Solutia finally gets disclosure approval; confirmation hearing set for Nov. 29

By Reshmi Basu

New York, Oct. 19 - Solutia, Inc. obtained the green light Friday for its fifth amended plan of reorganization and related disclosure statement from the U.S. Bankruptcy Court for the Southern District of New York.

The confirmation hearing is scheduled for Nov. 29.

After several failed attempts, the company pushed through its new plan, which was backed by all of its major constituents, including the ad hoc committee of Solutia noteholders, the official committee of equity security holders, the official committee of unsecured creditors, Monsanto Co., Pharmacia Corp, the official committee of retirees and the ad hoc committee of trade creditors.

2009 noteholders dispute

However, the hearing was far from relaxed as judge Prudence Carter Beatty questioned Solutia as to how the company would remedy its conflict with the second-lien noteholders, which could turn out to be a sticky point during the confirmation hearing.

The noteholders led by their trustee, Bank of New York, have argued that they are owed $209.9 million based on the principal amount of the 11.25% senior secured notes due in 2009 plus accrued interest of some $13 million.

However, Solutia contends they have exaggerated the amount and are not entitled to the interest payments or other damages.

In court Friday, the lawyer for the 2009 notes informed the judge that as of Friday morning, a new development occurred in which the noteholders' classification was switched to unimpaired from impaired.

John Cunningham of White & Case LLP criticized Solutia, saying that the company was engaging in unfair tactics by forcing his constituents to be deemed to the plan.

Beatty sided with the noteholders, saying they should be allowed to vote. And whether those votes would count would depend on how she ruled on their motion, which seeks a partial summary judgment that allows for the full amount of the senior secured notes claims, which is $223 million principal amount of the claim plus damages.

A hearing on that motion is scheduled for Oct. 26.

Nonetheless, judge Beatty received assurances form Solutia had they had the $223 million in the event that it was needed.

Meanwhile, she provided a little for food for thought regarding the noteholders' quest for full payment.

"You might get $223 [million] - not because of the OID [original interest discount] being secured but because the subsidiaries guaranteed the payment of securities," judge Beatty said noting that the OID is not a bankruptcy issue but a tax law issue.

Furthermore, she pointed to case law, which suggested that the noteholders were only entitled to the principal and were cut off from future income streams, depending on how the instrument was drafted.

Cover letter to trade creditors

In a separate issue, a visibly irate Beatty asked Solutia to provide a cover letter to the trade creditors, explaining what their options were in "plain English" instead of asking them to wade through hundreds of pages.

Under the plan, the trade creditors, who have claims in the $2,500 to $100,000 range, will have the option to elect a payment of 52 cents on the dollar, payable on the effective date of the plan or sell their claims to shareholders.

Exit lender worries

In his request for approval Friday, Solutia attorney Jonathan S. Henes of Kirkland & Ellis LLP told the court that while the company hopes to exit bankruptcy by the end of the year, new issues have surfaced, which have created a more pressured timeline for the company.

Henes told the court that the exit lenders have expressed concern that if the plan is not confirmed by the end of November, then the company will run into the holiday season, which will impede Solutia's ability to access financing.

Judge Beatty replied, "Your biggest problem about November is your 2009s."

As previously reported, the plan includes $250 million of new investment in the reorganized company in the form of a rights offering to noteholders and general unsecured creditors. They will be able to buy new common stock at a 33.3% discount to the implied equity value.

The rights offering will be backstopped by a group of creditors for which they will receive a fee of 2.50% and an allocation of 15% of the rights offering.

The plan also provides that Monsanto will take on financial responsibilities in the areas of tort litigation and environmental remediation.

Recoveries under the amended plan will include:

• Holders of $2.2 million in priority non-tax claims, $40 million to $50 million in senior secured claims, $209.9 million in secured note claims, $1 million to $2.5 million in convenience claims and $8.4 million in CPFilms claims will recover 100% under the plan;

• NRD claims will be reinstated;

• Holders of $2.44 billion in debtor intercompany claims and Axio claims will receive no distribution under the plan;

• Holders of $317 million to $367 million in general unsecured claims will receive 31.4% of the new stock for a recovery of 83.1 cents on the dollar;

• Holders of $455.4 million in noteholders claims will receive 43.8% of the new stock for a recovery of 88.4 cents on the dollar;

• Monsanto will receive up to $175 million in cash, to be reduced by any stock not taken up by equity holders in the rights offering;

• Current equity holders will receive 1% of the new stock and those with stakes above a threshold will be able to buy up to 17% of the new stock for a possible 18% stake.

Current equity holders who own at least a specified number of shares will also receive five-year warrants for 7.5% of the common stock and the right to participate in a buyout for cash of general unsecured claims of less than $100,000 but more than $2,500 for a recovery of 52.35%, subject to the equityholders' election to sell their claims;

• Holders of $35 million in retirees' claims will receive the benefits provided under the terms of the settlement between Solutia and its retirees, for a 69.8% recovery.

They will receive 2.01% of the new common stock, which will be deposited into a VEBA trust and used to pay retiree welfare benefits. This is in addition to the $175 million from the rights offering that will also be deposited into the trust;

• Creditors backstopping the rights offering will own 4.7% of the new common stock.

The enterprise value of the reorganized company is estimated at $2.85 billion, with an implied reorganization equity value of $1.2 billion.

A total of 59.75 million shares of new common stock will be issued by the reorganized company.

Solutia, a St. Louis-based manufacturer and provider of performance films, specialty chemicals and an integrated family of nylon products, filed for bankruptcy on Dec. 17, 2003. Its Chapter 11 case number is 03-17949.

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