The Distressed Debt Report

N e ws , I n fo rmatio n , a n d A n a lys is of Dis tres s ed Debt in the M iddle Mar ket

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Volume VII, No. 16

CHINESE COMPETITION,
LOST SUBSIDIES PUSH SOLAR
COMPANIES INTO BANKRUPTCY

IN THIS ISSUE
FEATURES
Chinese competition and lost subsidies are
pushing solar companies into bankruptcy.
Considerations for handling post-reorganization equity.
Patents provide value and challenges ...........2

NEWS IN BRIEF
Bankruptcy claims traded at the highest volume
in a year in July; Chapter 11 filings increased
in August; Tennenbaum raised $530M; New
Mexico put $200M into a PIMCO distressed
fund; Pennsylvanias school pension fund
placed $100M with Brigade Capital; Kansas
made a $30M commitment to a UBS real estate
fund; a New York power company may file for
bankruptcy; an Oregon publishers forbearance
expired; a Hawaiian hotel owner is in a fight
with Marriott; Iron Mining Group is in a dispute
with its bridge lender; Chinas ShengdaTech
hired a restructuring officer; Nutrition 21 plans
an asset sale; and hirings & firings ..................3

DISTRESSED DEBT MONITOR

The Distressed Debt Report lists the latest bankruptcies and debt defaults by publicly traded
companies........................................................7

by Kirk ONeil
Increased competition from China-based
solar product manufacturers and a reduction
in state-sponsored subsidies for solar installation in Europe have broken the backs of
U.S. solar manufacturers, forcing several to
file for bankruptcy over the past month.
Distress in the U.S. solar industry is
expected to continue over the next couple
of years, even if demand increases, as lowcost Chinese solar manufacturing continues to expand and flood the U.S. market
with low-priced products, according to
bankruptcy attorneys and turnaround
management consultants.
The string of solar company bankruptcies began with Marlborough, Mass.based Evergreen Solars Chapter 11
filing on Aug. 15, followed by Hopewell
Junction, N.Y.-based SpectraWatt Inc.s
bankruptcy filing on Aug. 19 and culmi-

CHAPTER 11
FILINGS IN U.S.
1,300

1,200

nating with Fremont, Calif.-based Solyndra LLCs filing on Sept. 6.

Both Solyndra and Evergreen Solar,
which manufacture panels for solar energy
systems, stated in their Chapter 11 filings that
their distress was caused by an over-supply of
solar panels worldwide that was exacerbated
by an expansion of Chinese manufacturers
who receive low-cost government capital and
subsidies. The bankrupt companies also cited
a reduction or elimination of government
subsidies and incentives to purchase solar
energy in Europe as a cause.
The problem with Chinese solar companies receiving subsidies from their government and driving down the prices of
solar products was addressed in a letter
that Sen. Ron Wyden (D-Ore.) sent last
Thursday to the Obama administration.
Wyden, who is chairman of the Senate
Continued on page 10

CONSIDERATIONS OF POSTREORGANIZATION EQUITY IN

THE SECONDARY MARKET
by Philip J. Flink and Timothy C. Bennett

1,100

1,000

900

800

September 13, 2011

S O N D J F M A M J J A
2010
2011

Source: Epiq Systems

The ongoing financial crisis and related surge in bankruptcies has left
many distressed debt investors in the unfamiliar position of holding stock
or other forms of equity in reorganized debtors. Investors holding these
types of securities may seek to immediately monetize them through a secondary market sale. Alternatively, investors may find a company to be an
attractive investment after its reorganization, and look to increase their
holdings in its securities. Recently, an active market in post-reorganization
equity has developed, in shares of companies such as RDA Holding Co.,
Stallion Oilfield Holdings, Express Energy Services, Gateway Casinos
& Entertainment and Hayes Lemmerz International. This article will
discuss issues potential sellers and buyers of such securities should consider
Continued on page 8

For use by original recipient only. It is illegal to forward or otherwise distribute without permission.

Post-Reorganization

DDR
Continued from front page
when negotiating, documenting and settling their trades in the post-reorganization equity of reorganized debtors.

The Legal Framework

Often, as part of a reorganization, a
debtor may offer creditors equity in its
reorganized entity in exchange for loans
or other prepetition claims.
Section 5 of the Securities Act
requires the registration of every offer
and sale of securities with the SEC
unless there is an exemption from registration available. A commonly used
exemption for the issuance of postreorganization equity is Section 1145 of
the Bankruptcy Code. Section 1145 provides an exemption from the registration
requirement, under certain circumstances, for securities issued by a debtor, principally in exchange for claims against or
interests in the debtor pursuant to a plan
of reorganization.
Not all issuances of securities by
newly reorganized debtors fall within the
exemption offered under Section 1145.
For example, some debtors rely on the
traditional private placement exemptions
from registration afforded under Section
4(2) and Regulation D under the Securities Act. Also, shares acquired in a rights
offering by an issuer to raise new money
may not qualify for an exemption under
Section 1145.
Section 1145 also permits such securities to be resold without registration,
provided that the seller is not acting
as an underwriter. Rule 144A, which
permits resales to qualified institutional
buyers in certain circumstances, and
the so-called 4(1) exemption, which
essentially permits private resales to
accredited investors, are frequently used
in the resale of restricted securities. Also,
even if securities are held by a seller acting as an underwriter, Section 1145(b)
permits ordinary trading transactions,
which has been interpreted to include
sales of securities through normal brokerage transactions if the public infor-

mation and volume limitations under

Rule 144 are otherwise satisfied.
Sellers and buyers need to be aware
that, in contrast to bank debt or bankruptcy claims transactions, federal
securities laws apply to trades of postreorganization equity. In particular, Rule
10b-5 under the Exchange Act requires
a party in possession of material, nonpublic information about an issuer or its
securities obtained in confidence or via
a fiduciary or other similar relationship
to either disclose such information or
refrain from trading.
In addition to any restrictions on
transferability that may be based in
the securities laws, there may be documents or agreements relating to postreorganization securities which also
impose restrictions. Such restrictions
could be based in the organizational
documents of the issuer or agreements
between the issuer and its shareholders. For example, an issuers articles of
incorporation or bylaws may have specific provisions regarding the transfer of
equity, including eligibility criteria for
assignees, mechanics for recording the
transfer and restrictions on the number
of permitted shareholders. Similarly,
stockholders agreements often contain provisions that may limit, impair
or outright prohibit the assignment of
shares, including rights of first refusal,
tag- and drag-along provisions and
lock-up agreements.

