Solutia settlement unlikely to prompt sea change seen in lenders' use of market MAC, attorneys say

By Rebecca Melvin

New York, Feb. 27 - The settlement reached this week in Solutia Inc.'s lawsuit against its exit financing lenders isn't necessarily going to have a negative effect on lenders or their ability to use 'adverse market change' provisions in contracts in the future, litigators for the case said.

"I don't believe market MACs will go out of vogue. In the right circumstances they could be invoked, Susheel Kirpalani of Quinn Emanuel Urquhart Oliver & Hedges LLP, special counsel for Solutia, told Prospect News.

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

Market MACs, just like company MACs, are supposed to be reserved for "extraordinary and unforeseeable circumstances," more of a force majeure-type of situation, the litigator pointed out.

The reason that the lenders didn't have a very strong case in the Solutia case, he said, is because they were asserting that the market MAC was an allocation of risk to the borrower, and that market conditions deteriorated between the time the contract was signed and when it was supposed to be syndicated.

But when it was signed, "the subprime and CLO problems were extant," he said.

If there had been a problem of a different type that was truly extraordinary and unforeseeable, then a market MAC could have legitimately been invoked, he said. Circumstances falling under that category would have been, for example, a disclosure that massive fraud at the New York Stock Exchange had been uncovered or a disclosure that the worldwide supply of oil was grossly overstated, he said.

"But the allocation of risk is inconsistent with how material adverse clauses are interpreted," he said.

In the agreement to settle the Solutia case, Citigroup Global Markets Inc., Goldman Sachs Credit Partners LP, and Deutsche Bank Securities Inc. have agreed to fund Solutia's $2.05 billion exit financing package on Feb. 28, at which time the company will emerge from Chapter 11 after four years under bankruptcy protection.

Solutia, a specialty chemical company, had filed suit Feb. 6 after the lenders had refused to fund the exit financing.

UCLA law professor Lynn LoPucki pointed out that the settlement might prove a problem for banks going forward.

"In the past, they were apparently able to persuade borrowers that materially adverse change provisions were not a problem for borrowers because the banks would not use them inappropriately. By this settlement, the banks have essentially agreed that they used this one inappropriately," LoPucki said.

"In the future, the market will be less accepting of materially adverse change provisions," he said.

But even George Zimmerman, an attorney for Skadden, Arps, Slate, Meagher & Flom LLP, which represented the defendants, said the settlement was a good resolution that benefited the banks as well as the borrowers. He didn't foresee a major change in how market MACs are handled in the future.

"I think its use was confirmed," he said of the market MAC. "It enabled the banks to go back to the table and renegotiate the terms so that they could fund and syndicate the financing."

Zimmerman said the market MAC is supposed to protect the lenders, and, in fact, that's what it did.

"Because of the existence of this clause, they could renegotiate the terms of the loans," and they got a "new deal," that fits the projections, he said. "At the end of the day, the provision worked from the lenders' perspective as it was supposed to."

When asked about the bankruptcy court judge's being satisfied that the changes to the final terms of the financing were non-material compared with the original commitment, Zimmerman pointed out that the judge was able to hear behind closed doors how the loans were renegotiated so that the lenders were happy.

"I don't think there is going to be a sea-change," Zimmerman said.

Both Zimmerman and Kirpalani agreed that the details of the language are always going to be negotiated in any contract, but in volatile times, market MACs are going to be necessary.

There's also the function of the lenders' appetite, Kirpalani said. And Zimmerman said that Wall Street could "take comfort that they work."

Kirpalani said he didn't think the situation going forward would be different if the judge had actually made a ruling in the case. He said a settlement was good for both sides.

"It's better for Solutia that they settled. They have to work with these guys for a long time to come, and it's better to have come to an agreement," Kirpalani said.

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