COURT: Taberna comes off sidelines, says it will oppose attempt to force CDO into bankruptcy

28 September 2017

An attorney for the Taberna Preferred Funding IV told a New York judge today that the pre-crisis CDO is shifting gears and will oppose an effort by senior noteholders to force it into involuntary bankruptcy.

 

“We will be opposing the petition,” said the attorney for Taberna, in a hearing before Judge Mary Kay Vyskocil of the US Bankruptcy Court for the Southern District of New York. Any opposing arguments would need to be filed by 6 October.

 

The move comes about three months after lawyers representing Taberna asked a judge to resolve conflicting arguments between senior and junior bondhondlers as to whether the involuntary bankruptcy case should be dismissed, as reported (see story, 29 June). At that time, Taberna adopted a neutral stance.

 

The Taberna petition was filed in June by Opportunities II Ltd., HH HoldCo Co-Investment Fund and Real Estate Opps Ltd. All are affiliated with a single investor, HoldCo Asset Management of New York, which was co-founded by Vikaran Ghei. The HoldCo group claimed it held 100% of the deal’s A-1 notes, or about USD 137m, and 34% of its A-2s, or about USD 17m, at the time of the filing.

 

On the other side are holders of junior notes who oppose the suit, including KL Fund II, Hildene Opportunities Master Fund II, Waterfall Asset Management, Investors Trust Assurance SPC and Citi Global Markets. They claim that the senior bondholders filed the involuntary petition to accelerate payments to them by liquidating the collateral that secures all of the CDO’s notes. That would result in the senior holders being paid in full, leaving many junior holders unpaid.

 

Judge Vyskocil today focused mostly on whether the senior holders have a right to file the involuntary bankruptcy. HoldCo attorneys argued that the indenture did not specifically prevent senior A noteholders from filing an involuntary bankruptcy, as it does holders of junior bonds. They also argued that they were technically not yet a non-recourse creditor, which is not permitted to file for bankruptcy, because the notes don't become non-recourse until the collateral has been "realized."

 

If the CDO is not performing, the bankruptcy code allows HoldCo to take action, an attorney argued.

 

But Vyskocil expressed skepticism. The senior bondholders have rights to pursue bankruptcy, "assuming you are correct that the indenture doesn't contain a prohibition against your client filing for bankruptcy," she said.

 

Vyskocil also delved into HoldCo’s reasoning. She asked whether HoldCo went the bankruptcy route to get around the predetermined order of winding down the deal that is laid out in deal documents. What “is reflected in the indenture is different than what you are trying to do here,” Vyskocil said. “So aren’t you trying to circumvent the contractual arrangement that is pretty clear?”

 

The HoldCo attorney disagreed, saying the investors are merely exercising their rights under the bankruptcy code that are “part and parcel” of the deal’s documents. When the contract was written in 2005, federal bankruptcy code allowed investors to take action if a CDO was not performing under the contract, he said.

 

Vyskocil did not rule today. However, she did grant the Structured Finance Industry Group permission to file a brief in the case outlining its opposition to the forced bankruptcy. In a filing earlier this month, SFIG painted a dramatic picture of the impact of the case if it goes forward, saying it would lead to a significant disruption of the capital markets, as reported (see story, 8 September).

 

by Maura Webber Sadovi