(Bloomberg) -- Investors including Silver Point Capital and bond giant Pacific Investment Management Co. wrongly stripped collateral rights from other investors via a $250 million rescue financing for Platinum Equity-backed Incora, a judge ruled, handing a partial victory to rivals who sued over the deal.
US Bankruptcy Judge Marvin Isgur ruled that the 2022 deal for aerospace parts supplier Incora was not properly authorized, siding with disgruntled bondholders including JPMorgan Chase & Co., BlackRock Inc. and hedge fund King Street Capital Management. The ruling essentially restores their liens on Incora’s assets, improving their recovery prospects.
The ruling will be scrutinized by distressed debt players, who have been pushing the limits of contract law for years with creative financing maneuvers. Disputes over the so-called liability management transactions — which at their most aggressive are sometimes referred to as creditor-on-creditor violence — scarcely undergo full-blown trials, meaning any new case law reverberates throughout the market for junk credit.
Still, Isgur said his ruling is based only upon what was permitted in lending documents between Incora and its various bondholders and doesn’t apply to all so-called uptier transactions, a particular variety of debt deal that pits creditors against one another. Troubled companies are turning to these types of transactions with increased frequency and financiers and businesses are free to agree to lending documents with relatively light covenant restrictions that allow for similar types of liability management transactions, he said.
“This decision does not challenge the legality of uptiering transactions,” Judge Isgur said. “Parties are free to contract and take to risks within their contracts.”
Restructuring Plan
Isgur said his ruling should not keep Incora from seeking approval of its bankruptcy-exit plan. Since filing for court protection under Chapter 11 of the bankruptcy code last year, Incora has shed unprofitable contracts, negotiated better terms with customers and reorganized it operations. The company, also known as Wesco Aircraft Holdings, would also eliminate $2 billion from its balance sheet under a restructuring plan.
That proposal would give senior creditors stock and new debt in exchange for reducing their existing debt holdings. The win for the JPMorgan side means its collateral rights are restored, but also means that the Silver Point group gets to keep at least some of their liens. Since both sides now have claims on Incora’s assets, they are likely to be forced to split ownership of the company, which may be worth about $1.65 billion.
Isgur had earlier telegraphed that he would find the 2022 financing was wrong, but said he didn’t know what to do about it.
The Incora transaction gave the company fresh cash it sorely needed and gave the investors who provided it the prospect of a healthy return. But it also changed debt terms in a way that left-out creditors said is unfair, and crushed the value of their investments.
The deal worked by calling for investors to exchange their bonds for new debt securities that put them first in line to claim Incora’s assets in the event of a bankruptcy. Pimco, Silver Point and the other bondholders who were invited to the deal gave Incora the cash it needed to stay afloat, at least for a time.
But JPMorgan, BlackRock and other bondholders were excluded. Plus, to get the deal done, Incora’s private equity owner forced the company to issue “phantom notes” that were primarily used to win a bondholder vote, the jilted creditors said in their lawsuit. Those notes were never valid, in part because they were never authenticated, and in part because their purpose was to strip rights from the excluded bondholders, creditors argued in court papers.
Silver Point and Pimco have denied wrongdoing and in a recent court filing urged Isgur to temper his final ruling in order to be fair to them.
Silver Point, King Street and JPMorgan declined to comment on the ruling. Platinum Equity, BlackRock, Pimco and Incora didn’t immediately respond to requests for comment.
The case is Wesco Aircraft Holdings Inc., 23-90611, US Bankruptcy Court for the Southern District of Texas (Houston).
--With assistance from Maria Clara Cobo.
(Updates with additional information throughout.)
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