Owens Corning: Supreme Court rules on loans

The US Supreme Court put an end to the conflict between different creditors of Owens Corning, the fiberglass manufacturer in Chapter 11 bankruptcy proceedings, appearing to uphold the seniority of gua…

The US Supreme Court put an end to the conflict between different creditors of Owens Corning, the fiberglass manufacturer in Chapter 11 bankruptcy proceedings, appearing to uphold the seniority of guaranteed loans over unsecured debt. By refusing to hear the case, the Supreme Court upheld the earlier reversal, on appeal, of a lower court decision that would have meant equal status for loan and bond holders, ignoring guarantees on the loans provided by still healthy subsidiaries of the bankrupt parent company. The Loan Syndications and Trading Association welcomed the decision. “This action by the Supreme Court affirms the LSTA“s consistent support for the Third Circuit opinion which maintained that no plausible reason existed for altering the lending agreements in this case”, said Elliot Ganz, LSTA general counsel. Until it was reversed by the Third Circuit Court of Appeals in August 2005, the original lower court decision frightened Wall Street and prompted concerns that bankers would have to apply stricter lending criteria, potentially increasing the cost of borrowing. In a filing with the Supreme Court, Credit Suisse First Boston, agent for the banks that made USD 2 billion of loans to Owens Corning, said the initial grant of so-called “substantive consolidation” was rightly overturned on appeal “because it was being sought as a stratagem to strip the banks of rights under the Bankruptcy Code, favour other creditors, and trump possible objections to the (company“s reorganisation) plan by the banks”. The appeal was taken to the Supreme Court by other creditors, including asbestos claimants. In declining to hear the case, the Supreme Court justices made no comment, a circumstance seen as an endorsement of the Third Circuit“s ruling that reversed the original decision to allow substantive consolidation. That decision had been made with the aim of simplifying and accelerating the bankruptcy process. Mr Ganz said after the Third Circuit ruling that lenders could now be confident that what was negotiated would be enforced. “Lenders have long relied on the legal precedent that obtaining guarantees from subsidiaries lessens the risks of lending to a parent company and the earlier decision had the potential to disrupt the market, negatively impacting both lenders and corporate borrowers”, he added.