On September 9, 2014, following a hotly contested four-day confirmation hearing, Robert Drain, U.S. Bankruptcy Judge for the Southern District of New York, issued a bench ruling approving Momentive’s chapter 11 plan. See In re MPM Silicones, LLC, No. 14-22503-rdd, 2014 Bankr. LEXIS 3926 (Bankr. S.D.N.Y. Sept. 9, 2014). Momentive’s plan provided for the company’s first and 1.5 lien noteholders to receive new notes with extended maturities at a reduced interest rate, while fully equitizing the second lien noteholders. Holders of senior subordinated notes did not receive any recovery. At the heart of the plan was a $600 million rights offering backstopped by the second lien noteholders.
In approving the plan, Judge Drain overruled objections filed by trustees for the first and 1.5 lien noteholders who argued that the plan was not “fair and equitable” because the proposed cramdown interest rate for each of the new notes was below the applicable market rate. The first and 1.5 lien noteholders also asserted that a make-whole premium would have been due upon a repayment of the debt pursuant to language in the first and 1.5 lien note indentures. The trustee representing holders of senior subordinated notes also objected to the plan on the grounds that it impermissibly subordinated the claims of senior subordinated noteholders to the deficiency claims of second lien noteholders, which resulted in the senior subordinated noteholders not receiving any recovery. The trustee for the senior subordinated notes also argued that the plan violated the absolute priority rule because Momentive and its debtor-subsidiaries retained intercompany interests even though the senior subordinated notes were not paid in full.
Although Judge Drain’s bench decision touched on several important confirmation topics, the ruling was controversial because it explicitly rejected a market-based approach to calculating the cramdown interest rate and endorsed the “formula approach” espoused in the chapter 13 cases Till v. SCS Credit Corp., 541 U.S. 465 (2004) and In re Valenti, 105 F.3d 55 (2d Cir. 1997). Under the formula approach, the debtor must, in a cram-down scenario, provide a secured creditor with new notes bearing interest equal to a “risk free” base rate (such as the prime rate) plus a risk adjustment of 1-3%. Importantly, he found while market pricing includes an element of profit, the Bankruptcy Code has no such requirement and thus the risk adjustment should be just that – an adjustment that reflects the ultimate risk of nonpayment, and not a mechanism to recover opportunity costs. Judge Drain’s decision conflicts with decisions issued by the U.S. Court of Appeals for the Fifth and Sixth Circuits as well as some lower court opinions. In economic terms, Momentive’s oversecured first and 1.5 lien noteholders lost nearly $100 million in trading value for their existing notes because the cramdown interest rate was calculated using the formula approach versus a market rate.
Following his confirmation decision, Judge Drain denied the creditors’ immediate request for a stay of consummation of the plan pending appeal. Whether a stay pending appeal is granted is committed to the discretion of the judge after considering the following factors: (i) whether the movant will suffer irreparable injury absent a stay, (ii) whether a party will suffer substantial injury if a stay is issued, (iii) whether the movant has demonstrated a substantial possibility of success on appeal, and (iv) the public interest that may be affected. On September 11, 2014, Judge Drain formally entered an order confirming Momentive’s plan, prompting the trustees for the first and 1.5 lien noteholders as well as the trustee for the senior subordinated noteholders to file an appeal with the district court and once again seek a stay pending appeal.