Vultures Circle Momentive Seeking $150 Million: Distressed Debt

Investors from GSO Capital Partners LP to Fidelity Investments have accumulated stakes in the senior bonds of bankrupt Momentive Performance Materials Inc. as a judge prepares to decide whether the company must fork over as much as $150 million to debtholders.

That’s about how much they’ll be owed if the court rules they are entitled to a special payout that compensates owners of the $1.1 billion of 8.875 percent first-lien notes when they’re redeemed early. Even if creditors lose, their downside would be mitigated in the event of an extended restructuring process that allows them to continue receiving their coupon payments.

The case highlights how the hundreds of pages of documents that govern every corporate bond sold are becoming a must read as investors look to boost performance at a time when yields are falling to record lows and returns are dwindling. Ambiguous wording in the contracts is ripe for bondholders to exploit at the expense of vulnerable borrowers.

The language in Momentive’s contract “is not air-tight about what bondholders are entitled to, and that prompted the arguments,” Robert Matz, an analyst at New York-based Covenant Review LLC, said in a telephone interview. “If investors find covenant details that are being ignored and they can be beneficial to them in a distressed situation, they would take advantage of that.”

Bond Premium

John Kompa, a spokesman for the Waterford, New York-based maker of silicones and quartz products, declined to comment on the restructuring process. Spokeswomen Oriane Schwartzman at Blackstone Group LP, parent company of GSO, and Sophie Launay at Fidelity declined to comment.

The first-lien notes traded at 108.25 cents on the dollar June 13 to yield 6.7 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities pay a so-called make-whole premium, which is the present value of all future interest payments, if they’re called early, according to data compiled by Bloomberg. That would make the bonds worth about 114 cents on the dollar, assuming a principal price of 106.7, the data show.

Momentive Performance brought a lawsuit in Manhattan bankruptcy court against the first-lien noteholders seeking to bar the special payout, saying the bankruptcy accelerated the maturity of the debt, nullifying the premium, according to a court document. It also sued another class of debtholders on similar grounds.

Bankruptcy Plan

The company’s proposed bankruptcy plan, which has the support of Apollo Global Management LLC and some of the other creditors, would repay the first-lien lenders their principal without consideration for the early premium, according to an April 14 court document. The company will go before a judge June 19 to seek preliminary approval of the plan, which would restructure about $4.17 billion of debt.

Fidelity held $132.7 million of the 8.875 percent notes on Jan. 31, according to data compiled by Bloomberg. GSO’s $2.6 million holding was disclosed in a court document.

Those bonds pay interest on April 15 and Oct. 15 -- payouts that would be worth about 4.4 cents each -- according to a filing with the U.S. Securities and Exchange Commission. A trustee for the noteholders submitted a timeline that would extend the lawsuits into the middle of October, according to court documents filed yesterday.

Momentive Performance, which is seeking to begin a five-day trial on Aug. 14 to confirm its plan of reorganization, has asked the judge to expedite the handling of the lawsuits over the premium payments as well as one based on the priority of different bondholders.

Leveraged Buyout

Momentive Performance, which was taken private by Leon Black’s Apollo for $3.8 billion in 2006, filed for bankruptcy in April after struggling to make payments on debt dating back to its leveraged buyout. The company hasn’t posted an annual profit since the acquisition and lost $464 million last year, Bloomberg data show.

GSO and Fidelity are looking toward the outsized returns offered in distressed situations as interest rates depress returns on assets. The yield on high-yield, high-risk debt fell to 5.75 percent yesterday, the lowest on record, according to Bank of America Merrill Lynch index data.

Holders of the first-lien securities are wagering the lawsuits will prolong the length of the bankruptcy process, allowing them to continue getting coupon payments from the 8.875 bond and decreasing the risk of the make-whole wager.

“The timeline in lawsuits like this is very much case by case,” Matthew Duch, a fund manager at Bethesda-based Calvert Investments Inc., said in a telephone interview.

The case is In re Momentive Performance Materials Inc., 14-bk-22509, U.S. Bankruptcy Court, Southern District of New York (White Plains).

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