Owens Corning's bank debt jumped 11 points to the 124-126 range after the US Court of Appeals for the Third Circuit overturned a district court decision that would have removed the structural seniority position of bank lenders owning debt in Owens Corning. The company's bonds also moved up 5 points across the board to the 85-87 range. One trader said the bonds rose because of speculation of a positive outcome in asbestos legislation.
The ruling reverses a decision made by district court Judge John Fullam last October allowing Owens Corning to consolidate its subsidiaries into one as part of its reorganization plan a process known as substantive consolidation. Bank lenders opposed the decision because they had obtained guarantees on some of the firm's subsidiaries. The ruling stopped lenders from claiming the assets of the subsidiaries that had not filed for bankruptcy.
As reported last week on CIN's Web site, Owens Corning may choose to appeal the decision. Steve Krull, senior v.p. and general counsel for Owens Corning, said an appeal is one of the options the company would consider. But he noted that the ruling could also be viewed as positive for the company because it removes uncertainty around its emergence from bankruptcy.
The Loan Syndications and Trading Association, which had filed an amicus brief in support of the lenders fighting Fullam's ruling (LMW, 11/8), applauded the court's decision. A ruling against lenders would have had serious implications for creditors, said Elliot Ganz, general counsel for the association. "It would have made unsecured credit more expensive and rare," he said.
A serious implication of the ruling is that it would have hampered lenders' ability to rely on corporate guarantees. "If lenders can't rely on corporate separateness, then the size of the loans that can be lent to the parent are going to be less," said Andrew Cardonick, partner at law firm Goldberg Kohn, which represented the Commercial Financial Association in the case.
Cardonick warned that the ruling does not sound the death knell of substantive consolidation, but he added that the decision severely restricts this process from being applied against the interests of the main creditor. Ganz said an appeal is unlikely. "The Third Circuit decision was unanimous, unambiguous and very strongly worded," he said. "They left no room for doubt about what standards they would apply before imposing substantive consolidation and that the facts in the Owens Corning case fell far short."