeking to “cram down” the plan on senior noteholders, requiring, in effect, that noteholders be paid in full. As reported, the replacement notes for first-lien lenders carried a proposed interest rate of the T+150, and for the 1.5-lien lenders a rate of the T+200. With the Treasury rate estimated at 2.2%, that equated to an all-in rate of 3.7% and 4.2% for the first-lien and 1.5-lien notes, respectively, according to court documents.
But according to Wilmington Trust, the indenture trustee for the 1.5-lien notes, “[i]t is incontrovertible that the replacement notes, as issued at this time…will have a fair market value substantially less than the face amount of the notes, and will therefore be worth far less than the amount of the allowed claims.”
Losing the battle, winning the war
Even though the company’s reorganization plan failed to gain confirmation last night, Momentive clearly came out the winner from Drain’s ruling, prevailing in the two key disputes that have dominated the case.
First, Drain rejected the arguments of the first-lien and 1.5-lien noteholders ($1.1 billion of 8.875% first-priority senior notes due 2020 and $250 million of 10% senior secured notes due 2020, respectively) that they were entitled to make-whole payments in connection with the early repayment of their debt.
As reported, the crux of the issue between noteholders and the company came down to an interpretation of the language – similar in each of the respective indentures – governing the early redemption of the notes. Noteholders argued that make-whole payments were due because the repayment of the notes’ principal pursuant to the reorganization plan constituted an optional prepayment ahead of the notes’ scheduled maturity dates in October 2015. The company, however, argued that under the indentures, the company’s bankruptcy filing caused an acceleration of the notes’ maturity dates, and the recovery under the proposed plan does not therefore constitute a prepayment ahead of maturity.
One question addressed by Drain was whether as a general matter a bankruptcy filing that accelerates maturities could trigger an enforceable make-whole premium. Drain ruled that while it was permissible under New York law for parties to agree to the payment of a make-whole premium even in a case where maturity was automatically accelerated due to a bankruptcy, such an agreement needed to be spelled out – typically in the indenture – in detail and explicitly.
Drain said that standard was not met in this case.
“Absent specificity, which is here lacking,” Drain ruled, the first- and 1.5-lien noteholders “do not have an enforceable claim” for the make-whole premium.
“Case law requires that much more is required upon acceleration to trigger such a provision under New York law,” Drain ruled.
Drain also rejected a challenge from holders of the company’s 11.5% senior subordinated notes, who had argued that their claims were 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. Given the plan’s dependence on the subordination provision to effectuating the second-lien recovery, a ruling favor of subordinated noteholders would have obviously torpedoed the proposed plan.
The subordination dispute also revolved around an interpretation of indenture language, in this case the definition of “senior indebtedness” in the subordinated notes indenture.
As reported, the subordinated notes indenture excluded from the subordination provision 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 argued that the second-lien debt fell within the exclusion from subordination based on the “junior in any respect” provision, because of the junior secured ranking of its liens.
In ruling in the company’s favor, however, Drain found that under the applicable law governing interpretation of contracts, “It is clear from the [indenture’s] definition of indebtedness [that the language “junior in any respect” applies to] subordination of debt and subordination of payment of debt,” not to the priority of the liens that might secure the debt.
It ain’t over ’til it’s over
Still, despite yesterday’s detailed four-hour decision read aloud from the bench by Drain, there could be one more round of key litigation to come before this case is finally completed.
As reported, following last week’s contentious cram-down confirmation hearing, Drain was set to deliver his ruling Monday afternoon. Before he could do so, however, attorneys for both the first- and 1.5-lien noteholders announced that some noteholders had changed their votes and now wanted to accept the plan – enough, in fact, to change the vote of the class from rejecting the proposed plan to accepting it.
As the noteholders saw it, that change of heart entitled them to the recoveries provided for them in the reorganization plan had noteholders accepted the proposed plan in the first place, comprised of a cash payment of 100% of principal and accrued but unpaid interest, but excluding the make-whole payments.
But the company opposed the noteholders’ attempts to change their votes, saying the noteholders had already rejected the plan and that their recovery should consist of the toggle distribution specified for them if they rejected the plan, namely, replacement debt.
“There should not be a do-over” in plan voting, an attorney for the company told Drain at Monday’s hearing, saying all that had changed since last week’s contentious confirmation trial and this week’s ruling was that noteholders had “read the tea leaves” (correctly, as it turned out) and believed Drain would rule against them.
That was not sufficient cause to permit a change of votes at this point in the process, the company’s attorneys argued.
Regardless, the disclosure of the changed votes clearly threw a monkey wrench into Drain’s plans on Monday afternoon, and rather than issue his ruling he brought the parties back into his chambers – and ultimately postponed his decision by a day – to give the parties one last shot at a consensual deal.
A deal was not reached, however – a fact ruefully pointed out by Drain at the start of yesterday’s hearing by his noting of the “stony faces” of the attorneys before him waiting to hear his ruling.
At yesterday’s hearing, however, an attorney for the first-lien noteholder said that he would be filing a motion seeking to change the votes of senior lenders, so more litigation on that issue could lie ahead. – Alan Zimmerman