Solutia files suit against Citigroup, Goldman Sachs, Deutsche Bank, demands exit financing

By Rebecca Melvin

New York, Feb. 6 - Solutia Inc. filed suit Wednesday against would-be lenders for refusal to close on $2 billion of financing that the company needs to exit bankruptcy.

The suit, filed at the U.S. Bankruptcy Court for the Southern District of New York, asks the court to order Citigroup Global Markets Inc., Goldman Sachs Credit Partners LP, Deutsche Bank Securities Inc. and Deutsche Bank Trust Co. Americas to either provide the exit financing or pay compensatory and punitive damages of no less than $2.25 billion.

Solutia and the banks have agreed that the case should be heard by the court on an expedited basis, with the trial to be concluded by the end of February, prior to the expiration of the banks' commitment, according to a Solutia press release.

A hearing is proposed for Feb. 21, according to an attorney.

Jeffry Quinn, Solutia chairman, president and chief executive, said, "Solutia is ready to emerge from Chapter 11. We have successfully repositioned our company, we have confirmed a plan of reorganization that brings significant value to our constituents, and our businesses are performing well. We now look to the banks to meet their commitment."

In November, the bankruptcy court approved the exit financing package and plan of reorganization.

Market MAC provision cited

In late January, shortly before the Feb. 6 anticipated close of exit financing, the banks notified Solutia they were refusing to provide the facility due to a market MAC, or materially adverse change, provision, which they say relieves them of their obligation to provide the financing.

Solutia argues that the state of the syndication market hasn't changed and that it was already depressed - having tumbled in the summer of 2007 - when the financing commitment was made on Oct. 25.

"We specifically bargained for a firm commitment from Citi, Goldman, and Deutsche Bank whereby these three lenders expressly agreed to fund Solutia's exit financing even if they could not syndicate the loans," the company's filing states.

"Rather than take the loans on their books as they were obligated to do, and repeatedly said they would do," the banks are guilty of breach of obligation, the filing states.

"The banks should be held to the promise that they made, and for which Solutia agreed to pay handsomely," the filing states.

According to the complaint, on the night of Jan. 20, just after completion of the roadshow, representatives of Citi (including two managing directors and two directors) participated in a conference call with representatives of Solutia (including chairman and chief executive Quinn and two others) to discuss the exit financing that was scheduled to close and fund on Jan. 25, 2008. During the course of the call, the banks, for the first time, cited the market MAC provision, stating that they would refuse to close and fund on Jan. 25 if requested to do so.

Further, Solutia alleges improper conduct, misrepresentations to the company and fraud that caused Solutia to enter into the initial engagement by promising that the financing was firmly committed.

Citigroup downplayed the market MAC provision as "bank policy," saying that it had never been invoked as an excuse not to provide financing in the past, the filing states.

Generally, the market MAC provision gives the buyer the right to pull out of the deal or renegotiate the terms in the event of an unforeseen material adverse business or economic change affecting the target company or its assets between the execution of the definitive acquisition agreement and the closing of the transaction.

Dana exits with $2 billion

As background in its complaint, Solutia alleges that Citigroup was unable to fill the syndication book due to its own gratuitous and self-motivated actions. One serious investor was ignored because Citigroup didn't want to "deal" with that person. In other instances, interested investors looking for a good price were turned aside because Citigroup wanted to "reeducate" the market, the filing states.

The filing also points out that Dana Corp. was able to exit from bankruptcy on Feb. 1 following successful syndication of $2 billion in exit financing.

If the market MAC provision can be used as an excuse for not funding, it is clear, Solutia alleges, that the banks intended from the outset to rely on it to evade any funding obligation absent an upturn in the market and a successful syndication, the filing states.

What this means for other companies at the tail end of Chapter 11 bankruptcies remains unclear. Currently Delphi Corp. is seeking lender agreements for $6.125 billion in exit financing, which it expected to have in hand on Jan. 23. Delphi's bankers are Citigroup and JPMorgan.

Citigroup told Prospect News on Wednesday, "We believe the [Solutia] suit is without merit and that we have complied with all contractual obligations." It refused to comment further.

Solutia says the lack of financing will also affect the commitment made by certain creditors to backstop Solutia's $250 million new equity rights offering. That commitment also expires on Feb. 28, if Solutia has not emerged from bankruptcy by that deadline. In that event, Solutia would be forced to return to creditors funds deposited pursuant to the equity rights offering.

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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