WACHTELL, LIPTON, ROSEN & KATZ Scott K. Charles David C. Bryan Alexander B. Lees 51 West 52nd Street New York, New York 10019 Telephone: (212) 403-1000 Facsimile: (212) 403-2000 Attorneys for Credit Suisse AG, Cayman Islands Branch, as First Lien Agent UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK : Chapter 11 In re : : Case No. 10-14419 (SCC) Boston Generating, LLC, et al., : : Jointly Administered Debtors. : : Hearing: September 20, 2010, 3:00 p.m. : REPLY OF CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, TO OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO THE DEBTORS PROPOSED FINAL CASH COLLATERAL ORDER Credit Suisse AG, Cayman Islands Branch (the First Lien Agent ), as First Lien Collateral Agent under the First Lien Credit and Guaranty Agreement dated as of December 21, 2006 (the Credit Agreement ), submits this Reply to the Objection of the Official Committee of Unsecured Creditors to the Debtors Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to Utilize Cash Collateral Pursuant to 11 U.S.C. 363; (II) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. 361, 362 and 363; and (III) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) dated September 17, 2010 [D.I. 143] (the Objection ), and in support thereof respectfully states as follows:
1. The Objection filed by the Official Committee of Unsecured Creditors (the Committee ) is meritless and should be overruled. While not belaboring all of the litany of deficiencies in the Committee s Objection, the following points are exemplary. 2. First, the Committee s assertion that the Debtors Proposed Final Cash Collateral Order (the Final Cash Collateral Order ) shifts the burden of proving diminution from the First Lien Lenders to the Debtors (Objection 3, 14) is simply wrong. To the contrary, the adequate protection afforded to the First Lien Lenders is expressly granted only [t]o the extent of the diminution in value of their interest in the prepetition collateral, including cash collateral, as a result of its use by the Debtors. Final Cash Collateral Order 4(a). To the extent that the First Lien Lenders collateral suffers no diminution, they will not be entitled to adequate protection under the terms of the Final Cash Collateral Order, and the adequate protection payments made to the First Lien Lenders during the chapter 11 cases will be subject to recharacterization by the Court as repayments of the over $1.1 billion principal amount of debt owed to the First Lien Lenders. Final Cash Collateral Order 4(d). 1 3. Second, the Committee similarly misconstrues the terms of the Final Cash Collateral Order in asserting that [t]he Court should not permit the accrual of default rates of interest where the Debtors have not defaulted on their obligations to the First Lien Lenders. Objection 4(c). As an initial matter, the Debtors in fact are in default because, inter alia, the bankruptcy filing constituted an event of default under the Credit Agreement. In any event, while the Final Cash Collateral Order does compute adequate protection payments by reference 1 The Committee further baldly asserts that there is no shred of proof of any actual or threatened diminution in the value of [the First Lien Lenders ] collateral. Objection 18. In fact, and as the Committee elsewhere concedes (Objection 11), the Approved Budget incorporated in the Final Cash Collateral Order demonstrates a very substantial diminution in the First Lien Lenders cash collateral over the course of the chapter 11 cases. 2
to default rate (and certain prepetition) interest amounts, it nowhere provides for the accrual of interest. Rather, the adequate protection payments to the First Lien Lenders will constitute payments of postpetition interest only to the extent that the First Lien Lenders turn out to be oversecured, and otherwise will be subject to recharacterization as repayments of principal. Final Cash Collateral Order 4(d) ( Notwithstanding anything contained herein or otherwise, all interest, fees and professional fees and expenses (in each case, as described above) paid pursuant to this Final Order shall be subject to recharacterization and reapplication pursuant to further order of the Court if and to the extent the First Lien Obligations are determined by the Court to be undersecured. ). 4. Third, the grant of a replacement lien on avoidance actions 2 works no harm on unsecured creditors because Section 507(b) of the Bankruptcy Code already grants to the First Lien Lenders a superpriority claim over every other claim allowable against the estate to the extent that the adequate protection provided by the Court proves to be inadequate. See 124 Cong. Rec. H. 11095 (Sept. 28, 1978); S.17403 (Oct. 6, 1978) (legislative history of 11 U.S.C. 507) ( Subsection (b) provides that to the extent adequate protection of the interest of a holder of a claim proves to be inadequate, then the creditor s claim is given priority over every other allowable claim entitled to distribution under section 507(a). ); Harvis Trien & Beck, P.C. v. Fed. Home Loan & Mortgage Corp. (In re Blackwood Assocs., L.P.), 153 F.3d 61, 68 (2d Cir. 1998) ( [Section] 507(b) means that a secured creditor has superpriority for a claim in the amount that the debtor s use of collateral during the time of the stay diminished the value of the collateral, but only to the extent such diminution is in excess of the adequate protection received. ). 2 See Objection 4(a), 10, 13. The First Lien Lenders already have prepetition liens on substantially all of the Debtors other assets. 3
