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Trial set for Nov. 25 in DOJ’s American/US Airways anti-trust suit

The District of Columbia federal court overseeing the anti-trust case filed by the U.S. Department of Justice to block the merger ofAmerican Airlines and US Airways has scheduled a trial for Nov. 25, according to a court order.

The scheduling of the early trial is a victory for the airlines, which have argued that they have a strong case and would like to see the matter resolved as soon as possible in order to clear the way for their merger and American’s emergence from Chapter 11.

American and US Airways were seeking a trial date of Nov. 12, while the DOJ had asked the court to delay the trial until March 3, 2014.

As reported, the bankruptcy court judge overseeing American’s Chapter 11 proceeding yesterday suggested that he would confirm the company’s proposed reorganization plan in the near future, notwithstanding the anti-trust suit. Of course, American cannot emerge from Chapter 11 until the DOJ’s anti-trust case is resolved and the merger is completed, so the timing of the anti-trust case is the lynchpin for the company’s reorganization.

American is due back in bankruptcy court in Manhattan on Sept. 12. Meanwhile, the parties are set to return to Federal Judge Colleen Kollar-Kotelly’s courtroom in Washington, D.C., on Oct. 1 for a status conference to discuss trial procedures. – Alan Zimmerman

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Europe: U.S. regulators revise CLO risk retention proposal

Federal regulators yesterday released revised risk retention requirements outlined under Dodd-Frank.

As revised, the proposed rule provides CLOs with an alternative option to meeting the original risk retention requirement, which requires CLO managers to hold 5% of the notional value of a CLO. Following today’s revisions, CLOs could also satisfy the requirement if the lead arranger for each term loan in the CLO agrees to retain a 5% stake in the specific tranche. The lead arranger would be required to retain this portion of the tranche until the loan is repaid, matures, or defaults. Of note, this alternative would not be available for balance-sheet CLOs.

Six agencies – the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the SEC, the Federal Housing Authority, and the Department of Housing and Urban Development – released the revised rule (click here for the document). The agencies are requesting comment on the proposal by Oct. 30.

“The proposed option for open market CLOs is intended to allocate risk retention to the parties that originate the underlying loans and that likely exert the greatest influence on how the loans are underwritten, which is an integral component of ensuring the quality of assets that are securitized,” the proposal said.

Other elements of the proposal are as follows:

  • The lead arranger would have to take an initial 20% allocation of the entire credit facility, with no institution holding more than the lead arranger.
  • The lead arranger retaining the 5% would need to be identified at the time of syndication, and the legal documents would need to include covenants governing the lead arranger’s compliance with the retention requirements.
  • To accommodate secondary trading, the proposal suggests that there be certain term loans within a broader credit facility that would be designated as “CLO eligible” if the lead arranger, at the time of origination, agrees to retain 5% of that tranche. “A CLO-eligible tranche could be identical in its terms to a tranche not so designated, and could be sized based on anticipated demand by open market CLOs,” the proposal said.
  • The lead arranger would be prohibited from selling or hedging its 5% position in performing loans for the life of the loan.
  • Voting rights within the broader credit facility would need to be drafted so that holders of the CLO eligible tranche have, at a minimum, consent rights with respect to waivers and amendments that impact the tranche. Also, the pro rata provisions, voting provisions, and security of the CLO tranche could not be “materially less advantageous” to its holders than relative to the other tranches in the facility.

To comply with this new option, CLOs would not only be required to hold only CLO eligible tranches, but would also be prevented from investing in ABS or credit derivatives, and would be required to purchase all of the vehicle’s assets in open-market transactions.

Market reaction
While market participants are still digesting the proposal, there is some concern that the alternate means of satisfying the risk retention requirement would not be feasible.

Elliot Ganz, the general counsel of the Loan Syndications and Trading Association, said the LSTA was surprised by the CLO eligible tranche requirement and expressed concern it would be “unworkable” because banks would not have an appetite, given capital requirements, to hold 5% of a TLB tranche. He also noted it is hard to comment “right out of the box” before speaking with banks and other market constituents.

RBS Structured Credit Strategist Kenneth Kroszner also expressed concern around the banks’ ability to satisfy capital requirements.

“While this was an accommodating attempt by regulators, it may fall short on the scope of the issue,” he said. “Loan arranging banks do not typically retain any portion of the leveraged term loan tranches bought by CLOs, rather they participate in the revolver or create a separate tranche to retain. We believe this creates a capacity constraint for banks considering recent more stringent capital requirements.” – Kerry Kantin

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Leveraged loan returns, Aug 28: Loans lose 0.01%; YTD return is 3.25%

Loans lost 0.01% yesterday after being unchanged Tuesday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.01% today.

In the year to date, loans overall have gained 3.25%.

