Patriarch Steps Down From Zohar, Steps Back From MBIA Fight

  • Lynn Tilton won't manage collateral for distressed-debt funds
  • Her role with 70 companies in Patriarch's portfolio continues

Lynn Tilton’s Patriarch Partners LLC stepped back from a legal dispute with MBIA Inc. over the Zohar distressed-loan funds -- a fight that was alternately said to imperil the global structured-finance markets and the Cayman Islands collateralized debt obligation industry.

Patriarch said in a statement Friday that it would step down as collateral manager of three Zohar funds, one of which the company had sought to force into bankruptcy. It will also remove its opposition to having the bankruptcy petition dismissed, according to the statement.

“The constant litigation between Patriarch and MBIA that began in 2009 and continues today has created an unproductive and untenable relationship between parties who by definition should be aligned,” Patriarch said in the statement.

The dispute centered on how to manage the debts of the Zohar vehicles, which contain loans in distressed companies. More than $800 million of debt insured by MBIA is at stake in one of the funds. Patriarch had petitioned to push one into bankruptcy and impose a reorganization plan that it said would pay MBIA in full. 

Zohar Objects

Zohar had objected to the bankruptcy. Greg Diamond, a spokesman for MBIA, said the firm didn’t have an immediate comment on Friday’s announcement. The insurer opposed Patriarch’s bankruptcy petition, he said in a December statement.

Tilton said the decision to step down as collateral manager won’t affect her role running the more than 70 companies funded with loans through the Zohar vehicles.

U.S. Bankruptcy Judge Robert Drain in White Plains, New York, this week put off a hearing on whether Zohar I could be forced into bankruptcy, saying he would allow MBIA and Patriarch to discuss whether a new collateral manager for it and fellow CDOs Zohar II and Zohar III could be found.

In arguing against the petition, Rick Antonoff, a lawyer for Zohar, has told court that trillions of dollars were at stake in the market for such instruments, which bundle together loans in several companies in an effort to spread out risk. Patriarch responded by saying Zohar’s main motive was to protect the Cayman Islands industry in drawing up such investment vehicles.

The case is Zohar CDO 2003-1, 15-23681, U.S. Bankruptcy Court, Southern District of New York (White Plains).

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