In the News Bankruptcy Court Decisions

Diary of a Deal: From Dashed Hopes to the NYSE

The summer of 2007 was not an ideal time to be a Chapter 11 debtor in search of exit financing. And yet, that was just the position $3.5 billion chemical company Solutia found itself in.

Solutia began its search for its $2 billion exit financing facility in May 2007. But as spring turned to summer, collateralized loan obligations had all but dried up and the credit markets collapsed, forcing Solutia to put the search on hold. So, when Solutia renewed its search in late September, it was with a keen recognition of the characteristics of the new credit market.

"We needed to find a way to get an exit facility committed to us regardless of whether the banks could get the loan syndicated," said Solutia's lead restructuring counsel, Kirkland & Ellis partner, Jon Henes, who shepherded Solutia through its Chapter 11 cases. The answer was an old -fashioned "club deal," where multiple banks agree to fund the loan and keep the debt on their balance sheets if they fail to syndicate the loan.

A commitment to do just that eventually came from Citigroup Global Markets Inc., Goldman Sachs Credit Partners LP, Deutsche Bank Trust Company Americas, and Deutsche Bank Securities Inc. In exchange for the risk, Solutia agreed to pay the banks an enhanced fee for their commitment to fund the facility — regardless of the results of the syndication process. The commitment letter contained a market material adverse change provision, specifying that the lenders' obligation to fund Solutia's exit financing was contingent on the absence of any adverse change in the markets that, in the reasonable judgment of the banks, impaired syndication of the facilities.

All was well at the Solutia camp. By the end of October, the banks executed a firm commitment to fund the exit financing package, set to expire on Feb. 29, 2008. Having installed a new leadership team, completed an operational restructuring, fixed its capital structure, resolved complex legacy liability issues, and resolved numerous lawsuits, Solutia was set to emerge and put four arduous, but fruitful years in Chapter 11 behind it.

On Nov. 20, 2007, the U.S. Bankruptcy Court, Southern District of New York approved the exit financing package, and nine days later, confirmed Solutia's plan of reorganization. The company anticipated that the plan of reorganization would become effective in late December or January.

But in the months that followed, Solutia's emergence was threatened, and four years of litigation and negotiations, and a complex global settlement that provided the foundation for the company's plan of reorganization, were jeopardized.

Come along as we follow Henes on Solutia's journey from celebration, to dashed hopes, and back again:

Jan. 22, 2008

The tides turned.

Just three days before the exit financing was to be funded, Citibank, Goldman and Deutsche Bank met with Solutia and informed them that they would not complete the exit financing.

The market material adverse change provision had not been met, the banks said. It was the first time a market MAC had been called in a Chapter 11 case.

And with that, Solutia's momentum was halted.

Solutia released a statement to the press indicating that the effective date of its emergence would be delayed. Quoting the release, Solutia believed that the "ongoing conditions in the credit markets began long before Oct. 25, 2007. Accordingly, Solutia believes that the lead arrangers are required to fund their commitments on or before Feb. 29, 2008."

After a deep breath, bewilderment gave way to reassessments and a clear-headed plan. Solutia's management did what they do best, said Henes, which is to lead, and in short order, a three-pronged plan was developed: 1) a litigation strategy; 2) a strategy to ensure that the litigation wouldn't preclude a settlement; and 3) a contingency plan to extend the DIP facility, which was due on March 31.

Feb. 6, 2008

Solutia retained Quinn Emanuel as litigation counsel and sued the banks, seeking enforcement of their commitment to provide exit financing.

Meanwhile, Henes remained in constant contact with Solutia's stakeholders to mollify their growing wariness. He also attempted to maintain a strong relationship with the banks to ensure that a settlement could still be reached, notwithstanding the lawsuit. And finally, he worked diligently with Solutia's internal financial team and financial advisors in an attempt to extend the DIP facility.

Saturday, Feb. 23, 2008

After days of testimony, Judge Prudence C. Beatty held the last day of the expedited trial. It was the first time the bankruptcy court had ever held court on a Saturday, but the commitment with the banks ended in just six days. All the evidence was presented, and closing arguments were scheduled for Feb. 25 at 2 p.m.

At 6 p.m., while the expert witnesses began testifying, Henes was on the phone with Jan Baker, the banks' counsel at Skadden, Arps. With many of the decision-makers stuck in court, Baker and Henes agreed that they should begin a dialogue to see if there was any hope for a settlement. It was do or die time, and both sides recognized it.

Henes hopped into a taxi with Solutia's director of planning and coordination, and with Solutia's CFO and general counsel not far behind, headed up to Skadden's Times Square office building. On the way, Henes and Baker planned the strategy for the evening. With the majority of the decision-makers in court, and others not flying in until the next day, they agreed to set the table for Sunday's negotiations. That night, Baker and Henes laid their cards on the table. "It was a good night," Henes said. He was home by 10 p.m.

