ZAIS Investment Grade VII noteholders' fund manager objects to plan

By Caroline Salls

Pittsburgh, June 22 - ZAIS Investment Grade Ltd. VII (ZING VII) A-2 noteholders' fund manager Hildene Capital Management LLC said it was "surprised and troubled" by the plan of reorganization filed for ZAIS by three funds managed by Anchorage Capital Group, LLC, according to a letter sent to the A-2 noteholders by Hildene.

Hildene asked the noteholders to join its motion for dismissal of the involuntary bankruptcy case filed against ZAIS by the Anchorage funds.

Because most structured finance transactions, including collateralized debt obligation transactions like ZAIS, are required by rating agencies to contain features to prevent a bankruptcy filing as a protection for noteholders, and because many structured finance market professionals believe CDOs to be bankruptcy-remote entities, Hildene said it was surprised and troubled by the plan.

Hildene said the plan filed by Anchorage would transfer all of the assets of the CDO to a new vehicle managed by Anchorage and foreclose any recovery by junior notes.

In addition, Hildene said the plan would pay to a new Anchorage entity all amounts received on the ZAIS assets, including any receipts in excess of the original principal amount of the senior notes held by Anchorage.

"We also believe that if the involuntary petition proceeds unchallenged, it could introduce significant legal uncertainty to the market for CDOs and other structured finance entities," Hildene said in its letter.

"Not only is ZING VII ineligible to be a debtor under the United States Bankruptcy Code, and Anchorage was unauthorized to file, the involuntary petition was filed in order for Anchorage to circumvent the ZING VII's indenture's provision requiring supermajority note holder consent to liquidate the collateral."

According to the letter, ZAIS is a cash-flow CDO dependent solely on its collateral for payments to noteholders. Hildene said ZAIS has been operating as designed and has never missed a payment required by the terms of its notes indenture.

Once ZAIS' class A-1 noteholders voted to accelerate their senior notes, Hildene said all noteholder payments were required to be distributed to the class A-1 notes until they are paid off.

"Junior noteholders accepted this risk but retain the opportunity to receive payments after the class A-1 notes are repaid in full," Hildene said.

"A well-defined and understood liquidation procedure is in place within the indenture, and Hildene Capital believes that the involuntary bankruptcy petition against ZING VII is a misguided and improper attempt to opportunistically rewrite the terms of the Indenture and should be dismissed."

Zais is a Cayman Islands-based investment company. The involuntary Chapter 11 case was filed on April 1 in the U.S. Bankruptcy Court for the District of New Jersey, and the case number is 11-20243.

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