Patriarch files Zohar I involuntary case to gain protection from MBIA

By Caroline Salls

Pittsburgh, Nov. 23 – Patriarch Partners, LLC filed through one of its affiliates an involuntary Chapter 11 petition for Zohar CDO 2003-1, Ltd. Sunday in the U.S. Bankruptcy Court for the Southern District of New York, according to a Patriarch news release.

Patriarch said it is Zohar I’s largest creditor, holding $286.5 million face amount of Zohar I notes.

Patriarch said it placed Zohar I into Chapter 11 in order to protect Zohar I and Patriarch from the efforts of MBIA Inc. and MBIA Insurance Corp. to obtain Zohar I’s assets for itself.

Patriarch said the filing will have no effect on the operations of the portfolio companies whose loans are held by Zohar I, and the filing does not trigger any defaults on portfolio company loans.

In addition, Patriarch said neither Zohar II 2005-1, Ltd. nor Zohar III, Ltd., two additional investment funds managed by Patriarch and some of its affiliates, are part of the filing. They will not be subject to any cross-defaults.

“We did not make this decision to file Zohar I for Chapter 11 protection lightly and have done so only after numerous good faith attempts to accomplish a fair and transparent restructuring of Zohar I with MBIA outside of court,” Patriarch chief executive officer Lynn Tilton said in the release.

“We believe the Chapter 11 process now presents the best way for Zohar I to restructure its finances while preserving the value of the portfolio companies it owns on behalf of its key stakeholders.”

Zohar payment issues

According to the release, Zohar I is structured as a collateralized loan obligation and has issued notes to investors and made loans to the portfolio companies with the proceeds of the notes. Patriarch affiliates hold substantial equity stakes in many of these portfolio companies. Some affiliates are also lenders to the Zohar I portfolio companies, Patriarch said.

Following the financial crisis of 2008, Patriarch said it recognized that Zohar I would require time beyond its stated maturity date of Nov. 20, 2015, to create value and to pay off the notes. In light of this – and as outlined in a lawsuit filed by Patriarch on Nov. 2 – Patriarch said it initiated discussions with MBIA, which insured roughly $150 million in Zohar I notes, regarding an extension of the maturity date of Zohar I and an associated global restructuring of the Zohar funds.

As part of these efforts, Patriarch said it spent more than $100 million to buy out a third-party noteholder in Zohar I that MBIA had indicated was an “impediment” to an extension of Zohar I and a global restructuring of the Zohar funds. Yet, even after Patriarch removed this “impediment,” Patriarch said MBIA refused to consent to an extension of Zohar I that would have paved the way for a restructuring.

“Our decision to file Zohar I for bankruptcy and to seek court approval for a plan of reorganization that will pay MBIA in full, while maximizing value for Patriarch, only emerged when it became clear that MBIA had acted in bad faith throughout our discussions,” Tilton said in the release.

“A Chapter 11 filing is now the only course of action available that allows us to continue our efforts to turn around and build value at the portfolio companies, preserve their value on behalf of all of our stakeholders and protect the jobs of the tens of thousands of our portfolio companies’ employees.”

Exclusivity termination motion

In addition, Patriarch asked the court to terminate Zohar’s exclusive periods for filing and soliciting votes on a Chapter 11 plan.

Patriarch said Patriarch XV should be allowed to propose a plan now to bring to an end more than “three years of deceitful negotiations by MBIA.”

“Zohar-I itself has no meaningful interest in proposing a plan itself,” Patriarch said in the motion.

Patriarch said MBIA is the controlling party of Zohar-I, and only MBIA, not Zohar-I or Patriarch, has the exclusive authority to control the disposition of Zohar-I’s assets.

“Termination of exclusivity will allow Patriarch XV to materially advance Zohar-I’s restructuring, a restructuring that MBIA, as the ‘controlling person,’ has surreptitiously frustrated and foiled during three years of fraudulent conduct.,” Patriarch said in the motion.

“It is time for MBIA’s conduct to be checked by a court of equity; for this court to allow Patriarch XV to utilize the tools afforded by the Bankruptcy Code to protect value for itself, while simultaneously paying MBIA off in full.”

Patriarch’s restructuring counsel is Skadden, Arps, Slate, Meagher & Flom LLP, and its financial adviser is Moelis & Co. Zohar is representing itself in the Chapter 11 proceedings.

The Chapter 11 case number for Grand Cayman, Cayman Islands-based Zohar is 15-23680.

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