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      Insolvency News and Analysis - Week Ending September 26, 2014
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    Archive for February, 2009

    Chapter 15 Recognition for Insolvencies North and South of the Border

    Sunday, February 22nd, 2009

    An update on recent recognition requests from North and South America:

    Railpower Technologies Corp. – The Quebec-based manufacturer of high performance, clean locomotives and power plants for the transportation and related industries obtained provisional relief for its U.S. subsidiary, Railpower Hybrid Technologies Corp., in the Western District of Pennsylvania on February 4.  A continued hearing on the requested relief, pending recognition of Railpower’s Canadian proceeding, is scheduled for March 5.  A copy of the provisional Order and the memorandum of law in support is available here.

    CPI Plastics – CPI Plastics Group Ltd., which previously obtained recognition in the Bankruptcy Court for the District of Wisconsin in order to protect its primary US asset – a films plant in Pleasant Prairie, Wis. – is now up for sale.  The Mississauga, Ontario-based profile and film extruder had been placed into receivership after its primary secured creditor, Bank of Montreal, petitioned to take over the company.  It continues to operate pending a sale.  According to news reports, the company’s C$3.4 million (US$2.7 million) fourth quarter losses triggered loan covenant violations with the bank.  A prior restructuring effort was unsuccessful.  The request for relief and the Bankruptcy Court’s subsequent recognition Order and related relief is available here.

    ITSA – Brazilian telecom ITSA obtained recognition from Judge Alan Gropper in New York’s Southern District in furtherance of its proposed plan of reorganization.  The company – which petitioned a Brazilian court for ratification of its extrajudicial reorganization plan last April – viewed the ancillary filing in New York as necessary in order to enforce the Brazlilian plan’s treatment of the company’s $35 million in 12% senior secured notes, which are held by U.S. creditors and whose indenture was issued under and governed by New York state law.  The company has no other assets or business operations in the United States.  Bankruptcy Judge Allan Gropper’s Order granting recognition are available here.

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    DIPzilla

    Sunday, February 15th, 2009

    An earlier post here noted the changes in DIP lending occuring in this credit market, and highlighted an October 2008 Reuters article as the jumping-off point for the observation:

    In a nutshell, what DIP financing capacity remains in this market has become much more expensive, making acquisition “bridge financing” more attractive and possibly increasing the trend toward Chapter 11 bankruptcy sales.

    A recent Bloomberg article (available here) suggests that the dramatically increased pricing and other incentives for DIP loans are bringing lenders back into the market, and cites the recent DIP package extended to Lyondell Chemical as an example.

    But what may be just as striking about the Lyondell DIP as its pricing . . . is its size.  Lyondell’s $8 billion proposed DIP – approved on an interim basis January 7 and awaiting final approval – dwarfs all prior DIPs. 

    Ever.

    Bloomberg’s article summarizes the DIP as comprised of approximately $2.1 billion from new lenders.  Lyondell’s pre-petition lenders “doubled down” with $3.25 billion of new money in order to shore up the same amount of old debt.  Copies of the Interim Order entered January 8, with exhibits, are available here, here, and here.

    To get a sense of the dimensions of Lyondell’s DIP, note that it nearly doubles the size of the prior record-holder (Delphi Corp.), based on figures compiled by The Deal’s Bankruptcy Insider and reprinted below:

    Largest loans

    Rank

    Debtor

    Date

    Commitment ($mill.)

    1

    Delphi Corp.

    5/9/08

    $4,354.0

    2

    LandSource Communities Development LLC

    6/8/08

    1,185.0

    3

    Circuit City Stores Inc.

    11/10/08

    1,100.0

    4

    Quebecor World Inc.

    1/21/08

    1,000.0

    5

    Delphi Corp.

    8/6/08

    950.0

    6

    Linens Holding Co.

    5/2/08

    700.0

    7

    Mervyn’s Holdings LLC

    7/29/08

    465.0

    8

    Lehman Brothers Holdings Inc.

    9/17/08

    450.0

    Pilgrim’s Pride Corp.

    12/1/08

    450.0

    9

    Vertis Inc.

    7/15/08

    380.0

    10

    Buffets Inc.

    1/22/08

    285.0


    *Includes loans provided by units.
    Of recent note: Bank of America Corp. includes Merrill Lynch & Co.; Barclays plc includes Lehman Brothers Inc.; Cerberus Capital Management LP includes GMAC LLC and Chrysler LLC; PNC Financial Services Group Inc. includes National City Corp.; Wells Fargo & Co. includes Wachovia Corp.

    Source: www.BankruptcyInsider.com; pipeline.thedeal.com

    To get another perspective on the size of Lyondell’s DIP, compare it to the total combined volume of DIP loans made by last year’s top 4 lenders:

    Bankruptcy financing

    Debtor-in-possession loan metrics, Jan. 1-Dec. 31, 2008

    Top lenders by volume*

    Rank

    Lender

    No. of commitments

    Volume ($mill.)

    1

    General Electric Co.

    21

    $1,960.1

    2

    Wells Fargo & Co.

    38

    1,533.7

    3

    Barclays plc

    5

    1,128.8

    4

    Bank of America Corp.

    24

    1,120.9

    5

    General Motors Corp.

    2

    977.3

    6

    Credit Suisse Group

    6

    947.0

    7

    J.P. Morgan Chase & Co.

    10

    862.2

    8

    Citigroup Inc.

    5

    738.9

    9

    Marathon Asset Management LP

    1

    592.5

    10

    Deutsche Bank AG

    2

    563.0

     

    Top lenders by number*

    Rank

    Lender

    Volume ($mill.)

    No. of commitments

    1

    Wells Fargo & Co.

    $1,533.7

    38

    2

    Bank of America Corp.