Sunday, Feb. 24, 2008

Sunday morning at 10 a.m., Henes met with Solutia's executives and financial advisors to develop a term sheet to present to the banks. At 2 p.m., representatives from the banks arrived. Though they were in the midst of litigation, the parties expressed their willingness to negotiate in good faith, with the hope of, very quickly, reaching a settlement.

During the negotiations, terms flew back and forth. Individuals met in the hallways to push and pull each other closer to a deal. And by 10 p.m., the parties had a big picture view of the settlement, but only in principal, and not in writing. They looked each other in the eyes, shook hands, and were confident that, come morning, the details would be hammered out, and the deal would be in writing.

Henes and Baker called the judge's clerk to tell her they had a deal and to request that Monday's hearing on closing arguments be adjourned. The court agreed to hold a hearing on Feb. 26 at 10 a.m. to determine whether to authorize the parties to enter into the revised exit financing package.

The rest of the night was spent documenting the deal and negotiating the final terms. At the same time, Henes' partner Jeffrey Zeiger began preparing a motion to file with the court, while Henes placed phone calls to Solutia's eight stakeholder groups to get them real time information on the deal, and what it meant to them. That lasted until 3 a.m.

Monday, Feb. 25, 2008

Solutia announced it reached an agreement on an exit financing package to close on Feb. 28. The agreement enabled Solutia to emerge with its plan of reorganization intact.

At 7 a.m., Henes returned to Kirkland's offices to begin work on the motion with Zeiger. Simultaneously, he responded to the many phone calls from Solutia's stakeholders, overwhelmed by the amount of information they were receiving in a short time.

At 3 p.m., Henes went to court for the first day hearing for another chemical company, Wellman Corp., that commenced a Chapter 11 on Friday. Back in the office at 7 p.m., the motion was filed, but a long night was ahead.

There remained two things to do: prepare for the hearing the next day, and work with three stakeholders not yet on board. In particular, certain hedge funds that guaranteed Solutia's $250 million rights offering argued that there was a condition in the back stop agreement that would not be met through the new exit financing agreement. The equity committee had real concerns about the terms of the exit facility and how they impacted a rights offer to equity holders. And the creditors committee was not pleased with the $5 million waiver fee to be paid to the hedge funds. Conversations that lasted until 2:30 a.m. hammered out some of the kinks.

Tuesday, Feb. 26, 2008

At 8 a.m., Henes met with Susheel Kirpalani of Quinn Emanuel, Jared Dermont of Rothschild, and Jim Sullivan, Solutia's CFO, to prep Dermont and Sullivan for the big hearing.

One hour later, Henes walked to the court with the equity committee, still not quite on board. During the walk, he got them "99.6 percent of the way" to supporting the deal. The $5 million waiver fee to be paid to the back stop parties still was not acceptable to the creditors committee, however.

It was at the courthouse that Henes finally gained the support of the creditor's committee, and worked out the remaining .04 percent with the equity committee. Henes was finishing his last sentence as the judge entered the courtroom. He turned around and walked to the podium.

Two hours later, Judge Beatty determined the terms of the exit facility were substantially consistent with the commitment letter, and authorized Solutia to enter into the exit financing.

Great news, but the loan wasn't closed, and the commitment letter expired the next day. Henes headed to Kirkland to work on the closing, where he stayed until 11 p.m., at which time he went home to await a midnight pre-closing conference call. It was 5:30 a.m. before the loan closed.

Hanging up, Henes was going to go to sleep. But since he'd been up all night, he thought he might as well wait to see if the money would actually flow. And flow it did.

Feb. 28, 2008

Solutia emerged from Chapter 11 stronger, healthier and more competitive than ever before, announced Sullivan.

March 17, 2008

March 17 found Henes at the N.Y. Stock Exchange with the Solutia management team ringing the opening bell.

"Solutia's Chapter 11 cases are a true success story. And, while the last days were harrowing, the final 67 hours ended with Solutia emerging from Chapter 11, and being present for the bell ringing make it particularly sweet," Henes reminisced. "This case got done through great leadership from Solutia's management team, a judge who understood complex issues and pushed parties to settle, strong relationship building, teamwork, and at the end, good old-fashioned face-to-face negotiations."

Source: Bankruptcy Court Decisions. Copyright 2008 by LRP Publications, P.O. Box 24668, West Palm Beach, FL 33416-4668. All rights reserved. For more information on this or other products published by LRP Publications, please call 1-800-341-7874 or visit our website at: