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A disgruntled group of Realogy’s USD 582m 11%/11.75% senior PIK bond holders filed suit against the company Friday in Delaware Chancery Court, according to court documents. The complaint was filed by indenture trustee Bank of New York Mellon and Carl Icahn’s High River LP, both of which are represented by law firms Brown Rudnick and Ashby & Geddes.
A second faction of bond holders representing more than 25% of the company’s 10.5%’s senior unsecured cash pay notes due 2014 has also organized against the offer. Sonnenschein Nath & Rosenthal, legal counsel to the 10.5% bonds, sent Realogy a letter on 26 November echoing the contention of the toggle holders.
The PIK lawsuit follows on the heels of a letter Brown Rudnick sent 24 November on behalf of that group protesting the exchange proposal, a source familiar with the matter and a trader told Debtwire.
The plaintiffs in the Delaware suit are seeking declaratory and injunctive relief with respect to the company’s plans to exchange USD 1.2bn of its USD 3.157bn unsecured bonds into USD 500m of newly issued second-lien debt arranged by JPMorgan and Credit Suisse. The crux of the argument boils down to two components: that the new loan is not permitted under Realogy’s credit agreement and that the swap discriminates between pari passu classes of debt.
A Realogy official declined to comment on the matter other than to say the company has reviewed the terms of its exchange with legal counsel Skadden Arps and believes the allegations are without merit. The company intends to proceed with the exchange and defend itself against any actions, the official said.
Bank of New York requested a judicial declaration that the exchange violates and breaches the PIK bonds’ indentures, while High River claims that the real estate giant’s insolvency and distressed financial condition renders the exchange offer a fraudulent transaction.
The complaint additionally states that the new second-lien debt would not meet the cash-funded loan requirement for incremental secured debt under Realogy’s USD 3.88bn credit agreement. Sonnenschein took that argument one step further in its letter, stating that section 6.09 of the loan agreement specifically prohibits paying off unsecured notes with secured debt.
Realogy is offering its USD 875m 12.375% senior sub notes due 2015, USD 1.7bn 10.5% senior cash pay notes due 2014 and USD 582.2m 11/11.75% senior toggle notes due 2014 the opportunity to swap into a new USD 500m second-lien loan on a tiered priority basis. Assuming the first and second priority 12.375% subs and cash pay bonds all swap, the toggle notes will be precluded from participation, further subordinating the PIKs’ already distressed position in the capital structure.
The group filed a motion today to expedite the proceeds to prevent the scheduled 15 December closing of the swap. The case has been assigned to Judge Stephen Jamb.
High River is rumored to have amassed a large position in both the PIK bonds and Realogy’s USD 3bn term loan, said two bond holders and two traders. Representatives from the fund have been reaching out to other PIK holders seeking support for the opposition effort, said the first bond holder.
The PIK note holders claim to represent a majority of the outstanding issue and certain cross holders of the company’s bank debt, according to an SEC filing by Realogy. They argue that the exchange is not allowable under the company’s existing credit agreement, that it constitutes fraudulent conveyance and that it is a breach of fiduciary duty, according to the filing.
While a successful fraudulent conveyance argument requires a high burden of proof in court, the credit agreement violation could be more palatable, said one buysider. To prove fraudulent conveyance, the bond holders would have to show that the swap is being executed at a time of insolvency when specific distributions or value are assigned preferentially to one claimant over another, he said.
However, Realogy’s loosely written credit agreement does leave room for argument over the company’s ability to incur new debt, the first buysider and a second buysider. “I was under the impression that they were tapped out on an accordion feature other than for refinancing and that new debt would have had to take out existing secured debt,” the first buysider said.
The Realogy official declined to comment on the company’s specific ability to incur additional debt and referred to published research reports by JPMorgan as an explanation. The investment bank projected in an October report that the company’s incurrence basket under both credit agreement and bond indentures would amount to USD 895m, but only if proceeds were used to pay down first-lien loans.
As previously reported, several banks contacted investors in August to sound out appetite for a new second-lien loan to refinance existing first-lien term and revolver debt.
Owners of the existing term debt that don’t hold cross positions in unsecured bonds are ambivalent about the exchange pending disclosure of the structure of the second lien, said a lender. Term loan holders like the de-leveraging impact of the transaction and would not organize against regardless of its propriety under the credit agreement as long as the second lien remains silent, the lender said.
Pro forma a successful transaction, Realogy would have USD 5.792bn of total long-term debt, down from USD 6.499bn at 30 September.
Realogy’s TL was last quoted at 57.125-59.375, according to Markit. The company’s 10.5% cash pay notes last traded today at 16.75, while the PIK notes are quoted at 13.5, according to MarketAxess.
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