Solutia lenders waive 'material adverse effects' clause, will fund $2 billion exit financing; approval hearing Feb. 26

By Paul A. Harris and Rebecca Melvin

New York, Feb. 25 - Solutia Inc.'s underwriters waived a material adverse effects provision contained in their commitment to the company's $2.05 billion of Chapter 11 exit financing, according to a Monday press release issued by the company.

The waiver, part of a settlement between the company and its lenders over exit financing, promises to end the specialty chemical manufacturer's lawsuit against Citigroup Global Markets Inc., Goldman Sachs Credit Partners LP, and Deutsche Bank Securities Inc. to either provide the funding or pay compensatory and punitive damages of no less than $2.25 billion, the company said Monday.

Under the terms of the revised exit financing package, the banks have agreed to waive the market "material adverse change" provision that was contained within the original commitment letter and increase the size of the senior secured asset-based revolving credit facility to $450 million from $400 million.

Citigroup, Goldman and Deutsche will fund the entire package, which consists of a $450 million asset-based revolving credit facility, upsized from $400 million, as well as a $1.2 billion senior secured term loan that has an interest rate of Libor plus 500 basis points with a four-year Libor floor at 3.5%. The funding package also includes a $400 million senior unsecured high-yield bridge facility.

The total cost of the financing, as well as the available liquidity of the company, is consistent with projections that were included in the disclosure statement previously approved by the U.S. Bankruptcy Court for the Southern District of New York.

When the financing funds, Solutia said it will dismiss with prejudice a lawsuit that it filed against the underwriters on Feb. 6 after the underwriters asserted that conditions in the capital markets were impairing syndication of the debt, triggering the material adverse effects provision in the financing commitment.

The financing is scheduled a close Feb. 28, at which time Solutia's plan of reorganization becomes effective and the company will emerge from Chapter 11.

The funding agreement represents a settlement in the midst of a hard-fought trial. The third day of the hearing, held on Saturday, lasted 11 hours, and included the testimony of Citigroup's David Jaffe and expert witnesses. The hearing was expected to continue on Monday afternoon, but was adjourned.

"We are extremely pleased to have reached an agreement on the exit financing package that will result in Solutia's emergence from Chapter 11," Jeffry Quinn, Solutia chairman, president and chief executive, said in the company release.

A Citigroup spokesperson said, "We are very satisfied with the adjustments made to the structure of the financing package, and pleased to see this matter resolved pending court approval."

A hearing on approval of the Solutia settlement is scheduled Feb. 26

In early February, Solutia and its underwriters had been attempting to place a $430 million face amount of 12½% eight-year senior notes (B2/B-) that were discounted to 93% of par, according to Susannah Livingston, Solutia's director of investor relations.

Livingston added that the 93% discount was deeper than that which the company had contemplated when it first launched the bonds on Jan. 10. However she did not specify the amount by which the original issue discount had been increased.

Had the bonds priced at the contemplated discount, the notes would have yielded 13.97% and would have generated about $400 million of proceeds, according to a market source.

Originally the credit facility was committed as a $400 million asset-based revolver and a $1.2 billion term loan. However, while attempting to syndicate the deal, the banks proposed upsizing the revolver by $50 million. They also proposed that term loan pricing be Libor plus 350 bps, with a three-year Libor floor of 3.25% (added during the syndication attempt) and an original issue discount of 91, which was increased from the 96 area while trying to syndicate.

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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