The bank debt levels for Owens Corning dropped roughly 15 points last week to the 50 level and about $200 million of the paper traded as the market anticipated that a bankruptcy court ruling will cost bank debt holders their claims to certain subsidiary guarantees. The issue at hand is substantive consolidation, which would put all the company's assets into one pot to be shared among the creditors. "The bank debt is supposed to be senior to the bonds. There is a concern that that's not the case," explained one trader. Credit Suisse First Boston is the agent to the company's pre-petition loan. An official from the bank declined to comment.
While Owens Corning's plan of reorganization has been premised on substantive consolidation from the beginning, the original plan contained a provision that offered lenders $400 million in an effort to settle the claims to the subsidiary guarantees. The company's view is that the 1997 credit agreement was drafted to provide the lenders with protection against subordination at the subsidiary level and not to give the lenders' claims structural seniority to the other unsecured creditors at the parent company level, said a person close to Owens Corning. But the recovery plan also contained a trapdoor, explained Andrew Rahl, head of the bankruptcy and restructuring practice group at Anderson Kill & Olick and a counsel to the bondholders and trade-claim holders. "If the banks object to the plan then they will get treated pari passu with the bonds and the trade debt," he explained. Although creditors have not had the opportunity to vote on a plan of reorganization, the bankruptcy court has stated the dispute over substantive consolidation is the first step in the confirmation process and there will be no opportunity to appeal on this issue alone, said one source familiar with the case.
There are actually two provisions set out in the company's initial plan of reorganization that could be changed if the creditors do not consent to company's current plan the $16 billion allotted to asbestos claimants and the $400 million settlement with the bank debt holders. The most probable scenario is that the company will have to revise its plan. "As we move through the different stages of the bankruptcy process, the likelihood that we would amend our plan increases. Our hope is to amend our plan to reflect a consensual plan among our creditors," said Steve Krull, Owens Corning's senior v.p. and general counsel. Although there has been no official ruling on the substantive consolidation issue, the market for the bank debt sunk from the mid 60s into the 49 51 context and the market for the bonds rallied from the 25 level to the 291/2 31 range. "The market is indicating how we view the trial. We think the trial went well from our perspective. We still believe that substantive consolidation is the right outcome," noted Krull. There is currently no deadline for the court to decide on this matter. An attorney representing the bank debt holders did not return calls.