A full xls of the Daily Index is availaible to LCD subscribers, please click here.

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American Capital prices $414M CLO via Citi

Citigroup yesterday priced a $414.2 million CLO for American Capital CLO Management, according to sources.

The transaction, which is the asset manager’s second CLO to price in the year to date, is structured as follows:

Of note, the spread on the $140 million triple-A rated A-1b tranche opens at L+110 but steps up to L+160 in April 2015 and again to L+190 in April 2016, sources noted.

The reinvestment period runs to October 2017; the legal final maturity is October 2025.

CLO issuance in the year to date stands at $52.05 billion across 107 deals, according to LCD; 13 deals have priced in August totaling about $6.4 billion. –Kerry Kantin

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US leveraged loans unchanged today, 3rd day in a row; YTD return is 3.26%

Loans were unchanged today after remaining unchanged yesterday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, lost 0.01% today.

In the year to date, loans overall have gained 3.26%.

A full xls of the Daily Index is available to LCD subscribers, please click here.

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Bankruptcy: LightSquared lenders, minus Ergen, file updated disclosure statement

A subset of the ad hoc group of LightSquared LP’s secured lenders filed a proposed disclosure statement with the U.S. Bankruptcy Court in Manhattan late Monday night, in support of a reorganization plan that would sell off the company’s assets in a Dec. 6 auction.

Collectively, the members of the ad hoc group hold about $1.379 billion of LightSquared LP’s secured loans, or 82% of the total. But the group filed its motion Monday independently of its largest single member, Charles Ergen’s fund SP Special Opportunities LLC, because it is an affiliate of the proposed stalking-horse bidder under the plan, L-Band Acquisition. The so-called “independent ad hoc group” includes Capital Research and Management Company, Cyrus Capital Partners, Intermarket Corp., and UBS AG, Stamford Branch.

LightSquared itself has not yet filed a plan or disclosure statement, but the ad hoc group pointed out in its filing that the company had circulated a motion it intends to file with the court seeking approval of solicitation procedures for competing plans.

The new disclosure statement includes hearing dates that could see a reorganization plan – the ad hoc group’s or LightSquared’s – approved by the end of the year. U.S. Bankruptcy Judge Shelley Chapman will hold a Sept. 24 hearing to consider approval of L-Band as stalking-horse bidder; a Sept. 30 hearing to approve disclosure statements; and a Dec. 10 confirmation hearing.

The ad hoc group, including SP, first filed a disclosure statement and plan in a surprise move shortly after LightSquared’s exclusive right to file a plan expired in July. The plan is premised on the sale of substantially all of the company’s assets in a court-supervised process, with a $2.22 billion cash stalking-horse bid from Ergen’s L-Band Acquisition. Ergen has been fighting for control of LightSquared with Phil Falcone, who owns the company currently through Harbinger Capital. Harbinger recently sued Ergen, challenging his purchase of more than $1 billion of the company’s secured debt. (see “Harbinger sues Ergen over ‘fraudulent’ purchase of LightSquared debt,” LCD News, Aug. 6, 2013).

Under the group’s plan, the proceeds of the asset sales would be paid to creditors in a waterfall distribution, with holders of the secured LP claims receiving $2.102 billion if the stalking-horse offer is accepted. Unsecured creditors, with claims estimated at about $7.6 million, would receive distributions from a $10 million distribution fund, with any excess flowing to holders of the company’s preferred units, which have claims of about $235.56 million outstanding.

The company’s common equity, which is held by a holding company (LightSquared, Inc.) controlled by Falcone, would theoretically be entitled to a distribution after creditors are paid at 100%, roughly $2.4 billion, according to the proposed disclosure statement.

Also according to the disclosure statement, the L-Band bid would be subject to higher and better offers, “but, in no event, shall the aggregate consideration to be paid in excess of the stalking-horse bid be less than $118.6 million,” representing a break-up fee of $66.6 million, expense reimbursement of up to $2 million, and a minimum $50 million overbid amount.

The independent ad hoc group valued L-Band’s current offer, with its assumption of certain material obligations, at more than $3.5 billion. The L-Band bid includes $2.22 billion in cash, for use of LightSquared’s 46 MHz of L-Band MSS spectrum and certain other assets, according to the disclosure statement. The offer is not conditioned on FCC or Industry Canada approval, which remains pending.

“Since the commencement of these Chapter 11 cases over a year ago, the debtors have pursued a single path to the exclusion of all others, maintaining that the only way to proceed was to pursue a highly uncertain resolution of the many regulatory hurdles they face, and that a sale of their assets would be impossible or inadvisable until they solved their regulatory problems,” the independent lenders wrote in their motion Monday. “Despite more than 15 months under the bankruptcy court’s protection, however, the debtors’ strategy has not advanced in any cognizable respect – they have not obtained the regulatory approval required to launch their planned network, they lack financing or a partner necessary to build out the network even if they did obtain regulatory approval, and they continue to impose on creditors the entire risk of an adverse outcome with respect to any of the multiple contingencies that remain between the debtors and an operating business that could even conceivably service its continuously growing debt obligations.”

