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Paul Allen had to keep his voting rights as part of the deal |
Following a decision in the United States Bankruptcy Court Southern District of New York, Charter Communications successfully reinstated $12 billion of its $22 billion debt complete with the favourable terms it was issued on in 2007. It has also written off $8 billion of debt and raised $1.6 billion of new equity through a rights issue.
“The ruling will be cited over and over again,” said Jay Goffman, head of corporate restructuring at Skadden Arps Slate Meagher & Flom in New York. “It states that you can get a group of bondholders together, give them legal and financial advice and get them to sign Plan Support Agreements without creating a 13(d) group.”
Earlier this month Judge James Peck of the United States Bankruptcy Court Southern district of New Yorkdescribed Charter Communications’ plan as “perhaps the largest and most complex prearranged bankruptcies ever attempted.”
But Peck approved the plan on November 18 and appeals from the senior lenders are unlikely to succeed. Two appeals have already been given short shrift.
“People are realising that debt instruments are tremendous assets in reorganisations,” said Nick Saggese, corporate partner for Skadden in Los Angeles. “Charter Communications proves that it is possible to retain such a valuable asset in Chapter 11 proceedings.”
The reorganisation was originally conceived by financial advisers Lazard Fréres & Co and submitted eight months ago. It centred on Paul Allen, a large investor in Charter Communications and co-founder of Microsoft, and his legal advisers at Skadden agreeing to wipe out his $8 billion investment in the company. In return for having his economic interest stripped, he would retain voting power over the management.
Allen’s generosity allowed the company to save $850 million in annual interest expense and create a positive cash flow. It could then take the plan to junior bondholders to get them to convert bonds to equity interests and agree to invest in the reorganised capital structure.
In order for the plan to succeed under the terms of the senior credit agreements, Paul Allen had to retain 35% of the voting power in the company. The junior bondholders had to collectively agree to Allen retaining his voting power.
This ran the risk of the junior bondholders being classed as a group under section 13(d) of the Securities Exchange Act. If this happened, then the voting powers of all the parties involved would be aggregated and could be used to claim a change of control in the company.
The senior creditors, led by JP Morgan Chase, felt that the plan wrongly prioritised the junior bondholders. If the plan collapsed, they would be able to renegotiate the $12 billion the company had borrowed. With the change in the markets since the original deal was struck, the senior creditors would be able to ask for an increased interest rate.
JP Morgan therefore argued that a group had been formed and that, under the terms of their credit agreements, there was a banking default. But Judge Peck did not agree and the plan succeeded.
Charter Communications was principally advised by Kirkland & Ellis while JP Morgan Chase was represented by Simpson Thacher & Bartlett. Skadden was counsel to Paul Allen, Paul Weiss Rifkind Wharton & Garrison advised the unofficial committee of bondholders and Ropes & Gray represented the creditor’s committee.
See also:
How UK courts are ruling on reorganisations
http://www.iflr.com/Article/2346849/Distressed-MA-case-studies-in-realising-value.html