Lyondell lenders, creditors face off over DIP loan as final approval hearing continues

By Rebecca Melvin

New York, Feb. 26 - Senior lenders and unsecured creditors of Lyondell Chemical Co. argued over the bankrupt petrochemical company's $8 billion debtor-in-possession credit agreement - the largest in history - ahead of a ruling expected Friday on final approval from the U.S. Bankruptcy Court for the Southern District of New York.

Creditors argued that the DIP is expensive and burdensome for borrowers and will set a precedent for future DIP lending; while senior lenders countered that it is reasonable and represents the best chance the company has to survive the current turbulence and hopefully make money again in better times.

Edward Weisfelner of Brown Rudnick, counsel for the official committee of unsecured creditors, recommended that the DIP should be granted on the condition that two extensions of three months, priced in the market, are included, in addition to the existing one-year maturity to Dec. 15, 2009.

Extensions were built into the DIP loans of Smurfit-Stone Container Corp. and Aleris International Inc., he said.

Smurfit-Stone filed for bankruptcy on Jan. 26, and was granted interim access to $550 million of a $750 million of DIP; and Aleris filed Chapter 11 on Feb. 2, and was granted interim approval to $150 million of a $1.075 billion DIP facility.

The current provisions make getting to a plan of reorganization for Lyondell "unrealistic and unachievable," Weisfelner said, referencing the complexities of the case including hundreds of reclamation claims, thousands of contracts for rejection, computation for damages and cure costs, PBGC calculation of claims, steelworker considerations, and the fact that one-third of the enterprise value resides in non-filing entities.

With $24 billion of liabilities and a headcount of 20,000, is it possible that we are going to have a plan of reorganization by Dec. 15, Weisfelner asked. Judge Robert Gerber also expressed concern about milestones, particularly the Dec. 1 deadline for confirmation hearing.

One-year term is market

But counsel for Citibank NA, the ABL DIP administrative agent, Marshall Huebner of Davis Polk & Wardwell, said: "Right now, market terms for a DIP loan is one year."

Huebner also pointed out that the Aleris and Smurfit-Stone filings followed Lyondell's filing and that Smurfit is an ABL facility, having no relevance to a term loan that relies on enterprise value.

"The Smurfit extension is prepaid. It's later, smaller and it's an ABL," Huebner said.

Pricing also debated

Heubner argued there is a 4% premium on the interest rate of the loan, which is reasonable given the current credit environment and given that senior lenders had to consent to be primed by the new money loan, he said.

Weisfelner agreed that market conditions were difficult, calling it "the biggest DIP at the worst time in history."

It's hard to see how the loan could have been pulled together except that the pre-petition lenders are forming the syndicate for the new money lending, he said.

Lyondell was being forced to borrow at 20%, which exceeds return on investment operationally, Weisfelner said.

But Huebner said commitment and exit fees were included in that figure, and the accurate rate is 13%, or Libor with a floor of 3% plus 10%.

"He gets 20% versus 7%, but I get 13% versus 9%, and the 4% spread is moderate and reasonable," Heubner said.

Enterprise value

The current enterprise value of the company is $19.2 billion, according to Duff & Phelps report. That figure indicates a deterioration of enterprise value from $38.5 billion in 2007.

"That makes the $8.5 billion DIP, 45% of the total enterprise value. That 45% of value is out the door before we start sharing dollars," counsel for Bank of New York Mellon, another objector, said.

The almost 30% reduction in value is due to market multiples for comparable companies having dropped 20% or 30% to 40%, said Robert Bartell of Duff & Phelps, a witness during the hearing.

The timing of the case is a concern to creditors, worried that being pressed to valuation sooner rather than later will lessen the value on which their claims will be based.

"We're asking for some period of normalization for the $24 billion of claim holders that will be based on a trough of valuation," Weisfelner said.

"General unsecured creditors will be deprived of the opportunity to demonstrate their entitlement of value, because the combination of a one-year maturity, unreasonable milestones, the untested covenant package and the provisions regarding management review, all work together to make it more likely than not that one of two things happens, either the DIP goes into default, or there is such a rush to judgment to get out of bankruptcy," Weisfelner said.

"This company was clicking along pretty well after a $20 billion merger that closed a little more than a year ago," Weisfelner said. The liquidity crisis as a result of commodity prices came before the synergies of merger could be realized.

"Management admittedly didn't have enough time before the liquidity crisis, which was exacerbated by sole equity holder Access Industries refusing to lend under a $750 million facility," Weisfelner said.

Access is another issue

The creditors complained that of the $20 billion raised for the merger with Basell in 2007, a large chunk went out to shareholders.

Weisfelner said there hasn't been enough time to deal with the issue of whether there might have been improprieties.

"I have no clue about Access," Weisfelner said. "They were part of the DIP, part of the roll-up. Now they are not part. There is a question of the nature of the money taken out in terms of dividends, management fees, and other fees to the insider."

Access Industries, a privately-held New York-based industrial group that owns Lyondell's Netherlands-based parent, LyondellBasell Industries AF SCA, known as LBIAF, is a non-debtor in these cases.

As previously reported, the DIP facility consists of $1.54 billion of revolving credit, secured by liens of receivables and inventory, or the ABL facility, which can be expanded to $2 billion; $3.25 billion of available term loans, secured by priming liens; and a modified dollar-for-dollar roll-up of $3.25 billion in existing senior secured debt, which will be secured by a priming lien junior to the liens granted to lenders under the new revolving and term loans and which will be subject to restructuring under a plan of reorganization.

Lyondell is a U.S. subsidiary of LyondellBasell, a Netherlands-based polymer, petrochemicals and fuels company. LyondellBasell's U.S. operations and one of its European holding companies filed for bankruptcy on Jan. 6. The Chapter 11 case number is 09-10023.

Correction: Leonard Blavatnik

Leonard Blavatnik is not chairman of the board of LyondellBasell Industries AF SCA as reported in a story published Wednesday in the Prospect News Distressed Daily. He is chairman of Access Industries, which owns that entity.

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