Bankruptcy battles

In several high-profile cases, investment performance will be determined by how well the GPs perform in bankruptcy situations, writes Christopher Witkowsky.

Bankruptcy battles involving private equity players have heated up recently as firms try to influence the outcome of some rather gruesome corporate restructurings.

Take, for example, Apollo Global Management’s efforts to wrest control of bankrupt plastics manufacturer Pliant from the company’s management, which created a reorganisation plan with a group of senior lenders.

Pliant fell into bankruptcy in 2006, was reorganised and taken out of bankruptcy by its management, and then stumbled back into Chapter 11 in February because of high energy and raw materials costs. The company’s management again wants to pull the company out of bankruptcy with a reorganisation plan it created with a group of senior lenders.

But Apollo is having none of that, arguing management’s plan leaves unsecured creditors with very little recovery, while giving senior lenders a big chunk of the reorganised firm.

The Leon Black-led firm, a holder of Pliant’s junior debt, fought for months and was finally authorized by bankruptcy court to file its own, rival plan of reorganisation for the company.

Much to the chagrin of the company’s management and senior lenders, Apollo’s plan predictably gives something back to unsecured creditors, who would get recovery of 17.5 cents for every dollar they are owed, in cash. Secured creditors would get $89 million in cash and $236 million in new debt. Existing equity holders, a group that includes JP Morgan Partners, would be wiped out.

Apollo’s plan is based on a flawed valuation of Pliant, the company management said in bankruptcy filings. “This is a bit of fancy financial footwork,” they said of Apollo’s plan. Apollo’s plan has “glaring deficiencies” and any attempt to get creditors to vote on it would prove to be a “colossal waste of time, energy and resources”.

Apollo, of course, doesn’t hold back: “The practical reality of this case is that unsecured creditors … have a stark choice between a small sliver of equity and warrants under [management’s] plan versus 17.5 cents in cash under the Apollo plan.”

The plans will come down to a creditor vote, which could come as early as next month.

Another case that has not yet even reached bankruptcy court, but could prove contentious, is TowerBrook Capital Partner’s aggressive move to force GTCR Golder Rauner-backed Wilton Holdings into bankruptcy.

A TowerBrook affiliate is a creditor of the company, along with Deutsche Bank, and the two firms filed an involuntary Chapter 11 petition against Wilton. TowerBrook and Deutsche Bank give no rationale for their move in bankruptcy filings, but the move itself is a shot across the bow of GTCR.

Finally, MatlinPatterson recently tangled with Nokia Siemens Networks for control of the wireless business of bankrupt Nortel. In a somewhat passionate appeal to stakeholders in the case, MatlinPatterson said it was ready to resurrect Nortel out of bankruptcy into a profitable, viable company. The firm made a $725 million bid for the wireless business, higher than Nokia’s $650 million “stalking horse” bid.

“Because MatlinPatterson has been an investor in Nortel for some time now, we are unwilling to accept and will actively take steps to prevent a “fire sale” of Nortel’s core assets followed by the wholesale liquidation of the remaining businesses,” the firm wrote in an open letter to stakeholders, including customers, employees and vendors. “MatlinPatterson has submitted an alternative proposal because we believe that Nortel’s assets, its technologies and its people are outstanding.”

Ericsson, the world’s largest maker of wireless networks, won an hours-long bankruptcy auction last week for Nortel’s wireless businesses with a $1.13 billion bid. Flowery language and passion aside, it was the money that did the talking in this case.