Yes, the leveraged loan market is highly troubled right now. But has it changed so dramatically from this past late October as to justify a failure to fund a loan commitment made at that time? This is the $2 billion question right now in the Chapter 11 case of Solutia, which has had its plan of reorganization confirmed but whose exit from bankruptcy is now in jeopardy.
Solutia’s prospective lenders, led by Citigroup, Deutsche Bank and Goldman Sachs, provided Solutia with a commitment letter dated October 25, 2007 for loans aggregating up to $2 billion to fund Solutia’s obligations under its Chapter 11 plan and provide it with post-bankruptcy working capital. The lenders expressly agreed that the commitment was not conditioned on their ability to syndicate the loans. However, the letter did contain (typically) “material adverse change” (MAC) language regarding Solutia’s business and (far less typically) a so-called “market MAC”, i.e., a provision that excuses the lenders from performing if there has been “any adverse change . . . in the loan syndication, financial or capital markets generally that, in the reasonable judgment of [the lenders], materially impairs syndication of the Facilities[.]”
Citigroup and the other lenders have invoked this clause and are refusing to fund the loans. Solutia has brought an action to compel their performance. The matter will be contested on an extremely expedited basis; the hearing is scheduled for February 21st.
A ruling for Solutia will force the lenders to fund a very large loan facility that they will be unable to move off of their books without incurring substantial losses. A ruling for the lenders will no doubt lead other banks that have similar “market MACs” in their commitment letters to seek to avoid funding their loan commitments. Either way, this case will further roil the leveraged loan market and further reduce liquidity.