It’s no longer just buy-out firms being targeted by jilted takeover targets for reneging on deals (think, Sallie Mae and JC Flowers, Alliance Data and Blackstone, and so on…). In a new twist on an area of litigation that has seen various companies sue buy-out firms for pulling out before concluding a deal, one US company is suing three banks for backing out of commitments to finance the company’s way out of bankruptcy protection.
Solutia, a US chemical company operating under Chapter 11 bankruptcy protection, has filed a lawsuit against three banks for allegedly reneging on earlier agreements to provide $2bn in “exit” financing the company needed to emerge from bankruptcy protection, reports the FT on Thursday.
Solutia, the former chemicals division of Monsanto, said the banks, Citigroup, Deutsche Bank, and Goldman Sachs, informed the company they would not provide the financing, citing changing market conditions. The banks insist they complied with their contractual obligations and dismissed the company’s allegations as being without merit.
Jeffry Quinn, Solutia’s chief executive officer, said in a statement: “The willingness of those banks to offer committed financing that was not subject to a successful syndication was a major factor in deciding to award them this business.”
The Wall Street Journal says the lawsuit, filed Wednesday, is believed to be one of the first of its kind and offers further evidence of how credit woes are making it harder and more expensive for companies to exit from bankruptcy.
The banks told Solutia last month that the tight credit market made them unable to find lenders to back the loan and qualified as a “materially adverse” condition that would allow the banks to terminate their agreement.
Solutia is demanding that the banks complete the deal or pay $2.25bn in damages, claiming fraud and breach of contract, reports the Journal. Solutia argues the banks knew the credit markets had been slowing for months when they agreed to the financing deal in late October. It also charges that on several occasions Citi directors and managing directors admitted the loan-syndication market was “horrible” and said they already knew Citi would not be able to syndicate the exit financing, the Journal adds.
The Solutia suit, and its underlying financing troubles, are “symptomatic of the general malaise in the credit markets,” James Millstein, co-head of restructuring at Lazard, told the Journal. “A number of other exit financings have run into trouble.”
The banks have agreed with Solutia to file a response this week and begin trial February 21.
For one party or another, it would seem that three little words, “material adverse change”, have rarely been as costly.