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Bank Creditors Drive Up Owens Corning On Substantive Consolidation Appeal

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Owens Corning's bank debt jumped 16 points last week, climbing to 107 1/2-108 1/2 after lenders took a bet that the U.S. Court of Appeals for the Third Circuit would overturn Judge John Fullam's decision on substantive consolidation.

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Owens Corning's bank debt jumped 16 points last week, climbing to 107 1/2-108 1/2 after lenders took a bet that the U.S. Court of Appeals for the Third Circuit would overturn Judge John Fullam's decision on substantive consolidation. The oral arguments in the appeal against the ruling were presented last Monday in Philadelphia in front of a three-judge panel.

"Based on the tone of the questions and the substance of the arguments, we felt very, very comfortable with the fact that the Third Circuit would likely overturn Judge Fullam's decision," a source familiar with the lender group said. "The panel's questioning of counsel for Owens Corning and counsel for the representative of the note holders and the trade creditors did appear more rigorous than its questioning of the banks' counsel," said a lawyer present at the proceedings. "The tone of appellate argument, however, is not a guaranty of how the court will rule. The impact of a reversal will depend, in part, on what the opinion says."

"It wouldn't be trading there if it wasn't expected," one trader countered. A group of hedge funds, banks and financial institutions attended the appeal. Substantive consolidation is becoming one of the hottest issues in the loan market. Last October, Judge Fullam controversially ruled that Owens Corning assets and debt would be consolidated under one entity (LMW 10/12). The decision disregarded any actual or perceived structural priority of bank debt recovery over bond and trade claim holders and asbestos claimants. At that time, Andrew Rahl, head of the bankruptcy and restructuring practice group at Anderson Kill & Olick and a counsel to the bondholders and trade claim holders, considered the decision a significant victory, but he acknowledged "the case was far from over."

At stake is not just the $1.6 billion of bank debt loaned to Owens Corning, with Kensington International and Springfield Associates--affiliates of hedge fund Elliot Management--and Angelo, Gordon & Co. the largest lenders.

The bank creditor group represented by agent Credit Suisse First Boston has fiercely appealed the decision as a problem for the financing markets. An amicus brief was filed jointly by the Loan Syndication and Trading Association and The Clearinghouse Association in January to support the lenders arguing "The ruling could create uncertainty as to the effectiveness of loan structures that rely on the priority of unsecured guaranties from subsidiaries of a borrower. This uncertainty would also extend to structured financings that depend on the viability of creating structural priorities among lenders to various entities in an enterprise" (1/10).

"The loans were made to Owens Corning because we were told, and we believed, that the guaranties were in place, otherwise the group wouldn't have loaned the money to them," the source said. An Owens Corning spokesman did not return calls. Rahl declined comment on a pending case. An Elliot spokesman and CSFB and Angelo Gordon officials declined comment.

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