Momentive Bondholders Want Interest in Cash: Bankruptcy

Sept. 19 (Bloomberg) -- For Momentive Performance Inc. and senior secured bondholders, the only dispute isn’t an appeal over approval of the Chapter 11 plan where the lenders were forced to take new debt at below-market interest rates.

A new dispute erupted in bankruptcy court on Sept. 17 over the company’s intention to pay $50 million in post-bankruptcy interest by issuing new debt, not in cash.

In other developments, the bankruptcy judge filed an opinion explaining why he refused to let senior lenders change their votes so they would receive cash rather than be forced into receiving new notes for their old debt.

The indenture trustees for two issues of senior secured notes told U.S. Bankruptcy Judge Robert Drain that silicones producer Momentive Performance is violating a court order from late May that authorized the company to take down a $570 million new loan with a lien ahead of the lenders’ existing security interests.

According to the indenture trustees, Drain provided in his order that the noteholders would be paid interest in cash, as part of a package of so-called adequate protection for having their liens subordinated to new debt.

The lenders say they learned from a regulatory filing this week that Momentive Performance intends to pay the $50 million of post-petition interest by issuing more debt under the plan, on top of $1.35 billion in new notes to pay off the principal amount of the old debt.

The noteholders point to exhibits to explanatory plan documents that don’t show interest being capitalized. Drain formally approved the plan when he signed a confirmation order on Sept. 11.

The noteholders are asking Drain to hold an emergency hearing and require payment of post-bankruptcy interest in cash.

Meanwhile, Drain filed an opinion this week explaining the legal reasons behind one of the rulings he made in approving the Chapter 11 plan. The plan gave the senior lenders an option.

They would be paid in full in cash if they dropped claims for so-called make-whole payments to compensate for early payment of the notes. If they voted against the plan, they would be given new notes, at a lower interest rate, rather than cash.

The noteholders voted against the plan. Drain ruled against them, saying the make-whole wasn’t earned. As a result, the confirmed plan calls for the noteholders to receive new notes for the old debt at lower interest rates.

The noteholders asked Drain for permission to change their votes from “no” to “yes,” so they would be paid in cash. Drain refused.

The judge said the request to change votes came after his confirmation order resulted in a decline in the market value of the old notes.

Allowing a change of votes, Drain said, “would not be in furtherance of a consensual plan.” He said that “seeking to undo a choice that had originally been made” was “not sufficient cause.”

Along with the senior noteholders, subordinated unsecured noteholders appealed plan approval. On Sept. 22, both senior and subordinated noteholders will ask a district judge to impose a stay and hold up implementation of the plan pending appeal. Momentive Performance opposes a stay pending appeal. If the district judge is inclined to grant a stay, the company wants to be protected by a $386 million bond.

For discussion of Drain’s opinion confirming the plan, click here for the Sept. 11 Bloomberg bankruptcy report. For details on the plan, click here for the May 14 report.

Momentive Performance filed under Chapter 11 in April. It had been acquired in 2006 by Apollo Global Management LP in a $3.8 billion transaction. Apollo has about 90 percent of the existing equity and some of the second-lien debt that was converted to new equity.

The appeals are U.S. Bank NA v. Wilmington Savings Fund Society FSB (In re MPM Silicones LLC), 14-mc-00298, and BOKF NA v. Momentive Performance Materials Inc. (In re MPM Silicones LLC), 14-mc-00303, both in U.S. District Court, Southern District New York (Manhattan).

The bankruptcy is In re MPM Silicones LLC, 14-bk-22503, U.S. Bankruptcy Court, Southern District of New York (White Plains).

Updates

Lehman Sues Mizuho in $100 Million Swap Dispute

Lehman Brothers Holdings Inc. started a $100 million lawsuit this week against Mizuho International Plc to wind up disputes over a swap agreement the London-based investment bank terminated when Lehman went into reorganization in September 2008.

According to the complaint filed in the U.S. Bankruptcy Court in New York, Lehman said it had given Mizuho $71 million in “up-front premium payments” in connection with several credit-arbitrage trades.

As Lehman tells the story, it owed Mizuho nothing when the London bank terminated the swap agreement. Mizuho nonetheless filed two claims against Lehman, each for $34.1 million.

Lehman filed the complaint asking the bankruptcy judge to toss out Mizuho’s claim and require the London bank to pay about $70.5 million.

The parent Lehman Brothers Holdings and its brokerage unit began separate bankruptcies in September 2008. The parent’s reorganization plan was approved in December 2011 and implemented in March 2012. In April, the parent made its fifth distribution.

