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Solutia Solution

posted by John Pottow

I didn't want Credit Slips readers to miss the settlement of the Solutia lawsuit that occurred at the end of February.

Solutia sued its consortium of DIP lenders for trying to back out of a $2.05 billion exit financing loan.  The justification for the weaseling, said the banks, was that the credit markets had gotten tough(!) and that it would be hard to syndicate and/or sell the DIP loan(!!), and so this was the sort of "material adverse change" that would allow rescission of the commitment under the contract(!!!).

I'd like to say this is consensual resolution of a contested matter, but I noticed that the "settlement" apparently involved the banks ponying up $50 million more in funds -- which sounds like someone got scared when Solutia said it'd be happy to have a bankruptcy judge weigh in and set a precedent.  There are some rosy press releases from Citigroup, and Solutia has happily emerged from 11, but there's more to this than meets the eye.  This would have been a watershed precedent -- either way -- in a turbulent credit market.  Smells like the banks didn't like their prospects here.  But the audacity of their (attempted) repudiation of the exit financing commitment on the "tough market" defense suggests (in addition to chutzpah) that the credit crunch really is proving tough all 'round.

Comments

I suggest that, both as to this poster and to all bankruptcy academics generally, before you weigh in on corporate finance transactions, which I don't believe any of you have very much experience in, you do what a modestly competent journalist would do and try to interview some of the people in the deal to understand the facts. I was not in the Solutia litigation but I followed it and can see from your post that you do not understand much about this case. To point out just one error, the lenders sued were not the "DIP" lenders [your line 3] and the lawsuit was not about a "DIP loan" [your line 5]. On a more substantive note, there was no claim for rescission in the lawsuit, but rather it was one for declaration and enforcement of the contract,a notion incompatible with rescission, I believe. Finally, as a practical matter, although the text of the pleadings does not show this, the real world battle was about the price for the loan and, if you look at the settlement, you'll see it was indeed repriced upwards by means of increasing the OID.

But these details are not the point of this comment. The real point is outsiders in journalism and academia are not closely involved in corporate finance generally or in specific deals and it would be much more responsible of you-all to recognize that and to improve your analysis by actively learning and verifying facts before you blog-viate erroneously. Especially with multiple exclamation points.

Mt: Your comments, while slightly frothy, add to this discussion. Thanks!

Why don't you add a supplementary comment based on what you do know about this case? I'm less interested in micro-details (although you're right to correct "DIP lenders" for "exit financing lenders") that don't affect the broader theme discussed. So what do we think was going on here? Am I wrong in the broad theme that the defendants to the law suit were raising a material adverse change defense? More info is welcome!

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