The board of the Loan Syndications and Trading Association has voted to file an amicus brief in support of bank lenders in the Owens Corning case. According to a memo obtained by LMW, "LSTA members requested that we file an amicus brief in this matter because, if left standing, 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."
Last month Judge John Fullam ruled that all of Owens Corning's assets and debt would be consolidated under one entity known as substantive consolidation (LMW, 10/8). The judge's decision put all of Owens Corning's assets and debt into one basket and disregarded any actual or perceived structural priority of bank debt recovery over bond and trade claims holders and asbestos claimants. The $1.6 billion of bank debt dropped from the mid-80s to the 75-78 context as a result. "The LSTA is recognizing this issue is important for the lenders in general," a trader said. Jane Summers, general counsel of the LSTA, could not provide comment by press time.
Andrew Rahl, head of the bankruptcy and restructuring practice group at Anderson, Kill & Olick and counsel to the bondholders and trade claim holders, at the time described it as a great victory for the bondholders and trade creditors. Responding to this latest development he said, "The idea that the Owens Corning decision on substantive consolidation is bad for the loan market is really nonsense."
Rahl said the decision is unique to Owens Corning. "The law of substantive consolidation is not controversial," he said. "The evidence in the Owens Corning case was overwhelming. The banks did not rely on these subsidiary guaranties. That decision would have no application to any other credit. Every credit has to be taken on its own."
Nonetheless, the judge's decision is being appealed by bank debt holders that thought their claims should not be treated pari passu with those of other debt holders because the banks had claims against the subsidiaries and not the parent company. These lenders include Kensington International and Springfield Associates--affiliates of distressed investor Elliott Management--agent bank for the lending syndicate Credit Suisse First Boston and Angelo Gordon & Co. The LSTA has hired Sherman & Sterling to develop the brief and a draft is expected to be available for review by Nov. 15. An Elliot spokesman did not return calls. Officials at CSFB and Angelo Gordon did not return calls.
According to the LSTA document, "in reaching his determination, the judge in the Owens Corning case relied on factors that are so common to 'corporate families' in the U.S. that, if upheld on appeal and followed by other courts, the extreme remedy of substantive consolidation would be more frequently applied. If courts were to order substantive consolidation without a more rigorous test on 'substantial identity' than the one applied here, the benefit of obtaining unsecured subsidiary guaranties to create structural seniority would be lost. In addition, unless reversed or remanded, it is expected that the ruling in Owens Corning would likely invite increased bankruptcy litigation in other cases brought by creditors, such as parent company bondholders who would be encouraged by this ruling to argue for parity of treatment in recovery against subsidiary assets."
Rahl said the matter is more straightforward than that. "There are a lot of bank debt holders that have lost a lot of money because they were betting on the outcome of this legal issue," he said. "That's what this was really about."