LTV Steel Company, Inc. ("LTV") and certain of its affiliates filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Northern District of Ohio on December 29, 2000. LTV and its subsidiaries had two pre-bankruptcy, two-tiered securitization transactions in place: a receivables securitization and an inventory securitization. The special purpose vehicles used in this securitizations (the "SPVs") were not put into bankruptcy.
LTV has attacked the structure of the securitization transactions in the bankruptcy case, arguing that the transactions did not involve "true sales", but instead constituted disguised financings. On the first day of the bankruptcy case, LTV filed an emergency motion for authority to use the "cash collateral" in the securitization transactions. In other words, it argued that it should be entitled to use the proceeds of the receivables and the inventory to finance LTV's post- petition operation so long as the investors in the securitizations were provided with "adequate protection". Essentially, LTV denied that these assets had been transferred to the SPVs.
Prior to the hearing on this emergency motion (which also takes place on the first day of the case), two local members of Congress were granted permission to be heard as friends of the Court and spoke as to the importance of LTV to the local economy.
The substantive issues of true sale and the recognition of the SPVs as separate legal entities (whose assets and liabilities are distinct from those of its parent and affiliated corporations) were neither litigated nor resolved at this initial hearing. Instead, the bankruptcy court entered an "interim" order authorizing the debtors to use the "cash collateral" generated from the receivables subject to the two securitization facilities. This interim order contains provisions typically seen in cash collateral orders entered in other bankruptcy cases (such as providing "adequate protection" of the "creditor's" interest in the "cash collateral" in the form of "replacement liens" on receivables and inventory generated after the commencement of the bankruptcy cases). However, it also expressly preserves the status of quo as to the substantive legal issues and contains provisions purporting to provide a remedy to the participants in the securitization facilities in the event it is subsequently determined that the transactions did involve "true sales" and were not disguised financing transactions.
The bankruptcy court scheduled an evidentiary hearing to take place on LTV's emergency motion on March 7th and in connection therewith, set February 20th as the deadline for filing court papers in opposition to LTV's emergency motion.
However, on January 9, 2001, Abbey National Treasury Services plc, a participant in the receivables securitization facility, filed its own emergency motion seeking a modification of this interim order. Essentially, Abbey National sought a restoration of the receivables facility pursuant to its terms, which would have resulted in all pre-petition receivables being recognized as being the property of the receivables SPV (and not of the debtors) and would have required all post-petition receivables to also be transferred absolutely to such SPV, with the right of the participants in the receivables securitization to begin accelerated recovery on the receivables if the value of the receivables dropped below a specified minimum threshold.
After a hearing on January 18th, the bankruptcy court issued a decision denying Abbey National's motion. In ruling that its interim order should remain undisturbed pending the scheduled evidentiary hearing, the bankruptcy court concluded that it had sufficient jurisdiction to have entered the order, observing (at page 14) that "there seems to be an element of sophistry to suggest that Debtor does not retain at least an equitable interest in the property." The bankruptcy court also stated that it was influenced by the possible effect on LTV's bankruptcy estate of granting relief to Abbey National1, that Abbey National's due process rights were sufficiently protected by the evidentiary hearing scheduled to begin on March 7, 2001, and that the provisions of the order itself adequately protected Abbey National's economic interests in the receivables.
Abbey National has appealed this decision, and the appeal is presently pending in the United States District Court for the Northern district of Ohio. LTV has moved to dismiss on the ground that the bankruptcy court's order was not a "final" order for appeal purposes and thus was not appealable as a matter of right.
Chase Manhattan Bank, the former agent under the receivables facility and the continuing agent under the inventory facility, and Abbey National each filed briefs on the February 20th deadline for filing court papers in response to LTV's emergency motion. However, pursuant to the terms of an existing protective order entered in the case, such briefs were filed under seal and accordingly, are not available to the public.
