The bondholders case.
That was so good I decided to excerpt the start of it here.
Dated: San Francisco, California
October , 2001
MEMORANDUM OF POINTS AND AUTHORITIES
I. STATEMENT OF THE CASE
Summary of Argument.
1. In 1998 and 1999, At Home Corporation ("At Home") raised $747 million from bondholders now represented by the Statutory Bondholders’ Committee (the "Bondholders’ Committee"). At Home used the money to develop its business of providing high-speed Internet access to cable companies. This business is burgeoning. The cable companies are adding 400,000 subscribers per quarter to the Internet access At Home already provides to about 3.5 million consumers. Sounds good and is good. So why are the bondholders confronted with an abrupt liquidation yielding them pennies on the dollar? This is the issue at bar.
2. Year 2000. AT&T Corp. together with certain of its affiliates (collectively, "AT&T") pays Cox Enterprises, Inc. ("Cox") and Comcast Corporation ("Comcast") $3 billion in exchange for total control of At Home. Cox and Comcast exchange their contracts with At Home for new contracts, relieving Cox and Comcast of exclusivity requirements, among other things. Result: At Home becomes a captive of AT&T, Cox, and Comcast (collectively, the "Controlling Cable Companies") and At Home received no value for relinquishing contract rights that gave it market value and leverage over Cox and Comcast. Meanwhile, the Controlling Cable Companies continue to exploit their enormously favorable new contracts with At Home.
3. Clearly, the foregoing unsavory shenanigans that stripped At Home of contract rights and stand-alone value will lead to legal actions to recover damages at an appropriate time in the near term. For now, however, the Bondholders’ Committee wants to minimize the damages the bondholders will suffer.
4. Regrettably, the end game currently being implemented is designed to give AT&T what it wants (i.e., At Home’s assets on the cheap), rather than to maximize creditors’ recoveries.
5. The prebankruptcy portion of the end game went like this. Create a "special" subcommittee of the board, albeit with a member that benefits from At Home’s continuation of service at current contract rates. Then, arrange a sale of At Home to AT&T. Then, in the last 20 or 30 days before bankruptcy, hire a financial advisor to bless the deal and supposedly to negotiate with AT&T. The problem is poignantly portrayed by the result: a sale to the insider with a sham auction and no use of At Home’s rejection power until AT&T can take the benefit for itself.
6. At Home spent a lot of time and effort catering to AT&T, but no time and effort maximizing value for creditors. Indeed, while At Home was refusing to meet with bondholders, its financial advisors were crowing to its board of directors that the beauty of a section 363 sale was that At Home wouldn’t have to negotiate with the very creditors who had the biggest stake in the outcome.
7. The postbankruptcy process of At Home’s end game is now in effect for all to see. At Home is continuing to abide by the master distribution agreements (the "MDAs") that destroy its value. When At Home faced a cash shortage, it momentarily refrained from allowing cable companies to add new subscribers until the cable companies paid amounts they owed At Home and agreed to prepay certain sums. Thus, At Home is conducting business as usual en route to a sweetheart sale to its controlling shareholder.
8. This Motion is to stop business as usual and to invoke Bankruptcy Code section 365 for its intended purpose - to allow debtors to renegotiate bad contracts.
9. Even after At Home realized it could not realize its value by auction because AT&T as the only bidder, who would not have to apply a big discount to offset the risk of an AT&T termination, At Home never implemented other means of realizing its maximum value. While At Home’s financial advisor advised the board it could arrange a sale without negotiating with creditors, it never mentioned At Home had another option. Namely, At Home can reject its MDAs and refuse to provide service unless the cable companies agree to much better terms or buy the company for a price acceptable to creditors. Converting the MDAs to real value contracts is precisely why section 365 is in the Bankruptcy Code.
10. Notably, the United States Supreme Court opined in Bank of America v. 203 North LaSalle Street Partnership, 119 S. Ct. 1411, 1422 (1999), that one reason it could not be satisfied the debtor’s owner was paying the maximum value to repurchase the debtor was that the owner was paying only $4.1 million to creditors while simultaneously obtaining $20 million in value by avoiding a $20 million tax liability. The Court was concerned that an owner was receiving a better deal than the creditors by reason of its insider position and was not paying to creditors the value of the asset to that insider. By the same token, At Home never tried to obtain its full value by telling AT&T, Cox, and Comcast that they could lose At Home’s service if they do not pay what it is really worth to them to avoid losing it.
11. Put differently, when you cannot value At Home by an honest auction without more than one bidder on equal footing, you can value it by telling parties they will have to pay what it is worth to them or else lose its service.
