NEW YORK (Reuters) – Senior lenders who provided $150 million to Freescale Semiconductor have filed suit against the chip maker over its attempt to exchange about $4 billion in notes for up to $1 billion in a new term loan.
The exchange has “unjustly enriched” noteholders because they have swapped nearly worthless notes for a valuable term loan backed by collateral, the lawsuit claims.
The exchange will also reduce the amount senior lenders could recover in a bankruptcy because the new loan will rank on the same level as the outstanding loan in claims on Freescale’s assets, according to the lawsuit.
A spokesman for Freescale could not immediately be reached for comment.
The lawsuit was filed on Tuesday by Susman Godfrey LLP in New York Supreme Court on behalf of the ING Prime Rate Trust, several Babson and ING Investment Management collateralized loan obligations, and other lenders. The identities of the noteholders are not known, Vineet Bhatia, an attorney with Susman Godfrey, said in an interview.
Freescale in February asked existing lenders for an additional $1 billion to bolster liquidity as it grappled with declining sales. Noteholders were invited to swap their debt for the new loan if the existing senior lenders declined.
While noteholders are receiving only a fraction of the original value of their notes, they will have a substantially better chance of recovery if Freescale files for bankruptcy, the lawsuit said.
Freescale’s exchange is an attempt to shrink an “unsustainable debt capital structure,” according to Moody’s Investors Service. Without completing the exchange offer, Freescale’s interest burden “may become a source of significant financial stress,” Moody’s said in a Feb 19 report.
Formerly Motorola’s semiconductor unit, Freescale was taken private in 2006 by Blackstone Group (BX.N), Carlyle Group [CYL.UL], Permira Funds [PERM.UL] and Texas Pacific Group [TPG.UL]. Its $4.25 billion term loan was issued as part of the leveraged buyout, one of the largest private equity buyouts ever.
The loan has plunged in value because its collateral is being diluted by the new loan that now ranks on the same level, Bhatia said.
The term loan was recently bid at about 40-1/4 cents on the dollar, down from over 60 cents in January, according to the LSTA/LPC Mark-to-Market Pricing Service.
Moreover, the terms of the original loan barred Freescale from issuing new loans, according to the lawsuit. The company cannot issue new loans if it suffers a “material adverse effect,” and its performance and value have deteriorated materially, according to the suit.
By Dena Aubin
(Editing by Leslie Adler)