Solutia and the lenders that committed to fund its exit from Chapter 11 have reached a settlement. After making some changes to the financing terms, the lenders, led by Citigroup, have agreed to drop their contention that a material adverse change (MAC) had occurred in the loan syndication markets. As described in an earlier post, such an adverse change, under the terms of the commitment letter, would have obviated the lenders’ obligation to lend.
In the end, following a three day evidentiary hearing held less than a month after the commencement of the suit, both sides stepped back from the brink before Judge Prudence Beatty of the U.S. Bankruptcy Court for the Southern District of New York issued her ruling. Judge Beatty had not appeared to be too receptive to Solutia’s contention that the so-called “market MAC” provision was somehow not valid because it was mere “boilerplate” language that had never been enforced. On the other hand, she seemed skeptical of the lenders’ contention that, as bad as the loan syndication market is currently, it has “materially” worsened since the commitment letter was executed in late October.
Neither side could afford to risk an adverse ruling. For Solutia and its stakeholders, a painstaking reorganization that took four years to reach hung in the balance. For the lenders, facing substantial exposures from huge commitments entered into during 2007’s halcyon days that cannot be sold in the current market environment, the best outcome clearly was to obtain some concessions to make this deal less painful and to preserve their legal arguments for another day.
This interlude succinctly encapsulates the current turmoil in the financial markets. Indeed, putting aside the pure legal question of whether a “material adverse change” had in fact occurred, the plain fact that Citigroup and the other lenders, Deutsche Bank and Goldman Sachs, were willing to bear the reputational risks of invoking a rarely used provision to back out of a firm lending commitment speaks volumes about the current lending environment.