Bondholders in US company try to block takeover Financial Times, Oct 3, 2001 By ROBERT CLOW
Bondholders in a US packaging company have filed a suit to block its acquisition by a US rival in a case that could prove an important test of US bankruptcy law. Under the terms of Temple-Inland's Dollars 786m (Pounds 671m) offer for Gaylord Container, the target's equity holders would get Dollars 100m, but holders of its senior debt would get only 73.5 per cent of the face value. Bondholders argue that the deal could turn US companies' capital structure on its head. In a corporate insolvency, shareholders are normally paid nothing until bondholders have their obligations satisfied in full. "This puts an equity holder at the top of the capital structure and senior debt at the bottom," said Wilbur Ross, the veteran bankruptcy specialist, who manages the two hedge funds which are suing Gaylord and Temple-Inland. State Street Bank & Trust Company and Fleet National Bank are also named in the suit as trustees of Gaylord's debt. The legal tussle could have broader implications for US mergers and acquisitions advisers who have been looking for ways to buy companies without paying the full price for debt trading at below face value. Mr Ross said that the bonds had change of control provisions, obliging Gaylord to buy them back at more than par if the company was taken over. By putting Gaylord's equity holders ahead of its senior debtholders the deal threatens one of the cornerstones of US insolvency law. In US corporate insolvency, equity holders interests are always subordinated to holders of bank debt and subordinated notes. Mr Ross and other bondholders could block the deal simply by not tendering their notes. Temple-Inland's offer does not become effective unless 90 per cent of the notes are tendered. But, in that event, Gaylord has agreed to pay Temple-Inland a Dollars 20m break-up fee, as well as covering its expenses. Payment of that Dollars 20m fee would reduce the cash available to pay the company's bondholders. Mr Ross's funds are attempting to have that break-up fee set aside too, arguing that it is fraudulent for a company which has already been declared in default of its debt by Moody's Investor Service to agree to make that payment. Temple-Inland and Gaylord declined to comment. Full article at: http://globalarchive.ft.com/globalarchive/articles.html?print=true&id=01 1003001991 Michael Keaney Mercuria Business School Martinlaaksontie 36 01620 Vantaa Finland [EMAIL PROTECTED]