    1,120.9

    24

    3

    General Electric Co.

    1,960.1

    21

    4

    Cerberus Capital Management LP

    412.4

    15

    5

    ING Groep NV

    30.3

    12

    6

    J.P. Morgan Chase & Co.

    862.2

    10

    PNC Financial Services Group Inc.

    184.6

    10

    7

    UBS AG

    276.2

    7

    CIT Group Inc.

    223.2

    7

    8

    Credit Suisse Group

    947.0

    6

    Highland Capital Management LP

    129.7

    6

     

    Finally, it is worth noting that as difficult and expensive as DIP lending has become, Lyondell’s DIP – approved within the first week of the year – gets 2009’s DIP lending season off to a record start.  Lyondell’s commitment alone comprises approximately 40% of 2008’s entire DIP lending volume:

    Annual trend

    Year

    No. of deals

    Volume ($bill.)

    2004

    150

    $7.7

    2005

    164

    14.0

    2006

    218

    9.5

    2007

    232

    13.6

    2008

    328

    18.1

     

    Bloomberg’s Tiffany Kary quotes several sources who attribute the higher pricing of DIPs to much higher risk: In a word, increased business failure rates and the prospective difficulty of exiting DIP facilities in this cycle are driving prices in this market.

    But if the size of Lyondell’s DIP is any indication, it appears that even in this market, there is still plenty of appetite for risk.

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    When is an “Outsider” Really an “Insider?” And When Does It Matter?

    Friday, February 6th, 2009

    Conventional wisdom has it that Chapter 11 cases in this economic downturn will be far more fractious than those in the prior cycle.

    In an era of extensive de-leveraging, various constituencies are expected to wrangle fiercely over their relative positions within a debtor’s complicated capital structure.  Likewise, the growing trend toward more bankruptcy sales means creditors will likely to pursue litigation against third parties in an attempt to recover value beyond the sale proceeds.

    On Wednesday, the influential Third Circuit Court of Appeals (whose juridsiction includes bankruptcy venues in Pennsylvania and Delaware) upheld an earlier bankruptcy court decision that may widen this already-growing field of battle.

    The decision – which, ironically, arises from a 2001 case commenced during the last bankruptcy cycle – holds (among other things) that Lucent Technologies, a primary creditor, supplier, and “strategic partner” of bankrupt Winstar Communications, was an “insider” of Wintsar.  As a result, Lucent was liable to Winstar’s creditors for the return of a $188 million payment made by Winstar to Lucent prior to Winstar’s bankruptcy filing.

    The payment grew out of a relationship in which Lucent agreed to both finance and build out Winstar’s global broadband network.  Over the course of that relationship, Lucent coerced Winstar to make unnecessary purchases and used Winstar “as a mere instrumentality to inflate Lucent’s revenues.”

    Winstar’s trustee ultimately sought to recover the $188 million payment from Lucent as a “preferential transfer” – i.e., as a payment to Lucent on account of prior obligations, made while Winstar was insolvent and that provided more to Lucent than it otherwise would have received without the payment, under Winstar’s Chapter 7 liquidation.

    The US Bankruptcy Code would make any such payment recoverable for Winstar’s creditors only if it was made within the 90-day period immediately preceding Winstar’s bankruptcy case . . . with one exception: If Lucent was an “insider” of Winstar, it could be liable to Winstar’s creditors for payments made up to one year prior to Winstar’s bankruptcy.

    In this case, the $188 million payment was made outside the normal, 90-day preference period, but within one year of Winstar’s bankruptcy.  To recover it, therefore, Winstar’s trustee had to show that Lucent was an “insider.”

    Following a 21-day trial in which the bankruptcy court heard from 39 witnesses and reviewed over 1,400 trial exhibits, the court ruled in the trustee’s favor – Lucent was an “insider,” and Winstar’s prior $188 million payment was a recoverable preference.

    To reach this conclusion, the bankruptcy court – and, ultimately, the Third Circuit – had to define the term “insider.”  The US Bankruptcy Code lists several types of entities that qualify, and further defines “insider” to “include[] . . . [a] person in control of the debtor.”  Because it employs the word “include,” various courts have treated the definition as an expansive one, and have included parties other than those specifically enumerated in the Code.  In Winstar’s case, the Third Circuit took this approach and held that the question of who is an “insider” is fact-intensive, requiring “an inquiry into [Lucent's] relationship with [Winstar], including whether [Lucent] dealt at arm’s length” with Winstar.

    Based on this definition, and on the extensive factual findings at trial, the Third Circuit agreed with the bankruptcy court: Lucent and Winstar were separated by far less than an arm’s length.

    In an age of widespread business collaboration, the Winstar decision may be a potential warning signal for “strategic partners” who have credit and business relationships on multiple levels with troubled companies.  But for those prepared to heed the warning, how close is too close?  When does an “outsider” become an “insider?”

    Given the Third Circuit’s fact-based approach, a “bright-line” threshhold is difficult to draw.  The Third Circuit appeared to focus on Lucent’s willingness to require Winstar, at its own expense and to its own detriment, to make purchases from Lucent for no apparent purpose other than to pump up Lucent’s bottom line.  The Third Circuit also left some further clues to its view of “arm’s length” in its distinction between the Lucent-Winstar relationship and a more general business relationship in which a strongly-positioned creditor can compel payment of its debt or other financial concessions that may be incidential to a credit agreement or loan.

    The Third Circuit’s decision looms large as a fresh wave of bankruptcies sparks renewed interest in “unwinding” the business transactions of bankrupt debtors and recovering the greatest amount possible for creditors.

    Hat-tip to the Wall Street Journal’s Jacqueline Palank for offering up a concise post spotlighting this important case.

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