The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-bk-13555, while the liquidation proceeding for the brokerage is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Rehearing Sought on Opinion Invalidating Lending

TMT Group, the Taiwanese owner of 16 oceangoing vessels, filed papers asking all active judges on the U.S. Circuit Court of Appeals in New Orleans to rehear and set aside an unsigned opinion by the three-judge panel on Sept. 3 erecting roadblocks to financing Chapter 11 reorganization in Texas, Mississippi and Louisiana, the states covered by the Fifth Circuit.

Because TMT had little or no connection to the U.S., the company’s owner deposited millions of dollars of stock in an unrelated company as collateral for a loan that the bankrupt company would use to operate in the reorganization begun in Houston in June 2013.

The three judges ruled the lender didn’t act in “good faith” because it was aware of an adverse claim to ownership of the stock. Contrary to how other courts interpret good faith, the judges said it wasn’t necessary to show that the lender was involved in misconduct such as fraud or collusion.

In papers filed Sept. 17, TMT wants all Fifth Circuit judges to rehear the case. The company says there are always adverse claims in bankruptcies. If lack of good faith can be so easily shown, TMT predicts that bankruptcy reorganization across the country will fail because lenders won’t be willing to lend if their collateral can be taken away.

TMT challenges a second facet of the Sept. 3 opinion saying the bankruptcy court had no jurisdiction over the stock because it was provided by a third party, not the bankrupt company.

The company says even more reorganizations will fail because they often depend in one way or another on contributions from non-bankrupt third parties.

When a third party signs a contract with a bankrupt, TMT believes the bankruptcy court acquires so-called related-to jurisdiction to enforce rulings and agreements with the debtor.

For discussion of the Sept. 3 opinion, click here for the Sept. 5 Bloomberg bankruptcy report.

The company was previously known as Taiwan Marine Transport Co. One of its units claimed to be based in Houston. The company’s vessels carried cargo including vehicles, ore and petroleum.

The appeals court decision is Vantage Drilling Co. v. TMT Procurement Corp. (In re TMT Procurement Corp.), 13-20622, U.S. Fifth Circuit Court of Appeals (New Orleans).

The Chapter 11 case is In re TMT Procurement Corp., 13-33763, U.S. Bankruptcy Court Southern District of Texas (Houston).

USEC to Emerge from Chapter 11 on Sept. 30 as Centrus

USEC Inc., a producer of enriched uranium for nuclear power plants, said it will implement the Chapter 11 reorganization plan on Sept. 30 that the bankruptcy court in Delaware approved by signing a confirmation order on Sept. 5.

On emergence from bankruptcy, USEC will change its name to Centrus Energy Corp. The new stock will trade on the New York Stock Exchange under the symbol LEU.

Holders of $530 million in 3 percent convertible notes will receive $200 million in new debt and 79 percent of the new stock. Holders of preferred stock are to have 16 percent of the new common stock plus $40.4 million in new debt.

Secured creditors with $56.5 million in claims and a $28 million loan financing bankruptcy will be paid in full, just like other unsecured creditors. For details on the plan, click here for the Sept. 8 Bloomberg bankruptcy report.

Following the bankruptcy filing in March, USEC’s stock was between $3 and $4 a share from early April until it surged 144 percent on July 1 and another 49 percent the next day, closing at $11.04 on July 2. The stock declined overall since then, including a 22 percent plunge yesterday, closing at $1.99 in New York trading.

Bethesda, Maryland-based USEC was owned by the U.S. government before being privatized.

The petition listed assets of $70 million and liabilities of $1.07 billion because the amounts didn’t include properties belonging to the operating companies not in bankruptcy. The consolidated balance sheet on June 30 showed assets of $807.7 million and liabilities totaling $1.34 billion.

The case is In re USEC Inc., 14-bk-10475, U.S. Bankruptcy Court, District of Delaware (Wilmington).

LightSquared’s Losses Widen to $1.63 Billion

LightSquared Inc., the developer of satellite-based wireless communications system, reported an $81.4 million net loss in August on revenue of $1.7 million. The cumulative net loss during Chapter 11 has widened to $1.63 billion, according to the operating report filed with the U.S. Bankruptcy Court in New York.

Oct. 20 is the date for a confirmation hearing where two Chapter 11 plans will be vying for approval by the U.S. Bankruptcy Court in New York. By that time, LightSquared will have been in bankruptcy reorganization more than 29 months.

One plan is from LightSquared and another from LightSquared’s controlling shareholder Harbinger Capital Partners LLC. The cutoff date for voting is Sept. 23.

LightSquared was developing a satellite-based wireless communications system that couldn’t be implemented for lack of regulatory approval.

The case is In re LightSquared Inc., 12-bk-12080, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Nineteen California Nursing Homes Go for $62 Million

Country Villa Plaza Convalescent Center will sell its 18 skilled-nursing facilities and one assisted-living facility in California to Shlomo Rechnitz for $62 million plus assumption of specified liabilities if the Santa Ana judge approves at a hearing on Oct. 22.

