Distressed Debt Concessions and Settlements

A pivotal aspect of distressed debt investing is the negotiations among opposing (read: warring) creditor factions. Senior creditors may want one thing, but subordinated bond holders want another. Sometimes people throw the "cram down" rule as a gauntlet in negotiations when in fact they may not even have the necessary stipulations as required by 1129 of the bankruptcy code to cram down a dissenting creditor class. Many of these negotiations are worked out behind the scenes - when evaluating an investment in a bankrupt creditor, it is prudent to play out all likely scenarios to see where ultimate recovery will come out.

Some of the more interesting cases are when a single creditor class has differing views about how a settlement or concession may play out. This is important, because under the code, from the US Courts website:

Under section 1126(c) of the Bankruptcy Code, an entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class.

This exact situation is playing out in Tribune's bankruptcy proceedings. Some background: Last week, Tribune announced it had come to an agreement between Centerbridge, J.P. Morgan and certain other senior secured lenders that would enable the company to file a plan and possibly emerge from bankruptcy. Under the settlement, Centerbridge and other pre-LBO senior debt holders would receive 7.4% of the cash, debt, and equity of the reorganized debtor's distributable enterprise value. The catalyst for this settlement was Centerbridge and other creditor's assertion that the LBO was effectively a fraudulent conveyance. On the news, the bank debt traded up a couple of points. To note, in the marketplace, a settlement was widely expected and in my opinion the bank debt traded up due to the 7.4% distribution being slightly lower than the 10% thrown in the market running up to the announcement.

This is where things get interesting. I have embedded the full response below.

Tribune AdHoc Lender Response

The ad-hoc lenders, which I listed in a previous post, and include some pretty big names in distressed debt are saying: "Nope. This won't do." And because they represent 42% of the bank debt, people should listen. From reading the document, it is readily apparent their main issue is that there are far too many releases being granted in exchange for nothing. Further, the bank group, via their post-re org equity interests, would fully indemnify Sam Zell, Tribune's directors and officers, the bank debt arrangers, etc. Everyone wins except the bank debt holders.

The ad-hoc lenders are asking the court to end exclusivity so that they themselves may file their own plan of reorganization (this will be their third attempt). Their plan looks to either shut down Centerbridge's claims of fraudulent conveyance by filing a "subsidiary only plan" (see above document for explanation). They also consider setting up a litigation trust among other actions which may allow the company to exit bankruptcy quicker as the company could emerge from bankruptcy and the litigation trust could deal with causes of action relating to the LBO.

After the close today, Tribune filed its own plan. We will find out soon enough where the direction of the case is headed because also filed tonight on the docket is the Amended Agenda of Matters Scheduled for Hearing on April 13th, 2010 at 10:00AM (tomorrow). Item 14: Debtors' Motion for an Order Pursuant to 11 U.S.C. 1121 (d) Further Extending Debtors' Exclusivity Period ... Responses Received: The above docket I have embedded.

We do not know which way the judge will rule in this one. If the ad-hoc group holds itself together (I am sure J.P. Morgan will be working the lines to work people over to their side), I do not see how the current plan gets confirmed. I have to think either settlement gets renegotiated. We will see though. Will be an interesting day in court.