To say that the world of mega Chapter 11 cases is slow right now is an understatement. Once American Airlines leaves Chapter 11, as it is soon expected to do, the number of pending big cases will be … well, can you think of one?
Sure, litigation lingers from the General Motors and Lehman Brothers cases. But that's not really surprising. The big case of the 1970s â€" Penn Central â€" had litigation that lasted into the 1990s. So that's not really restructuring, it's more like litigation about restructuring.
When I find myself poking into the Oreck Chapter 11 case, with its $11 million debtor-in-possession loan, we know things are slow.
Still, there are some interesting developments, perhaps none quite so fascinating as the super-speedy Central European Distribution Corporation prepackaged case.
The debtor, a vodka maker, is essentially an entirely foreign operation, save for a small office in New Jersey. All its operating companies are in Poland, Russia, Ukraine and Hungary.
So, naturally the company filed its Chapter 11 case in Delaware.
How? State of incorporation, of course. All well-advised distressed companies, wherever located around the globe, should make sure that they have a Delaware corporation somewhere in their corporate structure. Preferably as a holding company.
Now before the anti-Delaware crowd gets too hot and bothered, let's remember that Central European Distribution was listed in the United States and had a great big bundle of bond debt issued here, too.
And like all good prepackaged bankruptcies, this case was primarily about sticking it to the investors. Trade creditors and employees went through the process unharmed.
The really interesting parts of the case â€" beyond the fact that it was done in just over a month â€" is that one of the board members who signed a declaration in support of confirmation of the plan and the overall structure of the plan.
The declaration was signed by an independent director of Central European Distribution, Joseph J. Farnan Jr.
Restructuring types will recognize the name as the former federal judge from Delaware who used to oversee the bankruptcy judges, and once withdrew the “reference†â€" a Federal District Court order that automatically places bankruptcy cases before the bankruptcy judges.
He joined the board in February of this year.
Now to the plan itself.
Senior bondholders got some cash and a fistful of new paper. Nothing too interesting there.
The convertible bondholders got a recovery that seems to have confused many in the financial news media. Indeed, I couldn't make heads or tails out of it in any of the articles I have read.
To get to the bottom of this, I took a look at the memorandum submitted by Skadden, Arps, the vodka maker's counsel, in support of confirmation of the plan.
The lawyers explain that holders of the convertible notes
who participate in the RTL Offer will receive total consideration of $55 million, comprised of $25 million in cash and $30 million in secured notes issued by Roust Trading â€" an estimated recovery of 35.4% â€" while holders who do not participate in the RTL Offer will receive their pro rata share of $16.9 million in cash.
They don't define “RTL Offer,†but there is the orthodox footnote that capitalized terms are defined in the plan, so we go over there and find:
“RTL Offer†means the offer by RTL to exchange, subject to certain conditions, Existing 2013 Notes for Cash and securities issued by RTL on the terms described in the term sheet between RTL and certain holders of Existing 2013 Notes, dated March 14, 2013, and included with RTL's beneficial ownership report filed with the United States Securities and Exchange Commission on Form 13D/A filed March 14, 2013.
They aren't making this easy are they? So we head over to the Securities and Exchange Commission Web site to read the term sheet and find a document marked “privileged & confidential†yet filed with the S.E.C.
We also find out that there were about $155.3 million of the convertible bonds not owned by Roust Trading Ltd., the “RTL†of RTL Offer fame. That also tells us that RTL has been doing some shopping: they hold about $100 million of the convertible debt.
Either choice under the plan is giving the convertible noteholders the same amount of cash.
The difference is that the “RTL Offer†gives the old convertible noteholders additional RTL notes, which come complete with a PIK toggle. They are secured by 15 percent of the debtor's new stock, which presumably won't be worth a whole lot if the noteholders ever need to foreclose on it.
Maturity is in 2016, so basically it's a gamble to see if you will get a bit more recovery a few years down the line.
What does RTL get out of this alternative offer? Well, convertible noteholders who take the offer are releasing any claims they might have against RTL rising out of its effective takeover of the debtor.
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.
