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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 theclose of trial) and Charter Communications (scheduled for trial starting July 20) offers a previewof 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 balancesheets by equitizing junior debt while reinstating existing senior debt on original terms that aremore favorable to the borrower than those available in todays financing market.

This unusual scenario is the product of an unprecedented credit boom followedquickly by a market collapse, leaving a number of financially distressed, overleveraged compa-nies in its wake. Many of these companies find themselves unable to sell or refinance in the cur-rent market, and are looking to a little-used provision of Chapter 11 for a solution. Section 1124of the Bankruptcy Code provides that if, pursuant to its Chapter 11 plan, a debtor cures all non-bankruptcy defaults under a debt instrument and does not alter the rights of the debtholders, thereorganized company can reinstate the debt on its original terms, without the consent of thedebtholders. Thus, the success of a reinstatement strategy depends on the debtors ability tocraft a feasible plan that does not violate the terms of the relevant loan documents and allows thedebtor to remain in compliance with the loans terms post-bankruptcy. Because many securedcredit agreements negotiated over the last several years have favorable interest rates and containso-called covenant lite provisions (few or no financial covenants and permissive negativecovenants), 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) theequitization of the subordinated debt created non-curable defaults under the credit agreementprovisions concerning permitted refinancings and changes of control, and (2) the plan was notfeasible because the debtors would be unable to comply prospectively with the loans 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 additionof 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 debtors projections to identify, or defend against, po-tential default and feasibility issues.

Richard G. MasonDavid C. BryanElaine P. GolinJoshua A. NaftalisGregory E. Pessin