12. Only the prospect of turning off the switch will unlock the true value, and here is why. If At Home terminates service to a cable company, the cable company’s subscribers will all need new e-mail addresses. Additionally, the phenomenal growth and market capitalization multiples being enjoyed by the cable companies stem from the cable companies’ ability to add 400,000 subscribers a quarter to At Home’s service. Simply put, the value to cable companies of their At Home contracts is enormous, while At Home has negative cash flow!
13. To be sure, given enough time, money, losses, and aggravation, the cable companies can build substitute facilities. But, they could not do it between the petition date and today. At Home has already squandered and is everyday squandering the ability to charge the cable companies the real value the cable companies would pay right now for the At Home service.
14. It bears emphasis that the Bondholders’ Committee represents $747 million of bond claims. Moreover, its members are funds that care for and invest other people’s money on a daily basis. They balance risk and return. They know what fiduciary duty really means - to act in some else’s best interest. In contrast, AT&T, as controlling shareholder, is acting in AT&T’s best interests, not in At Home’s creditors’ best interests. AT&T even wrote into its asset purchase agreement that the MDAs should be rejected about when its purchase is approved. That way, AT&T, and not At Home’s creditors, benefit from the renegotiation of the MDAs.
15. Other than the $747 million of claims represented by the Bondholders’ Committee, there is about $100 million of arguably secured claims. These are cash collateralized and will be paid in full under any scenario to the extent they have valid, unavoidable security interests. According to an analysis provided by At Home’s financial advisors, there are also $145 million of equipment leases. Those lessors get paid or get their equipment. Beyond that, the accounts payable were just $13 million (the "Trade Claims") and there may be $140 million of employee and "other" (unspecified) claims. Thus, by any reckoning, the bondholders have the largest stake in whether the MDAs are rejected or not. They must be rejected because the value of At Home cannot be obtained unless the Controlling Cable Companies are faced with having to pay the value today of not losing At Home’s service immediately.
16. In sum, even the Debtors agree that there simply are no alternative bidders to prod AT&T to pay fair value for the assets. Thus, a sale under section 363 of the Bankruptcy Code provides the Debtors’ estate with no leverage to increase the sale price and no ability to reorganize around revised MDAs that fairly share the revenue stream with At Home’s stakeholders. In these circumstances, a section 363 auction is not the statutory tool most reasonably designed to maximize stakeholder value.
17. The restructuring tool that will maximize stakeholder value is found in section 365 of the Bankruptcy Code - the right to reject executory contracts. Indeed, while At Home’s network is captive to the Controlling Cable Companies, the Controlling Cable Companies are captive to At Home. The cable companies cannot effect a transition of customer service and their customer’s e-mail addresses to another network backbone provider without substantial time, expense, aggravation, and risk. By authorizing the immediate rejection of the MDAs, including the MDA with AT&T, the counterparties to those MDAs, who cannot implement their business plans without At Home and who have the resources to pay in full the claims of At Home’s creditors, can pay At Home the true value of At Home’s assets. Procedural History.
18. Within 20 or 30 days of bankruptcy, At Home retained a financial advisor to negotiate and bless the sale of its key assets to AT&T. The financial advisor advised At Home’s board of directors of several different strategies, pointing out that a section 363 sale would not entail negotiations with creditors.
19. Bondholders tried to meet with At Home’s chief executive in August and September 2001. At Home would not allow the meeting.
20. On September 28, 2001, At Home commenced its chapter 11 case and announced it would sell its major assets to AT&T for $307 million. At Home took no steps to reject its MDAs.
21. On or about October 3, 2001, the United States Trustee appointed the statutory creditors’ committee. The next week that committee became the Bondholders’ Committee, representing $747 million of claims, when the United States Trustee appointed a statutory unsecured trade creditors’ committee. At Home had accounts payable of $13 million. At Home’s unaudited financial statement also listed $120 million of "other" claims, $20 million of employee claims, and $145 million of equipment lease claims secured by equipment.
22. The Bondholders’ Committee met with At Home on October 4, 2001 and met with At Home and AT&T on October 9, 2001. Bondholders’ Committee members and attorneys have also maintained steady dialogues with At Home’s attorneys and engineers in efforts to understand the whole situation. The Bondholders’ Committee also retained financial advisors to help.
23. Notwithstanding steady requests, At Home has failed to request the immediate rejection of its MDAs with its significant cable partners, including AT&T, Cox, Comcast and Rogers Communications (whose designee is on the so-called special committee of the board). Instead, it is allowing time to pass while suffering under these MDAs while it plods toward the sale to AT&T unanimously opposed by all Bondholders’ Committee members. 24. The Bondholders’ Committee is bringing the instant motion for an order compelling At Home to reject immediately its MDAs. Thereafter, At Home should provide service only to cable companies that individually or collectively pay fair value for their service or agree to purchase At Home for a price acceptable to the majority of At Home’s unsecured debt. |