The term sheet outlining the sale to so-called stalking horse Rechnitz was the result of negotiations among the company, the official creditors’ committee and the buyer, according to court papers.

The court approved a term sheet in July enabling Rechnitz to take over management of the facilities pending acquisition. There was an auction in July with no competing bids, according to court papers filed by the company on Sept. 16.

Provided the court approves the proposed sale at an Oct. 22 hearing and enters an approval order before Oct. 31, the parties have agreed to work toward completing the sale on Oct. 31, according to court papers.

For the $62 million purchase price, Rechnitz would acquire approximately $29.4 million of accounts receivable, according to court papers.

The facilities sought Chapter 11 protection in March as a result of debilitating lawsuits, according to court papers. They have about 1,905 beds and generate annual revenue of approximately $170 million.

At the outset of bankruptcy, more than $7 million was owed to pre-bankruptcy secured lender PrivateBank & Trust Co., according to court papers. Rechnitz or his affiliates acquired the PrivateBank debt during the bankruptcy.

The case is In re Plaza Healthcare Center LLC, 14-bk-11335, U.S. Bankruptcy Court, Central District of California (Santa Ana).

Gull Creek Retirement Home Sale and Plan Approved

The non-profit, 86-unit Gull Creek Retirement Community in Berlin, Maryland, will be sold to an affiliate of WMD Asset Management LLC, with sale proceeds to be distributed under a Chapter 11 plan of liquidation.

The judge in Baltimore, Maryland, signed a confirmation order on Sept. 17 approving both the liquidating plan and sale.

After no competing bids were received and the auction was canceled, a WMD affiliate was named winning bidder with an offer of about $8 million cash plus assumption of specified liabilities, according to court papers.

The facility went into Chapter 11 on June 27, with the sale already arranged in agreement with Manufacturers & Traders Trust Co. as indenture trustee on defaulted mortgage revenue bonds.

The disclosure statement estimates a recovery of 50 percent for bondholders and no recovery for general unsecured creditors. Other than obligations to the indenture trustee, bondholders, a former manager and the former owner, Gull Creek was “generally current” with all other creditors, according to court papers.

The Maryland Economic Development Corp. issued about $7.9 million in revenue bonds in 1996 to finance the acquisition and renovation of the facility, according to court papers. Gull Creek has been in default under the bonds since it took control of the facility in 2001. The bonds were accelerated in January following expiration of multiple forbearances.

At the outset of bankruptcy, Gull Creek’s debt totaled about $15.7 million, with approximately $14.5 million owing to the indenture trustee and bondholders.

Gull Creek provides both independent and assisted-living services to its residents and has about 60 employees.

The case is In re TEC/Gull Creek Inc., 14-bk-20311, U.S. Bankruptcy Court, District of Maryland (Baltimore).

Processor Phoenix Payment Attracts No Competing Bids

Phoenix Payment Systems Inc., an international processor of credit-card, debit-card and electronic-check transactions, received no bids by the Sept. 12 deadline to compete with the $50 million offer from North American Bancard LLC’s EPX Acquisition Company LLC.

The auction that would have been held yesterday was canceled, according to court papers on Sept. 17. The hearing to approve the sale to the so-called stalking horse is scheduled for Sept. 23.

The purchase price offered by NAB’s EPX Acquisition will pay all undisputed creditors in full and will provide a “substantial” recovery for the company’s equity holders, Phoenix said in court papers filed Aug. 4. The buyer will also assume specified liabilities in buying almost all the assets.

The Bancorp Bank, which is the processor and sponsor bank for the sales and credit transactions submitted by the company’s merchants, is financing the Chapter 11 effort. Phoenix received final approval for the financing package on Sept. 3.

Phoenix, which says it’s a top-35 merchant processor, has direct connections to all four major card associations and derives almost all its revenue from merchants whose customers pay with those cards.

Providing services at more than 8,700 locations worldwide, Phoenix processed about 280 million transactions in multiple currencies in 2013, according to court papers.

Phoenix filed a Chapter 11 petition in Delaware in early August, listing as much as $50 million each in assets and liabilities.

The case is In re Phoenix Payment Systems Inc., 14-bk-11848, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Watch List

Retailer Delia’s Says It Needs More Capital to Survive

Retailer Delia’s Inc. said the $30.5 million negative cash flow from operations in the first half of fiscal 2014 leaves the company with insufficient liquidity to meet its cash requirements in the next year.

New York-based Delia’s has some 90 stores that generated $51.7 million in net sales for six months ended Aug. 2. The net loss in the period was $25.2 million.

The company said in a regulatory filing that it must either find new debt or equity financing or “restructure existing debt.”

