Zohar I Bankruptcy May Provide Peek Into Lynn Tiltons Empire
Bankruptcy could provide the best view yet of the inner workings of Lynn Tilton’s $2.5 billion distressed-debt empire, allowing investors a chance to judge for themselves the creditworthiness of an enterprise that has been charged as a fraud by the Securities and Exchange Commission.
Ms. Tilton, who denies the fraud accusations, launched an involuntary chapter 11 bankruptcy proceeding on Sunday aimed at protecting the oldest and smallest of her securitized pools of troubled company loans, dubbed Zohar I. If the bankruptcy case proceeds, investors eager to probe the strength of the businesses underpinning the enterprise will get their chance.
According to Ms. Tilton, she became a billionaire turning around troubled companies with the aid of a proprietary financial-engineering model that involves the bundling of business loans, which are then sold as collateralized debt obligations. She says the SEC has no case against her and the bankruptcy is designed to allow a restructuring of one of those CDO vehicles, Zohar I.
Bond insurer MBIA Inc., which is a top creditor of Zohar I, said in a statement on Sunday that the bankruptcy was designed to deflect attention from Patriarch’s poor performance as a manager.
Lawyers and a spokesman for Patriarch Partners didn’t respond to requests for comment.
Investors had been questioning how the loans generated by Ms. Tilton’s turnaround operation were performing and how much trouble the businesses are in even before the SEC claimed Patriarch had been hiding losses to protect its stream of management fees. Those questions will likely grow with the Zohar I bankruptcy.
Unless Zohar I itself, or MBIA, decides to challenge the involuntary bankruptcy petition, the chapter 11 case will continue. Zohar I’s assets, along with the system of management fees that funneled cash back into Patriarch’s pocket, will be laid out for inspection during the chapter 11 proceedings.
MBIA will play a key role in Zohar I’s future. On Friday, MBIA stepped up to cover $149 million in defaults, a move that gave it control of Zohar I. Ms. Tilton’s Patriarch still manages the collateral, the loans in the pool, and she is an executive of many of the businesses that are the borrowers on those loans.
It will be up to a bankruptcy judge in New York to decide who will call the shots in chapter 11 case. Patriarch’s lawyers filed papers asking for permission to file a reorganization plan that it says will preserve Zohar I. MBIA hasn’t said what it will do about the involuntary bankruptcy filing. It could fight the filing, or it could go along and use the court-supervised process as a way to cover its losses.
Ms. Tilton’s Patriarch says the bankruptcy filing was intended to protect Zohar I from MBIA, which moved into a control position when it bailed out Zohar I.
MBIA has said it wants to work with Ms. Tilton to preserve and protect the loans pooled in her collateralized debt obligation pools, particularly Zohar I and Zohar II. In court papers, Ms. Tilton accused MBIA of a bad-faith scheme involving a fire sale of Zohar I’s assets, securities that are keyed to the performance of loans to troubled businesses. In a statement on Sunday, MBIA called allegations of a scheme or bad intent on its part baseless.
MBIA has as much to lose as Ms. Tilton. The businesses that are borrowers in the Zohar I pool are also the businesses that undergird the credits in the Zohar II pool, where MBIA has $800 million worth of insurance exposure. MBIA has said it will work to avoid damage to the investment vehicles.
According to MBIA’s statement, a global restructuring is the best way to preserve the value in the Zohar funds.
In a recent lawsuit, Ms. Tilton accused MBIA of failing to deliver on a promise to extend the maturity of Zohar I. MBIA counters it was obliged to pay off on bond insurance if the value in the Zohar funds.
In a recent lawsuit, Ms. Tilton accused MBIA of failing to deliver on a promise to extend the maturity of Zohar I. MBIA counters it was obliged to pay off on bond insurance if the bonds defaulted at maturity, and the bondholders that would be looking to it to collect had no incentive to give the insurer more time to pay up.
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