The Bold & The Bankrupt!

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The Tatas have done it so has the Birlas as have the Mallyas, Tantis, Reddys, Singhs and now is the turn of the Ambanis. I am talking big ticket multi-billion dollar cross border acquisition. Last week Reliance Industries made a pitch for one of the world's largest chemical companies LyondellBasell. Interestingly, LyondellBasell collapsed last year under USD 26 billion of debt. It went on to file for Chapter XI bankruptcy proceedings in January this year and in September submitted a plan of reorganisation to the New York bankruptcy court.

Here is what the global major had to say in response to Ambani's proposal: "LyondellBasell has received a preliminary non-binding offer from Reliance Industries Ltd to acquire for cash a controlling interest in the company contemporaneously with the company's emergence from Chapter XI reorganisation. This offer is in addition to the previous non-binding equity financing proposals received by the company and represents a potential alternative to the initial plan of reorganisation previously filed by the company."

Cross border is always complicated but nothing like bankrupt target to get the legal juices flowing. To take us through complexity of this potential transaction I am joined by Daniel Glosband, Partner of Goodwin Procter.

Q: Let me begin by asking you, who takes a decision on an offer like the one Reliance has made at a company like LyondellBasell; is it the management of the company, is it the creditors of the company who are currently participating in that Chapter XI proceeding or is it court who is administering that Chapter XI proceeding?

A: At the end of the process the court has to approve the transaction regardless of whether it's conceptual among the other parties. In the first instance the board would decide to proceed with it, the creditors would have to be involved. If they do not agree then there is litigation in front of the judge who then decides if the proposal is appropriate or not. So there is no one party that decides it's all of the court, the company represented by its board and the creditors.

Q: Is it possible that if the creditors who are part of this Chapter XI proceeding are oppose to an offer of this nature that the court might still go ahead and rule in favour of it?

A: It is possible. It's a very complicated process but at the end of the day what has to happen is that the court has to find that the full value of the company is being distribute to the creditors and so if the court finds that this offer represents the best value for the company is the prices by which it can be imposed on the creditors even if they do not accept it.

Q: In our previous communication while we were having this discussion-you pointed out two lines of processes or two plans of action. We do know that LyondellBasell has submitted a plan of reorganisation to the New York bankruptcy code and you said there could be two different sets of outcomes based on whether that plan is accepted by the court or is not accepted by the court or withdrawn. Let's go with the first plan of action or the first set of outcomes that is if this plan is accepted by court. How does this deal progress from thereon?

A: If the plan is accepted by the court then the company will be owned by its senior creditors. It's not quite sure which level of senior debt will participate because that will be a function of the court finding what the value of the company is after taking expert testimony. But if the deal proceeds, then some group of senior creditors who own the company can in-turn act as any owners could outside a bankruptcy.

Q: If the plan is either not accepted by the court or if it is withdrawn by the company itself then what is the likely set of outcome?

A: What that would likely mean is that the company and the creditors are going to entertain bidding for the company and that would invite in parties like Reliance and anyone else that wants to bid into what essentially would be the auction process and at the end of the process the company would be owned by the successful bidder. That process, all has to go through a very formal exercise in bankruptcy with court approval steps along the way but at the end of the process it would be the winner of the auction that own the company.

Q: And you are saying that the winner of the auction would be decided upon by the court not by the board or the existing management of the company of any sort?

A: The court has to approve the final decision. What ordinarily happens it is is going to be a sale is that the court will, at the beginning of the process, approve what it calls bidding procedures and those bidding procedures will typically allow the company and some groups of creditors, depending on whether they are in the money or not, to decide what they think is the highest and the best offer. But even that have to be presented to the court to be sure that it meet statutory standards. At the end of the process if there is an offer that's acceptable to the debtor of the company and its creditors it's unlikely that the court would not approve it. But there still be an opportunity for unhappy parties to object if there were technical reasons to object.

Q: You are saying the court would only look then at the value of the offer or the value of the competing offers on a cash-translated basis-that is what will determine if it was to come down to an auction-who wins that auction. It's not other factors whether there are synergies or what makes more economic sense. It will all boil down to how much money it can realise through such an auction process?

