Professional Documents
Culture Documents
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.
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 lev-
erage ratio covenant. As part of a settlement following a five-day contested confirmation hear-
ing, the debtors and lenders agreed to leave the term loan in place but with significantly en-
hanced 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, dem-
onstrate that debtors and creditors confronted with a potential reinstatement must carefully ana-
lyze the debt documents and scrutinize the debtor’s projections to identify, or defend against, po-
tential default and feasibility issues.
Richard G. Mason
David C. Bryan
Elaine P. Golin
Joshua A. Naftalis
Gregory E. Pessin
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