Opposition to a motion by the unsecured creditors’ committee in the Chapter 11 case of NewPage for authority to file a fraudulent-conveyance lawsuit against the company’s secured lenders poured into the bankruptcy court this week, attacking both the legal and factual bases of the committee’s motion.

As reported, the committee’s proposed lawsuit arises out the company’s 2007 acquisition of the North American operations of Stora Enso Oyj, and the 2009 refinancing of the debt the company incurred in that earlier deal.

The issue could prove to be a lynchpin for the company’s reorganization, in that in the absence of the fraudulent-conveyance claims, unsecured creditors are out of the money in the company’s Chapter 11. Similarly, the voiding of lender liens pursuant to a finding of fraudulent conveyance would have a significant effect on secured-lender recoveries.

Along with its secured lenders, NewPage strongly opposed the committee’s motion to file the lawsuit. More importantly, perhaps, the company also suggested that the lawsuit might prove unnecessary, saying it “is confident” the alleged fraudulent-conveyance issues “can be adequately addressed through the plan-negotiation process.”

What’s more, the company said, it has “largely completed [its] operational restructuring and will file a proposed plan – the negotiations of which are occurring as this objection is being filed – in a relatively short time.”

The company did not provide any additional information, however, so the specific timing of its plan filing is not clear. In that regard, it’s worth noting that the company’s most recent exclusive period to file a reorganization plan expired on May 3, although the company’s filing of a motion to extend that deadline automatically extended the exclusivity period through the hearing date, currently set for June 22. The company is seeking to extend the exclusive-plan-filing period through Sept. 1, and the corresponding exclusive period to solicit votes to the plan through Oct. 31.

A hearing on the committee’s motion is also set for June 22.

The objections

In the meantime, the committee’s bid to file a fraudulent-conveyance suit came under heavy fire from both the company and its lenders, the potential defendants in the suit the committee is seeking to file.

As reported, NewPage acquired the Stora operations in December 2007 in a $2.52 billion deal consisting of $1.5 billion in cash, a $200 million note and a 19.9% stake in the resulting company. NewPage financed the transaction with $2.1 billion in new debt comprised of a $1.6 billion term loan and $500 million revolver.

In its May 4 motion, the panel had alleged that as a direct result of the 2007 acquisition, NewPage was “left with a crippling amount of new debt, but without any new value to show for it. No new equity was injected whatsoever. The target debtors simply had new owners.”

The committee added, “Hobbled by this massive, incremental debt, the enlarged and highly leveraged NewPage never had any realistic hope of sustaining its operations or paying its debts as they came due. … None of the parties to the deal cared [as]…the risk of the transaction was entirely offloaded to unsecured creditors.”

In addition, according to the committee, the financial forecasts that supported the deal were “extremely optimistic” and “inherently imprudent,” noting, “Discovery has unearthed the fact that the stress testing done to such projections failed to consider the effect of even the most recent – and therefore easily foreseeable – industry downturn.” Rather, the panel said, the company relied on speculative “synergies” of the combined businesses to support its projections.

The panel said “the forecasts, accordingly, were anything but reasonable,” adding, “The unsurprising and inevitable result was that, less than two years after its incurrence, the acquisition debt could not be sustained, and the debtors had to incur even more expensive replacement senior secured debt in 2009 to avert a default, further injuring unsecured creditors.”

Even though the 2009 refinancing proceeds were solely used to pay off existing secured debt – typically a transaction that is not subject to fraudulent-conveyance claims – the committee contends that it is subject to challenge because “to the extent the … [2007] acquisition debt was avoidable, the debt incurred under the 2009 refinancing afforded no value to the debtors and is itself avoidable.”

The panel further argued that the 2007 deal and the 2009 refinancing can be collapsed into a single transaction, arguing that Goldman Sachs, one of the bookrunners for the 2009 refinancing, was also the administrative agent under the 2007 term loan. “Moreover,” the committee said, “there is a significant amount of first-lien noteholders who were themselves 2007 term lenders. They and Goldman Sachs knew that the proceeds of the first-lien notes were being used to refinance the 2007 term loan. Indeed, in many instances, they were merely paying themselves.”

The two transactions, the committee argued, “were integrated and would not have occurred independently.”

The contemplated defendants of the committee’s suit were the company’s term loan, revolver, and second-lien lenders who funded the 2007 transaction, and the company’s first-lien lenders who advanced funds to purchase bonds in connection with the refinancing of that acquisition debt in 2009.

In their objections, however, those lenders said there was simply no merit to the committee’s allegations, pointing to the fact that the company was able to continue operations following the allegedly fraudulent transaction for more than four years, despite poor economic conditions.

“The 2007 transactions did not cause the debtors’ insolvency, as the committee speculates,” said Goldman Sachs in its June 11 objection to the panel’s motion. “As the committee acknowledges, the global economic recession that materialized after the 2007 transactions caused a ‘severe downturn’ affecting NewPage’s industry. Still, four years elapsed before NewPage filed for bankruptcy in 2011.”

Similarly Bank of New York Mellon, the indenture trustee for the company’s first-lien debt issued in 2009, said in its objection that the committee’s motion “provided no explanation for how the debtors, alleged to be undercapitalized in 2007, survived one of the greatest economic downturns in the country’s history. … The motion minimizes the fact that the debtors were able to refinance their debt in 2009 despite the massive contraction in the financial and banking sectors.”

As for the committee’s allegations regarding the company’s projections supporting the 2007 deal, Bank of New York Mellon, also noted the committee “dismisses the fact that the synergies contemplated by the acquisition were largely realized in the years following the transaction.”

And the committee’s allegation that “no new equity whatsoever” was added to the company in the 2007 transaction? According to Goldman, the deal “added approximately $600 million in assets to the combined entity’s collective balance sheet,” in that the company paid “$1.5 billion in borrowed cash to acquire a company valued at a minimum of $2.1 billion.”

Finally, the objectors challenged the committee’s attempt to collapse the 2007 transaction and 2009 refinancing into a single transaction for fraudulent-conveyance purposes, arguing that it is “based solely on [the] flawed theory that the 2007 transactions constituted a ‘no equity’ LBO that may be voided as a fraudulent transfer.”

In sum, the objections argue, the committee’s case is weak, at best, and the potential for success does not justify the time and expense the litigation would require – expense, ultimately, that could wind up being borne by the company’s secured creditors if the lawsuits are unsuccessful.

The committee’s motion “fails to demonstrate that the proposed benefits of bringing its claims justify the enormous costs to the estate that the litigation would impose,” Goldman said. “At bottom, the standing motion is a transparent attempt by out-of-the-money creditors to extract value from legitimate, arm’s-length secured creditors by asserting frivolous claims and threatening both the estate and these creditors with substantial litigation costs.” – Alan Zimmerman