A: Primarily that's the focal point for the decision-how much value it brings and then that value has to be distributed based on the ranking of the creditors in the company's capital structure. So the debtors plan, the company's plan that it proposed would imply a value of somewhere between USD 15 and USD 23 billion based on what debts the company says will be paid with cash or new debt and what debt would be paid in stock. So the corporate presumably in the company's cannot take text of find the value based and expert testimony and presumably that value would be somewhere between USD 15 and 23 billion. The reason I pick those two numbers is that there is a spilt in the letters of debt after USD 15 billion is of a senior debt and so whether or not the next level, the bridge loan holders receive any interest in the company is a function of whether the court finds the value to be more than USD 15 billion total which is everything up to the level ahead of the bridge loan holders. If you had a sale, the market will determine the value and that would indicate how further the value was available to be distributed. But it has to be distributed in accordance with the priorities ranking of the creditors.

Q: As is often common in other bankruptcy proceedings as well-adhered to unsecured creditors are litigating with the lenders and the company that is currently going through the process. What kind of complication could that present to any potential sale of this business to whether it's Reliance or any other bidder?

A: The creditors might try to block the sale just for leverage reasons basically; for negotiating reasons because the unsecured creditors are very clearly out of the money here on any rational approach to value. More likely they would encourage a sale and try to negotiate some distribution, try to negotiate to receive some amount of money even though they are out of the money just basically to sit quietly and not oppose the sale. On the other hand the court could allow a sale to go through not withstanding the opposition and then whatever rights they have would be applied to the proceeds and that would filing over the proceeds but they wouldn't be filing on to block the sale. Typically unsecured credit in this kind of acquisition are looking for any kind of a point where they can get in the way basically to see if someone give them something to get out of the way because otherwise just on pure valuation basis they won't receive any value.

Q: Put all of this together-you have given us the various potential outcomes. How do you think this deal is likely to unfold over the next six-eight months is that how long it will take for this company to determine whether it does want to open itself up to competing bids or it wants to go through the plan of reorganisation as it is placed in front of the court. You have considerable experience in this space. I know you would be speculating a bit but based on previous transactions how do you think this one will unfold?

A: I would be surprise if it doesn't eventually get into a sale process. The company might try to proceed with its plan to give itself negotiating power to try to force the bidding higher. But at the end of the day with the kind of money that Reliance is talking about, if people believe its real and they are likely to proceed and there might be other bidders out they would bid up the price. I will be very surprise if that would sufficiently enticing for the parties to agree to a sale process.

Q: Based on all the numbers going around, we do know that the company collapsed under around USD 26 billion of debt, it does have some debtor in financing money right now. But based on all the numbers, is there a sort of financial bid value or bid parameter that you could give me of whether what you expect the bids to come in at least at starting value? Would it have to be USD 12 billion as it been rumoured in many of the media articles or could it be higher, is there any significance to the USD 15 billion number that you were mentioning earlier when it comes to bid value?

A: From the articles I have seen the Reliance bid was to be about USD 12 billion in cash and USD 5 billion is debt assumptions-that would be a USD 17 billion bid. That would be within the range of values that the company's plan would suggests which is somewhere between USD 15-23 billion. So I think that's probably a reasonable starting point and I would think any other offers would be at the USD 17 billion and higher range including perhaps USD 5 billion of that by way of debt assumption.

Q: Reliance is a cash rich company, its sitting on USD 3.5-4 billion of cash and cash equivalent. I am curious to know how do you think the financing of such a deal would take place. Is there any opportunity for Reliance to look at a partially leveraged purchase of any sort, can you have any resource to the balance sheet of LyondellBasell or is it that because LyondellBasell is the company under going bankruptcy proceedings and in that sense has a negative worth on its balance sheet there would be no opportunity for recost to that?

A: I think there is a possibility that there could be leverage against the company's assets to help with the purchase price. The company would be viewed as-if didn't have an existing capital structure for this purpose and the assets would generally be available to be leveraged, the plan contemplates that the current debtor in possession financing of something over USD 3 billion and the prior senior secured financing again in the USD 3 billion range would be paid off and probably those lenders would insist on being paid. But after that the other creditors are expecting to be paid in stock. So to the extent there is someone were to borrow money against the asset value over that USD 6 billion and provide cash instead of stock, I would think that would be attractive and from the perspective of the lender who is going to add new money if they paid off the USD 6 billion they would then significant asset value above that all of that would be available to secure any new debt financing.

There is one negative consideration that would apply is that to allow the company to emerge from bankruptcy if it does it through the planed process even the plan involves the sale; the court has to make a finding that the company isn't likely to need further financial restructuring. That mean there can be so much leverage that the company is imperil as it emerges from bankruptcy and it has to have a healthy prognosis going forward or the court won't let it emerge. So that limits the leverage to some degree.