Hedge funds that invested in an obscure bond of General Motors Corp. (MTLQU)’s old businesses won approval of a settlement that will give some of them 1.8 times the return of other creditors and resolve disputes over how they acted on the eve of the automaker’s collapse.
U.S. Bankruptcy Judge Robert Gerber in Manhattan today approved a settlement that gives the holders of notes in GM’s Nova Scotia unit a $1.55 billion claim in the bankruptcy. Some, including Fortress Investment Group LLC (FIG) and Elliott Management Corp., have already received a share of a $367 million cash payment made to holders of the notes, which have a face amount of $1 billion.
Gerber said that while the settlement was unopposed, he reviewed it anyway, given that “the underlying controversy is of the magnitude that we have here,” and found that it was reasonable and should be approved.
The settlement is the culmination of a complex investment play that, for Fortress, dated back to 2005. It will release past, present and future holders of the Nova Scotia notes from liability, and free up more shares and warrants in the reorganized General Motors Co. (GM) for distribution to all creditors.
“This settlement will conclude years of complex litigation and substantially benefit the estate by reducing the claims at issue by more than $1.129 billion,” lawyers for creditors wrote in court papers. New GM also said in court documents that it supports the agreement.
Believing the U.S. auto giant was probably bound for bankruptcy, Fortress began in 2006 to buy bonds issued by General Motors Nova Scotia Finance Co., a unit of General Motors of Canada Ltd. Elliott started buying in 2008. By June 2009, those funds, along with Aurelius Capital Management LP and Appaloosa Management LP, had acquired, for pennies on the dollar, the majority of $1 billion in notes issued by the Nova Scotia unit.
The funds anticipated that in a GM bankruptcy, the Nova Scotia law governing the notes would allow them to make multiple claims on the same debt. One Elliott portfolio manager called the strategy a “double-dip litigation play.” A Morgan Stanley (MS) analyst likened the deal to sticking “two straws in one milkshake.”
They struck a deal on the eve of GM’s June 1, 2009, bankruptcy that said all holders of the Nova Scotia notes should get the $367 million in cash plus $2.67 billion in claims. GM, fearful of having its Canada unit tipped into bankruptcy by the hedge funds, acceded to a deal that promised the noteholders multiple recoveries.
A trust for other unsecured creditors sued in March 2012, saying that the deal improperly benefited the noteholders at their expense and that the hedge funds acted improperly to secure the deal.
The settlement, achieved in mediation overseen by U.S. Bankruptcy Judge James Peck in Manhattan, cuts the $2.67 billion in claims to $1.55 billion.
The GM Chapter 11 case is In re Motors Liquidation Co., 09-50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The adversary case is Motors Liquidation Co. GUC Trust v. Appaloosa Investment LP I, 12-09802, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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