Lenders in Solutia lawsuit say conditions needed for funding were not met

By Rebecca Melvin

New York, Feb. 22 - Lenders being sued by Solutia Inc. for Chapter 11 exit financing argued Friday that the commitment letter they signed contains unmistakable contract language that allows denial of financing under an adverse market change provision.

Employees for Citigroup Global Markets Inc. testified before the U.S. Bankruptcy Court for the Southern District of New York that they went to great lengths to syndicate Solutia's loans; they were unable to find investors; and conditions for funding were not met.

Chad Leat, head of capital markets origination at Citigroup, who was the senior most person involved in the transaction, told the court he believed a market MAC had occurred and that it would have been impossible to determine a market MAC had occurred before attempting to syndicate.

Adverse market change conditions are sometimes referred to as market MACs, which stands for material adverse change.

The other lending parties to the Solutia commitment letter were Goldman Sachs Credit Partners LP and Deutsche Bank Securities Inc. On Oct. 16, Citigroup was chosen as the left lead in the Solutia financing, set to receive 40% of the economics; Goldman Sachs was chosen as the right side lead, for another 40% of the economics; and Deutsche Bank would have received 20% of the economics under the fee structure.

"Firm orders for less than a quarter of the $2 billion financing were received," the lenders' pre-trial brief filing stated.

Despite going to potential investors on Solutia's $1.2 billion term loan at as low as 91 cents to the dollar, interest was low. And Citigroup's efforts to syndicate Solutia's loans continue, with minimal additional investor interest, Leat said.

Dana term loan cleared at 92

Solutia, a St. Louis-based specialty chemical company, said syndication of its loans was negatively affected by Dana Corp., which had a similar type of commitment letter for exit financing from Citigroup and two other lenders, which was launched in early January, simultaneous with its own.

Subsequent to the launch, Dana's deal for a $1.4 billion term loan was syndicated successfully and the Toledo, Ohio, auto-parts supplier emerged from bankruptcy.

Dana's term loan was offered at 96 and dropped to 92.

Susheel Kirpalani of Quinn Emanuel Urquhart Oliver & Hedges LLP, special counsel for Solutia, pointed out that the underwriting fee for the term loan for Dana and Solutia was identical.

"There was a tremendous forward calendar building on the bank's balance sheet," said witness Jared Dermont of Rothschild Inc., a financial adviser to Solutia.

To back up its assertion, Solutia produced an internal e-mail by Citigroup syndicate members that referred to the bank having too much to sell.

Richard Banziger of Citigroup's leveraged financing group, in a video deposition viewed Friday, said "I made a recommendation, that in our view, we did not believe that Solutia satisfied the condition during that time period."

In another taped deposition, John Tucker, a director at Citigroup, who shares responsibility for the Solutia relationship with another Citigroup employee, said that the first time he heard that the market MAC was going to be invoked was on Jan. 17.

"People were looking at the adverse change language in the contract," he said. And he said he was surprised when it was invoked because there hadn't been any talk about the adverse change provision since the letter was signed in October.

Market MAC was specific to Solutia

Leat said he considered general market conditions and Solutia-specific conditions when giving approval of the Solutia transaction in October. He wanted the MAC language in the Solutia agreement in particular despite the fact that Solutia attempted to negotiate it out.

"I would not have approved the commitment letter without the market MAC provision," he said, saying that he views a MAC as giving underwriters protection if the markets move in a materially adverse fashion from the time the commitment is made.

Judge Prudence Carter Beatty pointed out that Leat's testimony conflicted with what she had heard so far in the case because Solutia asserts that Citigroup's David Jaffe downplayed the market MAC language as merely bank policy, and told Solutia not to worry about it because a market MAC had never been invoked by the bank.

Leat also said, "We had a significant dislocation in the credit market in the summer, and in September we saw a revival in the markets, specifically the leveraged loan market, and we began putting new commitments on the books for new clients. But we felt we needed more protection than we needed in the past in case we had another market dislocation."

Market MACs have been around since the early 1990s when Drexel Burnham Lambert failed, Leat said, citing as an example of a previous market MAC invoked as Merrill Lynch's invocation of the MAC in a deal it had with Centennial Communications.

After he reviewed the state of the Solutia syndication book on Jan. 17, Leat said he requested documentation that might support a market MAC, including related comparable issuers in the market, recent history of leverage loan indices and the Dow Industrials, and any general economic factors that could weigh in on the situation.

"If we were having a successful syndication, we would have no reason to determine whether a market MAC had occurred. We couldn't make a determination on whether a market MAC had occurred until we went out in the market place," he said.

The testimony countered judge Beatty's assertion Thursday that the lenders should have told her if the financing was in question at the end of November when she confirmed Solutia's proposed reorganization plan.

Extreme price levels on loans

Leat, who has 22 years of experience in the leveraged financing business, said, "The [recent] price changes in our market go beyond anything I've seen in any market dislocation, including that of August."

Typically single B and BB leveraged loans require pricing of 250 basis points to 400 bps of yield, he said. In contrast, in January leveraged loans of those ratings required 550 bps to 1,000 bps.

"We have rarely, if ever, seen price levels at that extreme," he said. He said January's market was more extreme than August's.

"We determined that conditions in the market place had deteriorated to such a point that we could not proceed with Solutia's financing," he said.

The hearing is scheduled to continue through Monday.

Solutia filed for bankruptcy in December 2003. Its Chapter 11 case number is 03-17949.

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