Finding blocking Realogy exchange connects unsecured bond indenture, secured credit agreement

By Paul A. Harris

St. Louis, Dec. 22 - In blocking Realogy Corp.'s $500 million debt restructuring exchange, a judge in Delaware found that the proposed exchange violated the indenture of the plaintiff's senior toggle notes because that indenture "incorporates by reference" Realogy's credit agreement.

Corporate raider Carl Icahn sued to block the exchange because the senior toggle notes due 2014, of which he is a holder, stood to be downwardly displaced, or "primed," on Realogy's capital structure by the senior subordinated notes due 2015, should holders of the subordinated notes elect to exchange into the second-lien incremental term loans that the company was offering, market sources say.

Judge Stephen Lamb's finding is novel, according to Adam Cohen and Chris Chaice, both of Covenant Review.

"According to the judge's analysis, the exchange offer violated the credit agreement," Chaice said.

"The judge found that the credit agreement is incorporated by reference in the indenture of the toggle notes, which is puzzling to us because an indenture does not 'incorporate by reference' a credit agreement."

Still on top

Chaice and Cohen said that the creditors under Realogy's credit agreement may have been aware that the exchange represented a violation of that credit agreement but were ultimately unconcerned because those first-lien lenders will not be displaced by the exchange's second-lien loan.

"The (first-lien) bank lenders weren't getting primed," Chaice said.

"The bank lenders may even be getting a consent fee for allowing the company to do as it wished in the exchange.

"The reason Icahn reacted is that he was getting primed by all of the subordinated notes; he was going to get subordinated by subordinated debt.

"That was never a risk for the bank lenders."

Accordion feature

Judge Lamb also found that Realogy's use of its incremental second-lien credit facility - the accordion feature - into which the company proposes to exchange the subordinated notes, is appropriate, said Cohen and Chaice.

"People don't seem to be focusing on that part of the ruling. However to have a judge on record saying that accordion features in bank loans may be used to facilitate exchange offers is a very good thing for issuers," Cohen said.

"The judge went on to say that it didn't matter in this case because the company was wrong elsewhere. But now we have a judge on record telling sponsors they can use accordion features for exchange offers."

What about an appeal?

Although Realogy's press release announcing that it is terminating its exchange invitation made no statement regarding a possible appeal of the Delaware court's decision, Cohen and Chaice said that the company is no doubt weighing its options.

"There may be factors involved that go beyond whether Realogy thinks it's right," Cohen said.

"An appeal could take a long time. There was an indenture lawsuit that began in 2006 which was just resolved last week.

"And it's expensive to launch an appeal.

"Realogy (owned by Apollo Management LP) may determine that it's better to hand something to Carl Icahn in order to resolve this than to fight."

Cohen also recalled that judge Lamb recently ruled in another case involving Apollo, finding that Apollo-owned Hexion Specialty Chemicals Inc. breached its merger with Huntsman Corp.

"Maybe Apollo decided that they don't want to try to have that judge appealed," Cohen said.

"You can't draw a conclusion that they won't fight just because they didn't say they would in the press release."

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