5. Thus, to the extent that the proceeds of avoidance actions are needed to satisfy a deficiency in the adequate protection granted to the First Lien Lenders, the First Lien Lenders by statute already have a superpriority claim on those funds, ahead of all unsecured creditors. The reason why a prudent lender also takes a replacement adequate protection lien on proceeds of avoidance actions is two-fold: (i) to prevent a lien superior to the lender s Section 507(b) superpriority claim from being granted to anyone else, and (ii) to prohibit dilution by other pari passu superpriority claims. Because the statutory superpriority under Section 507(b) already outranks the claims of unsecured creditors, however, the grant of this replacement lien to the First Lien Lenders does no injury to unsecured creditors. 6. Fourth, there is no merit to the Committee s suggestion that the Debtors 506(c) and 552(b) waivers are inappropriate in this case. Objection 4(b), 19-21. These waivers are entirely appropriate here because the First Lien Lenders cash collateral will be the primary source of funding for the chapter 11 cases. Because the entire cost of the bankruptcy, subject to the Approved Budget attached to the Final Cash Collateral Order, is already being paid for out of the collateral of the First Lien Lenders, there is no need to preserve any right of the estate to surcharge that collateral. 7. Fifth, the fifty (50) day Challenge Period for the Committee to investigate the First Lien Lenders liens was more than sufficient, particularly in light of the facts that (i) the First Lien Lenders collateral consists almost entirely of four power plants and cash collateral, and (ii) the Committee will be able to obtain access to the lien searches on the First Lien Lenders collateral that have already been conducted by the Debtors counsel. In any event, as an accommodation to the Committee, the First Lien Lenders have agreed to extend the Challenge Period to the later of (i) fifty (50) days after of entry of the Final Cash Collateral 4
Order and (ii) five (5) days before the sale hearing date, but in no event later than sixty-five (65) days from entry of the Final Cash Collateral Order. Imposition of a ninety (90) day period as requested by the Committee (Objection 4(f), 23) is wholly inappropriate given the limited investigation required by the Committee. 8. Sixth, there is no merit to the Committee s position that a professional fee carve-out of $500,000 or nearly $100,000 per month for the expected duration of these chapter 11 cases for the Committee s advisers is inadequate. Based on the Constellation sale price that is the product of a robust four-month pre-bankruptcy auction process conducted by JPMorgan Securities Inc., the unsecured creditors in this case are out-of-the-money by over $400 million. The First Lien Lenders respectfully submit that the $500,000 carve-out for the Committee s professional fees is more than adequate for the Committee to investigate the lenders liens and otherwise discharge its fiduciary obligations under the unfortunate economic realities of this bankruptcy case. 3 9. Seventh, and finally, there is no merit to the Committee s assertion that the chapter 11 sale process benefits only the First Lien Lenders. Objection 9, 11. Numerous other constituencies will benefit greatly from the bankruptcy process, including without limitation: (i) the Debtors employees, who depend upon the Debtors continued operations for their livelihoods; (ii) the citizens of the greater Boston metropolitan area, who depend upon the Debtors continued operations for their power and electricity; (iii) the Second Lien Lenders, who 3 At the request of the Debtors, the First Lien Agent had previously agreed to an increase in the amount of the proposed Committee professional fee carve-out to $1.5 million. When the Debtors subsequently reported that the United States Trustee had been unable to form a Committee because there was no interest on the part of three unsecured creditors sufficient to form a Committee, then, after advising the United States Trustee and the Debtors without objection, the First Lien Agent reduced the carve-out to $500,000, which the First Lien Agent believes is more than sufficient for the Committee to discharge its fiduciary duties in this case. 5
stand to benefit should the Section 363 auction result in proceeds in excess of the First Lien Lenders claims; and (iv) the numerous contract counterparties whose contracts are being assumed, and whose business relationships are thus being continued, through the sale of the Debtors power facilities. By contrast, the enormously out-of-the-money contract rejection creditors who hold two out of the three Committee seats should not be heard to complain that all of these important constituencies the First Lien Lenders included should be denied the benefits of the chapter 11 process and the Section 363 sale process facilitated thereby. See, e.g., NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984) ( The fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources. ); United States v. Whiting Pools, Inc., 462 U.S. 198, 203 (1983) ( By permitting reorganization, Congress anticipated that the business would continue to provide jobs, to satisfy creditors claims, and to produce a return for its owners. Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if sold for scrap. (citation and internal quotation marks omitted)). WHEREFORE, the First Lien Agent respectfully requests that the Court overrule the Objection in its entirety, and grant the First Lien Agent such other and further relief as is just and proper. 6
Dated: September 20, 2010 New York, New York WACHTELL, LIPTON, ROSEN & KATZ /s/ David C. Bryan Scott K. Charles David C. Bryan Alexander B. Lees 51 West 52nd Street New York, New York 10019 Telephone: (212) 403-1000 Facsimile: (212) 403-2000 Attorneys for Credit Suisse AG, Cayman Islands Branch, as First Lien Agent 7