The Momentive Performance Materials bankruptcy resulted in a number of disputes on issues germane to bankruptcy practitioners, including on intercreditor agreements (as we wrote about here), the enforceability of makewhole premiums and the proper interest rate in the context of a Chapter 11 cramdown plan. On that third issue, Judge Drain entered an order on remand in April addressing the proper cram-down rate for two classes of senior noteholders that had been issued replacement notes under Momentive’s Chapter 11 plan. Given the notices of appeal filed just days later, it looked like another round of appellate review might occur. But on May 15, Momentive announced that it had elected to refinance those notes, resulting in a voluntary dismissal of the appeals.
In its decision in Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2d Cir. 2017), the Second Circuit had ruled that the proper approach in a Chapter 11 cramdown dispute requires, as step one of a two-step process, that the trial court “assess whether an efficient market rate can be ascertained, and, if so, apply it to the replacement notes.” See Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2d Cir. 2017). Only if such an efficient market did not exist should a court proceed to second step and use a “formula” or “prime-plus” approach to calculate the cramdown rate (by starting with an essentially risk-free interest rate and applying appropriate risk adjustments).
On remand, Judge Drain interpreted the Second Circuit’s directive as requiring him to determine whether there was either “traditional market efficiency or efficiency in the form of a fair and transparent competitive process involving sophisticated parties that arrives at a potential exit loan with a term, size and collateral comparable to the proposed forced cram down ‘loan.’” In assessing the cram-down rate for the 1L notes, Judge Drain concluded that while there was no “traditional market efficiency” for the notes, the Debtors had “negotiated backup exit financing with a term, size and collateral comparable to” the first lien replacement notes “at a time sufficiently close to the confirmation of the Plan to serve as a reliable comparison” to those replacement notes.
As a result, the court was able to determine a rate, based on certain adjustments in market conditions, that it believed met this so-called “process efficient” requirement. The court ruled that the appropriate cramdown interest rate for the 1L replacement notes was “LIBOR [calculated on a three-month basis] + 4.50%, which includes .50% of OID and .375% of market flex, with a floor of 1.00%” – which was a significant step-up from the original rate under the confirmed plan.
With respect to the 1.5 Lien replacement notes, the court concluded that “[t]here was no similar back-up exit financing negotiated comparable in term, size and collateral” to those notes. However, the court concluded it could nonetheless determine a “process efficient” market for exit financing of a term, size and collateral comparable to the 1.5 Lien Replacement Notes by combining the terms set forth in “a proposed bridge facility commitment letter” with “expert testimony employing a reasonably reliable methodology to calculate a step-up from the negotiated ‘process efficient’ back-up first lien exit financing.” Based on this approach, the court ruled the interest rate for the 1.5 Lien replacement notes was 7.9%.
For bankruptcy practitioners, the refinancing and dismissal is notable as it means that Judge Drain’s rulings applying the so-called “process efficient” standard will not receive further review, at least for now.