Wachtell 1124

July 15, 2009 RESTRUCTURING AND FINANCE DEVELOPMENTS Attempted Reinstatement of Bank Debt in Bankruptcy Litigation in the bankruptcies of Spectrum Brands (settled three weeks ago at the close of trial) and Charter Communications (scheduled for trial starting July 20) offers a preview of what will be a recurring theme during this economic downturn and tight credit environment: financially distressed companies seeking to use Chapter 11 to substantially de-lever their balance sheets by equitizing junior debt while “reinstating” existing senior debt on original terms that are more favorable to the borrower than those available in today’s financing market. This unusual scenario is the product of an unprecedented credit boom followed quickly by a market collapse, leaving a number of financially distressed, overleveraged companies in its wake. Many of these companies find themselves unable to sell or refinance in the current market, and are looking to a little-used provision of Chapter 11 for a solution. Section 1124 of the Bankruptcy Code provides that if, pursuant to its Chapter 11 plan, a debtor cures all nonbankruptcy defaults under a debt instrument and does not alter the rights of the debtholders, the reorganized company can “reinstate” the debt on its original terms, without the consent of the debtholders. Thus, the success of a “reinstatement” strategy depends on the debtor’s ability to craft a feasible plan that does not violate the terms of the relevant loan documents and allows the debtor to remain in compliance with the loan’s terms post-bankruptcy. Because many secured credit agreements negotiated over the last several years have favorable interest rates and contain so-called “covenant lite” provisions (few or no financial covenants and permissive negative covenants), such companies have a strong incentive to try to take advantage of reinstatement. In Spectrum Brands, the debtors tried to reinstate their $1.4 billion senior secured term loan. The senior lenders mounted a two-pronged challenge to the plan, arguing that (1) the equitization of the subordinated debt created non-curable defaults under the credit agreement provisions concerning permitted refinancings and changes of control, and (2) the plan was not feasible because the debtors would be unable to comply prospectively with the loan’s senior leverage ratio covenant. As part of a settlement following a five-day contested confirmation hearing, the debtors and lenders agreed to leave the term loan in place but with significantly enhanced economic terms for the lenders: a 2.50% increase in the interest rate spreads, the addition of a 1.50% LIBOR floor, and a shortening of the maturity by 9 months. The outcome of the Spectrum trial, as well as future cases such as Charter, demonstrate that debtors and creditors confronted with a potential reinstatement must carefully analyze the debt documents and scrutinize the debtor’s projections to identify, or defend against, potential default and feasibility issues. Richard G. Mason David C. Bryan Elaine P. Golin Joshua A. Naftalis Gregory E. Pessin If your address changes or if you do not wish to continue receiving these memos, please send an e-mail to [email protected] or call 212-403-1487. W/1434444