Incora Judge Says $250 Million Funding Was Flawed, Asks What Now


(Bloomberg) -- Silver Point Capital and bond giant Pacific Investment Management Co. will soon learn whether they will get nothing for putting together a controversial, $250 million rescue package for a Platinum Equity-backed aerospace parts supplier in 2022.

US Bankruptcy Judge Marvin Isgur is scheduled today to decide a months-long trial that pitted the investors against a group of jilted bondholders, including JPMorgan Chase & Co., BlackRock Inc. and hedge fund King Street Capital Management. The decision is seen as an important test of the limits of rescue financing and liability management. 

Isgur has already said the financing for Platinum portfolio company Incora was flawed, indicating he’ll side with bondholders who said the deal was only possible thanks to underhanded paper shuffling. But now he must decide what to do about it — or, in the formal language of the court system, what “relief” he should grant the winners.

“So my question is: Can I take away the bigger relief and give you the smaller relief if I think that’s the right thing to do?” Isgur said to lawyers for bondholders late last month. To help him decide, he asked both sides to submit short answers to a technical point of law about how much power federal courts have. 

Previously: As Platinum Debt Deal Heads to Trial, So Do Limits of Lending

The ruling is highly anticipated among distressed debt players, who have been pushing the limits of contract law for years with creative financing maneuvers. Disputes over the so-called liability management transactions — which at their most aggressive are sometimes referred to as creditor-on-creditor violence — scarcely undergo full-blown trials, meaning any new case law may reverberate throughout the market for junk credit.

The Incora transaction gave the company fresh cash it sorely needed and gave the investors who provided it the prospect of a healthy return. But it also changed debt terms in a way that left-out creditors say is unfair, and crushed the value of their investments by purporting to weaken their claims to Incora’s assets.

For Incora itself, the ruling will go a long way toward deciding who will own it next. Since filing for Chapter 11 bankruptcy last year, Incora has shed unprofitable contracts, negotiated better terms with customers and reorganized its operations. The company, known by some as Wesco Aircraft Holdings, would also eliminate $2 billion from its balance sheet under a restructuring plan Isgur will consider approving.

But first, the judge must decide whether JPMorgan and its allies win big, or win small. A big win would mean Silver Point, Pimco and the other investors in their group would be stripped of their collateral rights and get no credit for rescuing Incora. Isgur said repeatedly last month during closing arguments in the trial that he thought it would be unfair for those investors to get nothing for that loan.

A small win for the JPMorgan side would likely mean its collateral rights are restored, but the Silver Point group gets to keep at least some of their liens. Under that scenario, both sides would likely split ownership of Incora, which the company’s restructuring plan values at $1.65 billion.

The dispute started in 2022 when Pimco and Silver Point helped Incora raise $250 million. The investors exchanged their bonds for new debt securities that put them first in line to claim Incora’s assets in the event of a bankruptcy. As part of the transaction, Pimco, Silver Point and the other bondholders who were invited to the deal gave Incora the cash it needed to stay afloat.

But JPMorgan, BlackRock and other bondholders were excluded. Instead, they saw their debt stripped of the collateral protections that would have given them a claim on the aerospace company’s assets in bankruptcy, according to court papers. 

To win enough support to complete the deal, Incora’s private equity owner forced the company to issue “phantom notes” that were primarily used to win a bondholder vote, according to a lawsuit filed by the creditors left out of the financing. Those notes were never valid, in part because they were never authenticated, and in part because their purpose was to strip rights from the excluded bondholders, creditors argued in court papers.

Silver Point and Pimco have denied wrongdoing and in a recent court filing urged Isgur to temper his final ruling in order to be fair to them.

But the two investors also argued that Isgur doesn’t have the right to void the debt contract at the heart of the dispute. During last month’s hearing, Isgur warned the firms that if they stuck to that position, he may have no choice but to throw out their entire lien, leaving them with nothing. 

“I hope you’ll let me do the right thing,” Isgur told lawyers for Silver Point and Pimco.

The case is Wesco Aircraft Holdings Inc., 23-90611, US Bankruptcy Court for the Southern District of Texas (Houston).

--With assistance from Maria Clara Cobo.

©2024 Bloomberg L.P.

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