Judge Holds Up AbitibiBowater Financing Over Fairfax Release

18th Jun 2010 21:58

By Eric Morath Of DOW JONES DAILY BANKRUPTCY REVIEW A bankruptcy judge on Friday refused to approve a $500 million financing deal for AbitibiBowater Inc. (ABWTQ) as long as that deal grants key investor Fairfax Financial Holdings Ltd. (FRFHF) immunity from a possible legal challenge. Judge Kevin J. Carey of the U.S. Bankruptcy Court in Wilmington, Del., said he would approve the financing deal, which AbitibiBowater claims is essential to its effort to raise more than $1 billion to fund it emergence from Chapter 11, if the company dropped the Fairfax release. Carey scheduled another hearing for Monday to learn the newsprint maker's decision. AbitibiBowater is seeking approval to enter into a deal with seven bondholders, including Fairfax, who've agreed to backstop a $500 million debt offering. "I can't conclude that inclusion of the Fairfax release is fair," Carey said. Granting such immunity is "better suited" for a Chapter 11 plan, which is subject to a creditor vote, he said. Failure to obtain the financing, including the release for Fairfax, could cause the company's entire bankruptcy-exit plan to fall apart, AbitibiBowater financial adviser Steve Zelin said at a court hearing Thursday. If Fairfax, a major holder of AbitibiBowater's bonds and stock, doesn't receive the release, it has the right to walk away from its financing commitments, said Zelin, a senior managing director at the Blackstone Group LP (BX). That may cause the six other bondholders to also bail on their pledges and leave the company scrambling to come up with replacement financing, he said. "The rights offering, the $500 million, is a critical element of the plan because we need to be certain that all secured debt will be paid," Zelin said. Without the funding, Zelin said AbitibiBowater may have to repay lenders with stock rather than cash--a move that would reduce recoveries for unsecured creditors who are currently in line to control the company upon its emergence from Chapter 11 protection. In exchange for providing $110 million of the backstop commitment, Fairfax is seeking to be shielded from possible legal challenges related to its role in a debt issuance that occurred about a year before AbitibiBowater filed for Chapter 11. Carey said that his refusal to include the release as part of the financing is not an indication that he believes claims against Fairfax are valid or significant. The creditors protesting the release have said a lawsuit against Fairfax could be worth $200 million. The protesting creditors, including bondholders represented by Wilmington Trust Corp. (WL), also said the company could obtain the necessary financing without the backstop commitment. Zelin, however, described the backstop as an "insurance policy" that protects the company if credit markets should sour and gives it stronger standing to negotiate a loan on better terms with lenders. The notes issued as part of the rights offering would carry an interest rate of 10%. In exchange for providing the backstop commitment, bondholders including Fairfax, Avenue Capital Group, Barclays PLC (BCS) and Paulson & Co. would receive up to $30 million in fees. Their commitment is open to challenge at auction, but no other parties had come forward by Friday, the deadline to submit a bid. AbitibiBowater, the world's largest newsprint manufacturer, filed for bankruptcy protection last year in the U.S. and Canada to restructure some $7 billion in debt. The Montreal company filed its bankruptcy-exit plan last month and intends to emerge from Chapter 11 by the fall. (Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.) -By Eric Morath; Dow Jones Daily Bankruptcy Review; 202-862-9279; [email protected] (END) Dow Jones Newswires June 18, 2010 16:58 ET (20:58 GMT)