Empire Generating: Majority Lender Is Poised To Control Outcome Using Credit Bid

Bankruptcy Judge Robert Drain was recently affirmed in approving assumption of a restructuring support agreement that was premised upon a credit bid by the collateral agent for a secured lender group acting at the direction of the majority lenders. In re Empire Generating Co., No. 19-CV-5721 (CS) (S.D.N.Y. March 23, 2020). The minority lenders that held approximately 45% of the secured debt were not parties to the RSA, objected to the assumption and then appealed the order approving the assumption, as well as the companion order approving the bidding procedures reflecting that credit bid as the stalking horse. The equity of the debtor’s subsidiary was the subject of the sale. There were fair value estimates of the assets subject to sale approximating $250 million. The RSA contemplated a credit bid of $353 million, which was the entire amount of the secured loan; and a Chapter 11 plan which, assuming, as was expected, that the credit bid was the successful bid, treated the secured debt as fully satisfied and unimpaired. In accordance with the lender agreements, the equity was to be ratably distributed to the secured lenders. Importantly, the equity was to be sold without modification, whether to reflect the value differential inherent in the control premium received by the majority lenders or any protections for the minority lenders.

The majority lenders relied upon a collective action provision in the intercreditor agreement among the lenders under the credit facility to direct the agent to credit bid the full amount of the secured loan, notwithstanding that such amount far exceeded the estimated value of the debtors’ assets. In contrast, if the Chapter 11 plan provided for distribution of the equity on account of the secured debt, acceptance by the class of secured claims would require a two-thirds vote. While the minority lenders would receive their ratable share of the equity purchased with the credit bid, the majority lenders became the controlling equityholders without having agreed to any minority protections. The minority lenders argued that they were essentially forced into the Chapter 11 plan where the majority lenders, by virtue of receiving control of the reorganized debtor, would recover more than the minority lenders. The bankruptcy judge looked to the intercreditor contract as controlling, declining to reach the question of whether the majority unfairly evaded the protections generally available under the Bankruptcy Code and was affirmed.

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