Judge Delays AbitibiBowater Investment Deal For Challenge

11th Jun 2010 17:06

By Peg Brickley Of DOW JONES DAILY BANKRUPTCY REVIEW A bankruptcy judge Friday delayed a decision on newsprint producer AbitibiBowater Inc.'s (ABWTQ) proposed $500 million investment deal with leading bondholders, giving other creditors time to muster evidence to challenge the arrangement. Judge Kevin Carey said he had reservations about the proposed investment arrangement, which would immunize a major creditor, Fairfax Financial Holdings Ltd. (FRFHF, FFH.T), from a legal challenge. Protesting bondholders say the grant of immunity to Fairfax takes $200 million out of their pockets and is not necessary to make sure AbitibiBowater can get the money it needs to exit Chapter 11. Carey was scheduled to take the matter up Friday, but pushed it to next week after objecting creditors said they need time to probe AbitibiBowater's reasoning. At a hearing in the U.S. Bankruptcy Court in Wilmington, Del., the judge said he was concerned about a provision that says unless Fairfax gets immunity, other major bondholders who are supposedly committed to the deal won't make the investment. "It's like a death trap for the court," said Bruce Zirinsky of Greenberg Traurig, attorney for some of the objecting bondholders. AbitibiBowater, of Montreal, says it needs protection from volatility in the capital markets to ease its exit from Chapter 11, hence the investment arrangement with major bondholders, including Fairfax, Avenue Capital Group, Barclays PLC (BCS), Paulson & Co. and three others. According to the company, the grant of immunity to Fairfax will cost other creditors much less than $200 million. It's a good settlement of a risky claim, heading off the expense and uncertainty of litigating over a $378.5 million loan guarantee, AbitibiBowater said. "Before we throw out a $387 million avoidance claim which is worth...$200 million of additional value to the other creditors of Bowater, I think we should have a fulsome factual inquiry," Zirinsky said. The investment arrangement that incorporates the Fairfax immunity is a so-called backstop commitment in which bondholders, for a fee, pledge to make sure AbitibiBowater will be able to raise $500 million in new debt to fund its emergence from bankruptcy in case other bondholders shun the deal. In court filings, other bondholders say there's little chance the deal will go begging, and there's no need to give Fairfax immunity. Bondholders represented by Wilmington Trust Co., as well as Aurelius Capital Management and Contrarian Capital Management LLC., said AbitibiBowater is already paying too much for the investment deal, which carries fees of up to $30 million to be split among Fairfax and six other bondholders. The investment agreement is set up to be exposed to challenges at an auction. However, as long as the Fairfax immunity is built into the ground rules for the bidding, bondholders say there's no possibility of competition for the deal. Even if the Fairfax-led major bondholders lose at the auction, they're in line to collect a breakup fee that could run as high as $25 million, under the rules the company put before Carey for approval Friday, the objecting bondholders say. AbitibiBowater, one of the world's largest producers of newsprint, filed for protection from creditors in the U.S. and Canada in 2009. (Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.) -By Peg Brickley, Dow Jones Daily Bankruptcy Review; 302-521-2266; [email protected] (END) Dow Jones Newswires June 11, 2010 12:06 ET (16:06 GMT)