Banks push to lead plan for exit from Chapter 11

10/25/2005

Bank creditors, who have had a secondary role during the five years of Owens Corning's Chapter 11 case, are attempting to move into the driver's seat.

The latest evidence came yesterday in a bankruptcy hearing in Wilmington, Del., during which the company sought more time to file a revised bankruptcy-exit plan without competition from plans submitted by creditors.

The bank creditors, in an earlier written response to that request, said the Toledo building materials manufacturer has had enough time.

Those creditors, fresh off a court victory that could entitle them to recover all of what banks lent the company before bankruptcy, along with unpaid interest since the filing, said they have prepared a reorganization plan for OC and are eager to file it if given permission by the court.

But Judge Judith Fitzgerald, acting on a compromise reached late last week by the Fortune 500 company and those creditors, agreed to delay the matter until a hearing Nov. 14 and to extend the deadline until then. Without the extension, competing plans could have been filed as early as today.

During the hearing yesterday, OC lawyer Norman Pernick said the company, along with the banks and their main adversaries, lawyers for asbestos claimants, "are still talking and negotiations are still substantive." The company remains hopeful of reaching a negotiated settlement of the Chapter 11 case that would avert continued litigation, he said.

In keeping with Judge Fitzgerald's request, Mr. Pernick said, executives will file a revised reorganization plan by Dec. 31. The firm has asked for a deadline extension to Jan. 31.

In another development yesterday that demonstrated the banks' improved position, OC conceded for the first time that it may have to pay interest that has accrued on the bank debt since the Chapter 11 filing on Oct. 5, 2000.

The company, in a filing with the U.S. Securities and Exchange Commission, said it will take a $538 million accounting charge in the third quarter in connection with the unpaid interest because it is "probable that such expenses will be payable "

Much of OC's bank debt was sold by the original lenders and is now held by speculators and investors.

They say they are owed $2.6 billion in principal and interest. They argue that they are entitled to full recovery because valuable OC subsidiaries, including the non-bankrupt unit that owns its profitable foreign operations, co-signed for the loans.

OC and its asbestos claimant allies had sought to void those guarantees.

That effort hinged on the claim that affairs of the subsidiaries and the parent company were so intertwined that they should be treated as a single enterprise.

But a U.S. Appeals Court panel in Philadelphia upset that plan in August when it ruled that they must be treated as distinct units.

In contrast to the conciliatory tone taken by company lawyers in recent weeks, the banks, in a document filed in U.S. Bankruptcy Court late last month, were critical of the firm's handling of the Chapter 11 case.

They characterized executives as "least capable of filing a confirmable reorganization plan."

"The debtors have been in Chapter 11 for over five years during which time the court has extended the exclusive plan nine times," wrote lawyer Rebecca Butcher, of Wilmington, Del.

" Exclusivity has become - and will remain - a stumbling block to a prompt conclusion of these cases," the lawyers wrote.

Mr. Pernick, a Delaware lawyer who has represented OC since the start of the bankruptcy, said during the hearing that the company disputes the criticism. But he did not elaborate.

In a later telephone interview, Stephen Krull, OC legal chief, said, "There are many factual and legal points that they make that we do not agree with. There is no question that the company is best positioned to file a plan and take this company to emergence."

Meanwhile, a group of investors who say they hold more than one-third of the firm's bond debt have complained that they have been left out of negotiations among the company, the bank creditors, the asbestos claimants' committee, and a court-appointed representatives for future asbestos claimants.

"Absent the agreement of the bondholders, these cases will likely continue to be plagued by litigation. " King Street Capital Management LLC and other investors wrote Oct. 14 in response to OC's request for more time to file a bankruptcy-exit plan.

Contact Gary Pakulski at:

gpakulski@theblade.com

or 419-724-6082.