Owens Corning bond, trade creditors seek to subordinate bank debt claims, share assets of 'sham' affiliates

By Caroline Salls

Pittsburgh, Jan. 9 - Owens Corning bondholder and trade creditors' representatives requested an order equally subordinating bank debt claims to those of the bondholders and trade creditors and an order making assets of affiliates IPM, Inc., Owens Corning Fiberglas Sweden, Inc. and Vytec Corp. available to Owens Corning creditors amid allegations of misleading prospectuses and "sham" affiliation.

According to a complaint filed Friday filing with the U.S. Bankruptcy Court for the District of Delaware, if the court grants the request to "pierce the corporate veil," making the affiliates' assets available to Owens Corning creditors, the bondholder and trade creditor representatives also want bank claims be equally subordinated to those non-debtor subsidiaries' claims.

The bank debt in question refers to $2 billion in financing from agent Credit Suisse First Boston and a syndicate of lenders to be used toward Owens Corning's 1997 purchase of Fibreboard Corp. and for refinancing of Fiberboard's debt.

In 1998, Owens Corning sold $1.5 billion of bonds, underwritten by the bank debt lenders to generate funds to pay down the credit facility.

The representatives said in the filing that Owens Corning's debt under the credit facility was guaranteed by several of its subsidiaries, and the guarantees under Owens Corning's bond debt were structurally subordinate to the bank debt, although the bond prospectuses said the bond debt was unsubordinated.

"Accordingly, the statements in the prospectuses that the bond debt was unsubordinated and would rank equally with other unsecured and unsubordinated obligations of the company were untrue at the time they were made and were materially false and misleading," the representatives said in the complaint.

According to the filing, the lenders have taken the position in Owens Corning's bankruptcy cases that their claims are entitled to priority over all other unsecured claims.

The banks also maintain that in negotiating for the guarantees, they always intended to obtain structural seniority over the rest of Owens Cornings' general unsecured obligations.

In addition, the representatives called IPM, Owens Corning Fiberglas Sweden and Vytec "sham affiliates" and alter egos of Owens Corning, with no true independence.

The representatives said the assets, which were held by each individual Owens Corning subsidiary, were not that subsidiary's own to manage or use in its interest, and the subsidiaries did not control their own cash management, and their nominal officers were not involved in deciding on capital investments.

As a result, the representatives contend that all property in the possession, custody or control of the affiliates rightfully belongs to Owens Corning to be shared by its creditors, including Owens Corning's stock ownership of its foreign subsidiaries held by IPM and all assets of OC Sweden and Vytec.

According to the representatives' complaint, the sham nature of the operation of the Owens Corning enterprise falsely led the bondholders and trade creditors to believe that Owens Corning possessed more assets than it did.

As a result, the representatives said piercing the corporate veils of the sham affiliates and making the assets, which they nominally hold available to Owens Corning's creditors, is necessary to prevent the banks from seeing a greater recovery than the bondholders and trade creditors because the banks obtained guarantees from the affiliates.

Owens Corning, a Toledo, Ohio, building materials company, filed for bankruptcy Oct. 5, 2000. Its Chapter 11 case number is 00-3837.

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