Blavatnik Faces Creditors in Trial Over Lyondell Bankruptcy

  • Billionaire accused of benefiting from 2007 merger with Basell
  • Defense says no one could have foreseen 2008 financial crisis

Almost a decade after the ill-fated deal that created chemical giant LyondellBasell Industries NV, creditors headed to court to try to recover billions of dollars that they say Len Blavatnik extracted before the company went bankrupt.

At a trial that began Monday in Manhattan bankruptcy court, the creditors will seek to claw back more than $1.7 billion from Blavatnik, his firm Access Industries Holdings LLC and other affiliates. They’re also seeking about $2 billion more from Blavatnik and other executives for alleged mismanagement of LyondellBasell, which filed for bankruptcy in 2009. (It exited in 2010.)

They say money he extracted as a shareholder and through certain fees was improperly and intentionally transferred away from the financially precarious company, dooming it to failure. If the creditors can prove their case, U.S. bankruptcy law would let them recover the funds for redistribution.

Blavatnik, who is worth about $18.1 billion according to data compiled by Bloomberg, denies wrongdoing and says the suit is premised on the notion that he should have anticipated the 2008 financial crisis.

‘Blowout Price’

Access Industries bought Basell BV in 2005 for $5.7 billion and picked up Lyondell two years later, with banks committing $22 billion to fund the acquisition. The deal paid $12.5 billion to shareholders. The creditors have assailed the “blowout price” of $48 a share to acquire Lyondell’s stock, considering it had previously languished for years, seldom rising above $30.

A trust for the unsecured creditors sued in 2009, alleging that after Blavatnik bought a 10 percent stake in Lyondell -- but before a deal was made -- he and other executives made the company appear more financially healthy than it was. Creditors say they did so in order to benefit themselves through stock holdings.

Before the merger agreement, Blavatnik acquired rights to Lyondell’s stock, and received a $100 million transaction fee and a $25 million “management” fee, according to the lawsuit.

Lyondell’s main businesses -- petrochemicals and petroleum refining -- are capital-intensive and cyclical, meaning they need to be adequately funded to survive downturns. But the company’s highly leveraged capital structure and the cost of the 2007 deal left it unable to do so, the creditors allege. They cite analysts who predicted an industry slowdown after 2007 and also point to signals that a recession was brewing at the time of the merger.

‘Extremely Leveraged’

“The extremely leveraged capital structure created as a result of the merger was both unreasonable and reckless,” they said in their court filings. Blavatnik, who approved the transaction, personally made over $458 million when the deal went through, they allege.

Blavatnik’s lawyers counter that the creditors are ignoring the “unprecedented and unforeseeable global disruption” of the financial crisis. Also, the transaction wasn’t a garden-variety leveraged buyout, but a strategic merger supported by the equity and assets of the acquirer. 

Blavatnik had more than $6 billion of his own equity in Basell at risk in the deal, according to court papers. Five major banks committed to the transaction, risking billions, his lawyers say. Publicly available market data, along with analyst and credit-rating information at the time, projected an adequately funded company, they said.

“To suggest LBI was foreseeably ‘doomed to fail’ in 2007 is, simply put, to rewrite history,” lawyers for Blavatnik said in court filings. “The math and logic of the Trustee’s conspiracy theory just don’t work.”

The trial is expected to continue for at least three weeks, with closing arguments sometime in December or January.

The case is Lyondell Litigation Trust, 09-01375, U.S. Bankruptcy Court Southern District of New York (Manhattan).

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