Covanta files amended reorganization plan; bank lenders, 9.25% noteholders get different treatment

By Carlise Newman

Chicago, Sept. 29 - Covanta Energy Corp. filed an amended disclosure statement Monday for its reorganization and liquidation plans - and split secured bank lenders and secured bondholders into two separate groups.

The split into two classes follows objections to the original plan, which included protests from holders of the company's 9.25% secured notes due 2022. They objected that the original plan proposed to pay them "significantly less than" the face amount of their claims and also objected to the inclusion of the 9.25% notes within the same class as the secured bank claims, whose holders comprise 80% of the class 3 claims.

Under the plan, bank lenders, with $418.7 million to $448.6 million in claims, will receive their share of the sum of any net liquidation proceeds and liquidation assets; any excess cash equal to the amount of the claim; and their share of the remaining recovery, where distribution will consist of cash, new high yield secured notes and new lender warrants.

The estimated recovery for bank lenders is 63% to 70.5%.

Secured noteholders, with $105 million in claims, will receive a separate category of recovery made up of cash, new notes and warrants, subject to various conditions.

Secured noteholders will also have the option to opt out of participation in the 9.25% settlement. If there are bondholders that reject the plan with claims in excess of $10 million, the adversary proceeding will continue, and the distribution to the rejecting bondholders will be held in a reserve account.

If that amount is less than $10 million, the claim of the bondholder that rejects the plan will be deemed a secured claim, and they will be treated the same way as secured noteholders that accept the plan.

Estimated recovery for secured noteholders before giving effect to the 9.25% settlement distribution is 63.0% to 70.5%; and after, 55.2% to 61.7%.

Subordinated claims, which consist of $85 million convertible bonds bearing interest at 6% and $63.5 million convertible bonds bearing interest at 5¾%, will receive nothing.

Covanta said in the statement that it will use the confirmation gearing to prove that the plans have been proposed in good faith, and that the classification of the 9.25% note claims under the respective plans is proper and that no disparate treatment exists.

The reorganization plan is based on the economic benefits to be derived from restructuring the company as an employee-owned business. By establishing an ESOP, to which Covanta will contribute all of its stock, the employees of Covanta will receive an equity interest in the reorganized company that provides employees an opportunity to profit from the value of the reorganized common stock.

The liquidation plan applies to the subsidiaries the company will sell. Covanta will sell its interests in Heber Geothermal Co., Heber Field Co., Second Imperial Geothermal Co., Mammoth-Pacific LP and other related holding companies to affiliates of ArcLight Energy Partners Fund I L.P. and Caithness Energy, LLC for $170 million.

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