The indenture trustee for Momentive Performance Materials 11.5% senior subordinated notes due 2016 has asked the bankruptcy court to schedule a “threshold hearing” for the week of July 28 on the issue of whether the notes are subordinate in payment rights to or, as the indenture trustee contends, pari passu with, the company’s second-lien debt.
In a June 16 court filing, the subordinated notes trustee, U.S. Bank, argued that the subordination issue was a threshold issue that should be decided before the bankruptcy court addresses other issues in the case. According to U.S. Bank, if the second-lien lenders prevail in the dispute, the company can continue with confirmation of its proposed reorganization plan, but if subordinated noteholders prevail, it would render the company’s proposed reorganization plan unconfirmable and require new negotiations – an issue better decided sooner rather than later.
U.S. Bank said it proposed the threshold hearing schedule in a June 12 letter to Bankruptcy Court Judge Robert Drain.
As reported, the company’s proposed reorganization plan provides for second-lien lenders 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.
On May 30, however, the indenture trustee, U.S. Bank, filed a lawsuit arguing that under the terms of the subordinated notes indenture, the second-lien debt does not constitute “senior indebtedness,” and as a result is pari passu with the subordinated notes (see “Momentive’s subordinated holders sue, claim pari passu with 2nd-lien,” LCD, June 3, 2014). According to the lawsuit, the definition of “senior indebtedness” in the subordinated notes indenture excludes any debt that “by its terms is subordinate or junior in any respect to any other indebtedness or obligation of the company.”
According to the lawsuit, the key phrase in that language is “junior in any respect,” which the suit argues means that it applies not only to debt that is considered junior in right of payment, but also to debt that is junior in other respects as well – such as a junior secured ranking of second-lien debt.
As also reported, Momentive on June 5 asked the bankruptcy court to set a schedule for the case that would see, among other things, the subordination issue litigated on an accelerated timeline along with two other adversary actions filed in the case, namely, lawsuits filed by the company’s senior creditors (comprised of $1.1 billion of 8.875% first-priority senior notes due 2020 and $250 million of 10% senior secured notes due 2020, the so-called 1.5-lien notes, respectively) seeking declaratory judgments that holders are entitled to acceleration payments as a result of early repayment of the debt.
The company’s requested timetable would see discovery completed simultaneously for all three matters by July 25, with a confirmation hearing slated to begin on Aug. 14, continuing to Aug. 14, 15, 20, 21, and 22.
Momentive filed its reorganization plan and disclosure statement on May 12, and a hearing on, among other matters, the adequacy of the disclosure statement is set for tomorrow. In that regard, it is worth noting that virtually every creditor constituency in the case, with the exception of a group of the second-lien noteholders who are serving as backstop parties to the company’s proposed $600 million rights agreement and who will, under the company’s proposed reorganization plan, wind up with the lion’s share of the reorganized equity, has objected to the proposed disclosure statement.
Meanwhile, in addition to asking Drain to set a threshold hearing on the subordination issue, U.S. Bank also objected to Momentive’s proposed timetable more generally due to its compressed timeframe, saying it was “patently unreasonable and devoid of any notion of due process.”
U.S. Bank added, “But, the most offensive part of the debtors’ proposed schedule is that there is no real reason for it. The debtors’ post-petition financing does not mature until the date that is 12 months following the commencement of these cases—i.e., well into 2015. The only reason the debtors have requested a confirmation hearing in mid-August is because that is when the plan proponents determined they want to be paid.”
Meanwhile, the indenture trustee for the company’s 1.5-lien notes also objected to the proposed timetable, calling it “unjustifiably compressed” and “unduly prejudicial.”
“The debtors have failed to allege, let alone demonstrate, cause for their proposed shortened deadlines, and, in fact, no such cause exists,” the indenture trustee, Wilmington Trust, said.
Wilmington Trust put forth an alternative timetable for the case that would see discovery on the adversary actions and confirmation issues concluding by Sept. 9, with motions for summary judgment filed by Sept. 15 and briefing on the motions concluded by Oct. 13.
Under this schedule, the confirmation hearing would be held at a date to be determined, presumably after the court has decided on the adversary actions, inasmuch as Wilmington Trust said that creditors should not be required to vote on the plan until the issues raised in adversary actions are resolved.
A hearing on setting a schedule for the case is scheduled for tomorrow in White Plains, N.Y. – Alan Zimmerman