Also on that date, a group of twenty-three participants in the securitization market (including originators, issuers, trade associations, investors, and an underwriter) (the "securitization amici"), represented by Mayer, Brown & Platt, filed a memorandum in opposition to LTV's emergency motion. In their memorandum, the securitization amici do not extensively discuss the particulars of the LTV securitizations, but instead emphasize that securitization is based on century-old concepts of absolute transfers among affiliated entities and corporate separateness that have been long recognized under federal bankruptcy law, that securitization has become a $5.9 trillion market, benefitting all segments of the U.S. economy (including locally important segments such as the auto industry), that securitization transactions have been routinely respected in other bankruptcy cases, and that accepting LTV's frontal attack on securitization could cause a seismic disruption of the financial markets. On this last point, the memorandum, in cautioning against a broadly-written decision in favor of LTV, highlights the negative effect that the Octagon decision had on the securitization market.
The motion, the bankruptcy court's order granting the motion, and the memorandum of the securitization amici are posted on Securitization.NetTM .
Another friend of the court brief in opposition to LTV's emergency motion was also filed on February 20th by the New York Clearing House Association L.L.C.
On March 5, 2001, LTV filed several motions, seeking bankruptcy court approval of two different, but related, debtor-in-possession ("DIP") financing arrangements. If these motions are granted and a closing occurs under such DIP financing facilities, it should result not only in the resolution of the pending litigation, but in an express finding of the bankruptcy court that the pre- petition securitizations involved "true sales" of the subject receivables and inventory (the "securitization assets") and were not disguised lending arrangements.
LTV proposes to enter into two different DIP financing facilities: a replacement facility (the "Replacement Facility") to be funded by the participants in the pre-petition securitizations and the proceeds of which are to be used exclusively to repurchase the securitization assets from the SPVs and cause the payment in full of the pre-petition securitization facilities, and an additional $100 million working capital facility (the "Working Capital Facility") to be agented by Abeleco Finance LLC ("Abeleco"). A condition precedent to the obligations of the lenders under the Replacement Facility is that the bankruptcy court Order approving the transactions expressly will authorize the repurchase of the securitization assets from the SPV and, "in connection therewith find that the sales effectuated pursuant to the Existing Inventory Facility and Existing Receivables Facility were 'true sales'".
The interest rates under the Replacement Facility (which are to be Chase's Alternative Bank Rate plus 11/2% or, at LTV's option, LIBOR plus 21/2% for interest periods of 1 or 3 months) appear to be higher than under either of the pre-petition securitization facilities. Also, the fees payable in connection with such facility would include a $500,000 advisory fee payable to the agent, a facility fee of one half of one percent of the replacement commitment to the agent for the lenders upon the making of the initial loans, an administrative agent fee of $250,000 per quarter payable to the agent, and a structuring fee to the proposed co-agent (Abbey National) in the amount of $250,000 plus a co-agent fee of $75,000 per quarter payable to the co-agent. The collateral under the Replacement Facility is not to be limited to a first lien on the receivables and inventory, but is to also include certain other property of LTV and the other debtors.
If these motions are approved and a closing occurs under these proposed facilities, the LTV securitizations will have been replaced by conventional DIP financing, which has been a common occurrence in bankruptcy cases of originators. There will have been no decision of the LTV bankruptcy court on the merits disregarding the LTV securitizations, but instead an order of the bankruptcy court will have expressly concluded that the securitizations involved true sales.
Prior to the filing of these DIP financing motions, the evidentiary hearing on LTV's emergency motion for use of cash collateral, which was scheduled to begin on March 7th, had been continued to March 14th. These DIP financing motions now have been scheduled for hearing on March 7th (for approval of payment of a commitment fee and other preliminary matters relating to the Working Capital Facility) and March 20th (for approval of the facilities themselves). In light of this scheduling, it is expected that the March 14th hearing on the LTV's emergency motion for use of cash collateral will be further continued, pending disposition of these DIP financing motions.
FOOTNOTE
1. "This circumstance would put an immediate end to Debtor's business, would put thousands of people out of work, would deprive 100,000 retirees of needed medical benefits, and would have far more reaching economic effects on the geographic areas where Debtor does business." Id. at 14-15.
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