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April 30, 2019 – Oaktree Capital Management, L.P., on behalf of itself and certain of its managed funds and accounts (collectively, “Oaktree”), objected [Docket No. 1883] to the Debtors, Disclosure Statement, citing (i) the lack of disclosure as to the "Secured Lender Settlement" (which Oaktree refers to as the "Insider Settlement") as indicative of a general "lack of disclosure in the Disclosure Statement and the Debtors’ and their new found friends’ efforts to exert undue leverage on Oaktree and other similarly situated parties" and (ii) efforts to play with valuations that are designed to help those "new found friends" (ie Fairfax and Bluescape).
The objection states, “The so-called 'Secured Lender Settlement' is more aptly named the “'Insider Settlement' as it does not include any non-insider secured lenders and plainly is intended to benefit the Insiders while punishing true, third party secured creditors, like Oaktree, which owns approximately 13% of the Debtors’ 1.5 Lien Notes. The description of the Insider Settlement in the Disclosure Statement is practically non-existent and symptomatic of the absence of material information relevant to a comprehensive understanding necessary to make an informed decision when voting on the Amended Plan. Bankruptcy Code section 1125(b) states that a disclosure statement must contain ‘adequate information’ regarding a proposed plan for holders of impaired claims and interests entitled to vote on such plan…Importantly, the Amended Plan acknowledges that unsecured creditors effectively are fully out of the money and, absent the Insider Settlement, would not be entitled to any real recovery on account of their claims. Admittedly, the Insider Settlement is creative, but its intended purpose is obvious (and devious): to enable the Debtors and the Insiders to effectively cram overvalued equity on Oaktree and other secured creditors on account of secured claims (which would not otherwise be permissible) while at the same time satisfying Bankruptcy Code section 1129(a)(10) through ‘settling’ the Committee’s purported claims against the Insiders for $60 million worth of nominal equity and buying non-insider unsecured creditor votes to accept the Amended Plan. Indeed, the Insiders need the unsecured creditors to vote to accept the Amended Plan in order to have an impaired accepting class at each Debtor without taking into account the votes of insiders to satisfy the provisions of Bankruptcy Code section 1129(a)(10) and by using an inflated $750 million total enterprise value as the underpinning of the Amended Plan, the Insiders are able to retain a massive stake in the Reorganized Debtors through the payment of ‘funny money’ consideration to get those votes.”
The objection continues, “It should not be lost on the Court that Fairfax and Bluescape, which collectively hold approximately 75% of the Debtors’ 1.5 Lien Notes and an even greater percentage of the Debtors’ 1.75 Term Loans, are benefitted by the use of an inflated valuation which (x) reduces the percentage of equity required to purportedly satisfy Oaktree’s 1.5 Lien Notes Claims in full, while at the same time (y) increasing the Insiders’ overall ownership percentage in the Reorganized Debtors through the provision of an inflated recovery to the 1.75 Lien Term Loan Facility Claims, notwithstanding the use of a portion of the inflated valuation recovery to ‘settle’ the Committee’s claims against the Insiders. In short, by fashioning the Amended Plan around an insider-driven settlement and an inflated valuation, the Debtors have provided their Insiders with both sufficient settlement currency for the release of Secured Claim Challenges against them as well as the means to underpay Oaktree’s 1.5 Lien Notes Claims. Yet, the Disclosure Statement contains very limited disclosure regarding the Insider Settlement and no disclosure at all about how this “settlement” construct benefits the Insiders to the detriment of true third party creditors while enabling the Debtors to perform an end-run around the provisions of the Bankruptcy Code. And this is just the beginning of the lack of disclosure in the Disclosure Statement and the Debtors’ and their new found friends’ efforts to exert undue leverage on Oaktree and other similarly situated parties. In addition to failing to provide adequate disclosure with respect to the manufactured Insider Settlement, the Disclosure Statement fails to disclose why the Debtors’ estates are retaining patently meritless claims against Oaktree; how and when those claims will be resolved; and what legal basis there is, if any, for using those meritless claims to hold Oaktree’s distributions hostage under the Amended Plan.”
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