“That risk has increased over time as the debtors’ position has worsened – creditors’ cash collateral has been depleted; the number of potential strategic purchasers for the debtors’ assets may be diminishing in light of market developments; Harbinger Capital Partners, the debtors’ controlling equity holder, and certain of its affiliates, including Philip A. Falcone, have admitted wrongdoing and agreed to incur significant penalties to resolve Securities and Exchange Commission enforcement actions against them; and Harbinger has started to roll out its long-threatened litigation end-game strategy by suing the GPS industry, which is sure to have a chilling effect on the debtors’ current efforts before the Federal Communications Commission to obtain approval of their applications,” the motion went on.

“In short, in the more than 15 months since the commencement of these Chapter 11 cases, the debtors have failed to make any tangible progress toward their proposed regulatory solution or a plan of reorganization based thereon, and the debtors’ prospects of solving their problems are increasingly bleak. In any case, it is now completely clear that pursuing a plan conditioned on regulatory approval would ensure that these Chapter 11 cases are not concluded for months, if at all. The LP debtors’ estates cannot afford to continue playing out Harbinger’s option.” – John Bringardner

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US leveraged loans unchanged today for second reading in a row; YTD return is 3.26%

Loans were unchanged today after remaining unchanged on Friday, according to the LCD Daily Loan Index.

The S&P/LSTA US Leveraged Loan 100, which tracks the 100 largest loans in the broader Index, gained 0.01% today.

In the year to date, loans overall have gained 3.26%.

A full xls of the Daily Index is available to LCD subscribers, please click here.

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American urges bankruptcy court to confirm plan despite DOJ lawsuit

American Airlines urged the bankruptcy court overseeing its Chapter 11 proceedings to confirm its reorganization plan, notwithstanding the lawsuit filed earlier this month by the Department of Justice that is seeking to block the company’s merger with US Airways upon which the plan is premised.

In a legal brief filed with the Manhattan bankruptcy court on Friday, American argued that it has met all of the requirements for confirming its reorganization plan, even while acknowledging that the DOJ’s suit presented a potential legal hurdle to the company’s emergence from Chapter 11, which is conditioned on completion of the merger.

Even if the DOJ is successful in blocking the merger, the company said, the reorganization plan provides a mechanism for moving forward.

“That mechanism operates to vacate the confirmation order and nullify the plan,” the company said.

Conversely, the company said, “the failure to enter the confirmation order … would add an unwarranted element of uncertainty to the administration of the Chapter 11 cases and would introduce a destabilizing factor to the detriment and prejudice of all parties in interest.”

The company didn’t specify those destabilizing factors, but in a separate legal brief filed by the creditors’ committee in the case, also urging the bankruptcy court to confirm the plan despite the DOJ lawsuit, the panel suggested, “A delay in entering the confirmation order would invite further pre-confirmation proceedings in this court to promote the parochial interests of particular constituencies. … [A]s counsel for Bank of New York Mellon perceptively observed at the confirmation hearing, a delay in entering the confirmation order ‘creates the opportunity for new parties to come into this case with perhaps a different set of expectations.’”

As reported, at the Aug. 15 plan confirmation hearing, Bankruptcy Court Judge Sean Lane ordered American and the creditors’ committee to submit briefs addressing the legal issues raised in connection with plan confirmation by the DOJ lawsuit. The next bankruptcy court hearing is set for Aug. 29.

Interestingly enough, the DOJ has taken a similar position as the company and the creditors’ committee, telling the bankruptcy court that it does not oppose plan confirmation, but noting that its anti-trust lawsuit poses a risk that a confirmed plan “may not be able to become effective for a considerable time, if at all.” (see “American Airlines may confirm plan, but still can’t merge, DOJ says,” LCD, Aug. 23, 2013).

Meanwhile, an issue more critical to when American can potentially emerge from Chapter 11 is playing out in Federal court in Washington, D.C., where American and US Airways, on the one hand, and the DOJ on the other, are sparring over when to set a trial date in the anti-trust case. The DOJ asked the court to set a trial for Feb. 10, 2014, but the two airlines are seeking a much closer date, Nov. 12, for the matter to be heard (see “American and US Airways at odds with DOJ over antitrust trial date,” LCD, Aug. 22, 2013).

Another key deadline in the case is Dec. 17 (extended from Dec. 13), which is the date by which either party can unilaterally terminate the merger, if it hasn’t closed, although, obviously, the parties can agree to extend that deadline. – Alan Zimmerman