Comparable-stores sales declined 12.4 percent in the second quarter. The stores cater to teenage women.

Altegrity Faces Default Within Six Months, S&P Says

Altegrity Inc., a provider of background investigations for the U.S. government, is facing an “inevitable” default or “distressed exchange” in the next six months, Standard & Poor’s said yesterday.

S&P acted after the U.S. Office of Personnel Management told Altegrity it won’t renew an existing background investigation contract.

S&P lowered the corporate rating by two grades to CCC-. The first-lien debt also went down two levels, to CCC, coupled with a prediction the holders will recover 70 percent to 90 percent following default.

Lower-ranking debt now has a C rating from S&P along with a judgment those creditors won’t recover more than 10 percent after default.

S&P’s pessimism stems in part from a $66 million interest payment due Jan. 15.

The new S&P corporate rating matches action taken last week by Moody’s Investors Service.

Based in Falls Church, Virginia, Altegrity’s companies include USIS, Kroll and HireRight, according to its website.

Altegrity is principally owned by investment funds affiliated with Providence Equity Partners Inc., according to Moody’s.

Downgrades

PDVSA’s Citgo Demoted to B- Corporate by S&P

Refiner Citgo Petroleum Corp., ultimately owned by the government of Venezuela, was itself downgraded a second time inside one year as the result of a downgrade issued yesterday to the Venezuelan parent Petroleos de Venezuela SA.

Standard & Poor’s lowered PDVSA’s corporate rating yesterday by one grade to CCC+. Under S&P’s group ratings methodology it was obliged to downgrade Citgo another level to B-, on top of a downgrade in December.

S&P calls Citgo an “insulated subsidiary” of PDVSA. S&P doesn’t believe Citgo is entitled to a rating more than one step higher than the parent’s.

S&P said that Houston-based Citgo’s “highly restrictive debt covenants lower the probability of its being drawn into a potential PDVSA bankruptcy.”

PDVSA has “full control” over Citgo, S&P said. The rating company observed that Citgo has no independent directors “or other structural ring-fencing.”

Advance Sheets

Panel Again Questions Sternberg Limits on Stay Violation Fees

A violation of the automatic stay over a $575 debt ballooned into a damage award of more than $25,500.

The case also gave judges on the U.S. Circuit Court of Appeals in San Francisco another opportunity to criticize the court’s 2010 Sternberg decision limiting the ability to recover attorneys’ fees for a stay violation.

A payday lender collected a $575 loan after a woman filed in Chapter 7. When charged with violating the automatic stay prohibiting collection of a pre-bankruptcy debt, the lender made a conditional offer to settle by paying about $1,400. The lender didn’t admit violating the stay.

The bankruptcy judge after trial awarded the bankrupt a total of about $25,500, including damages for emotional distress and punitive damages. The court also awarded attorneys’ fees up until the date of the conditional offer. Both sides appealed. The district court in substance eventually upheld the lower court.

In the next appeal, the three-judge panel for the Ninth Circuit upheld the lower courts’ awards, and then some. The court reversed the lower courts by ruling that the bankrupt was entitled to attorneys’ fees until the bankruptcy court ruled in her favor, found a stay violation and required repayment of the seized funds.

The court said that the conditional offer didn’t end the stay violation and thus didn’t cut off the right to recover attorneys’ fees. To cut off fees at the earlier date would “undermine the remedial scheme of Section 362(k)” of the Bankruptcy Code allowing individual bankrupts to recover fees for stay violations.

As required by the Sternberg decision, the court said in its unsigned opinion that the bankrupt could only recover fees for halting a stay violation, not for attempting to recover damages.

In a concurring opinion, Circuit Judge Paul J. Watford said that Sternberg interpreted 363(k) “more narrowly than Congress likely intended.” He gave reasons to “question the soundness of Sternberg.”

In a another case at the end of August decided by a different panel, two judges on the Ninth Circuit criticized Sternberg. For discussion of the case called Schwartz-Tallard, click here for the Sept. 3 Bloomberg bankruptcy report.

Four circuits allow damages for emotional distress following a stay violation. For the most recent case at the circuit level, click here for the May 12 Bloomberg bankruptcy report about a case called Lodge.

The new Ninth Circuit case is Snowden v. Check Into Cash of Washington Inc. (In re Snowden), 13-35291, U.S. Ninth Circuit Court of Appeals (San Francisco).

(The amount of damages sought in the Lehman item was corrected in an earlier version of the story.)

To contact the reporters on this story: Sherri Toub in New York at stoub@bloomberg.net; Bill Rochelle in New York at wrochelle@bloomberg.net

To contact the editors responsible for this story: Andrew Dunn at adunn8@bloomberg.net Joe Schneider

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