Documenting the Trade

Frequently, parties to a distressed
loan trade enter into a binding trade
commitment prior to the effective date
of a plan of reorganization, but then are
unable to settle the trade until after the
effective date of the plan and the loans
are converted into proceeds which
can take the form of cash, new loans or
equity in the reorganized entity. In such
circumstances, the parties normally document the settlement of their trade using
the form of proceeds letter promulgated

The Distressed Debt Report 2011 DealFlow Media

by the Loan Syndications and Trading

Association (LSTA). Under the LSTA
proceeds letter, a seller assigns to a buyer
all right, title and interest in and to the
underlying claims and resulting proceeds of the loans.
Parties to a trade for non-legended,
unrestricted post-reorganization securities (i.e., the parties specifically enter
into a trade for the securities, not for
the original underlying loans or claims)
customarily settle such trades without
any additional documentation executed,
or representations made, by either party.
However, when the securities to be
transferred are subject to restrictions, it
is beneficial for both the buyer and the
seller to enter into an agreement where
they receive the protections of representations and warranties made by the
other party. While there is no standard
form of agreement to document specific
trades for post-reorganization equity
entered into after the effective date of
an underlying plan of reorganization, a
market form of purchase and sale agreement has developed and is used by most
broker-dealers and other market participants. In addition to concepts common to the LSTA proceeds letter and,
indeed most secondary market trading contracts, such as title, sophistication and non-reliance these forms of
agreement for secondary market equity
trades often include specific securities
law compliance representations made
by the seller and buyer.
A seller is generally expected to represent and warrant that it has not taken
any actions that would subject the sale of
the transferred securities to a registration
requirement. An aggressive buyer also
may seek the seller to make the broader
representation that there have been no
acts or omissions by the seller that would
render the transaction violative of any
applicable securities laws.
A seller typically requests its buyer
to represent and warrant that the buyer
is purchasing the transferred securities
September 13 2011

For use by original recipient only. It is illegal to forward or otherwise distribute without permission.

Post-Reorganization

DDR
for the buyers own account, for investment purposes, and not with a view
towards a resale or other distribution of
the securities. This cautious approach
serves to provide the seller comfort that
it would not be deemed to be acting as
an underwriter engaged in a distribution
of the securities. A buyer is also generally
asked to acknowledge to its seller that
the buyer understands the securities it is
purchasing have not been registered with
the SEC, and could be subject to other
restrictions on transferability as well
(such as those contained in a stockholders agreement).
In addition to memorializing the
terms and conditions of the trade on a
purchase and sale agreement, the parties to the transaction often will need
to execute additional documentation
and submit it to the issuer of the securities, its counsel or to third parties such

as transfer agents in order to settle the

trade and reflect record title in the
name of the assignee. If the securities
are subject to a stockholders agreement,
purchasers of the securities are likely to
need to execute a form of joinder to the
agreement and submit it to the issuer,
agreeing to be bound by the terms and
conditions thereof. Issuers may have
specific requirements for example,
market participants trading shares of
Stallion Oilfield Holdings have been
executing a separate form of assignment
and assumption agreement to document the transfer of the registration
rights which accompany the underlying
transferred shares. Many issuers, such
as RDA Holding Co., require officers
certificates wherein the parties to the
trade make specific representations as
to their status and holdings directly
to the issuer. Stock powers are often a
necessary requirement to affect the
legal transfer of
shares of stock.
F inall y, issuers
may require delivery of an opinion
of counsel, stating that the sale
is exempt from
the registration
requirements of
the Securities Act,
in order to effectuate the transfer
of the shares.

THE PIPEs
CONFERENCE 2011

Tips for
Settlement

November 1 2
New York Marriott Downtown

Parties contemplating purchasing or selling

post-reorganization securities should take
some basic steps
to improve their
chances of expe-

The largest and most influential event in the small cap

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Register by Sept. 16 for only $1,345 ($200 savings).
Subscribers to The PIPEs Report receive a 2-for-1 coupon.

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The Distressed Debt Report 2011 DealFlow Media

diting settlement. A thorough understanding of the issuers organizational

documents and other binding documents
such as stockholders agreements and
strict compliance with all procedures,
requirements and deadlines required for
the transfer of equity set forth therein
is a must. Further, it is recommended
that parties to a transfer reach out to
the issuer or its counsel and its transfer
agent, if applicable, early in the process to ascertain whether any additional
documentation (such as a legal opinion)
will be required and, practically, to get
a sense of timing in order to plan settlement.
Finally, as with any complex or significant transaction, parties should retain
sophisticated advisors with experience in
securities law, bankruptcy law, and distressed investing to guide them through
the process.
Philip J. Flink is a partner in Brown
Rudnicks Corporate Department. He can
be reached at 617-856-8555 or pflink@
brownrudnick.com. Timothy C. Bennett is
an associate in Brown Rudnicks Corporate
Department and practices in the distressed
trading markets. He can be reached at
1-212-209-4863 or tbennett@brownrudnick.com.

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September 13 2011