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Lynn Tilton Battles Cayman Islands Directors on Zohar-I Bankruptcy

BN-LK024_1122pa_J_20151122185350By PEG BRICKLEY From Wall Street Journal

Zohar-I’s directors have asked a judge to throw out bankruptcy petition

Distressed-company investor Lynn Tilton lashed out at the Cayman Islands corporate directors who moved to block her attempt to force one of her debt-investing vehicles into bankruptcy.

She says the directors have ignored their duties to Zohar—a collateralized loan obligation, or CLO, fund—in favor of protecting the interests of the Cayman Islands, which is receptive to creators of sophisticated financial vehicles like Zohar-I.

It is a conduit stuffed with loans to troubled companies, and the conduit itself is in trouble. It missed a payoff date in November and was bailed out by bond insurer MBIA Inc.

Zohar-I’s directors have asked a judge to throw out the bankruptcy petition Ms. Tilton filed against it on the basis that the fund is designed to be bankruptcy-proof, and investors are counting on that. Ms. Tilton says Zohar-I’s best chance is in bankruptcy, where she can force MBIA to come to a restructuring deal.

Ms. Tilton, who was accused of fraud by the Securities and Exchange Commission in connection with her CLO operation, has denied wrongdoing and vowed to fight the charges. Now she is battling directors in the Cayman Islands, who have said her attempt to invoke bankruptcy protection for Zohar-I runs afoul of the agreements that created the specialized investment vehicle.

Zohar-I is one of three CLO funds that form the financial foundation of Ms. Tilton’s collection of troubled companies. A self-style corporate rescuer, Ms. Tilton sells stakes in the loan collections to investors to raise money to turn around distressed businesses. The SEC has accused her of improperly hiding losses, which she has denied.

In court papers, the directors calling the shots for Zohar-I from the Cayman Islands said there is more than $2 trillion invested in funds like Zohar-I, and Ms. Tilton’s move puts the market for those funds under a cloud of doubt.

Bankruptcy isn’t part of the deal investors are sold when they invest in CLO funds, and the added risk is unacceptable, lawyers for Zohar-I told the U.S. Bankruptcy Court in Manhattan. Lawyers for Ms. Tilton’s Patriarch Partners responded Tuesday, accusing Zohar-I’s directors of acting on the basis of a “motivation to protect the parochial interests of the Cayman Islands CLO cottage industry” instead of looking out for Zohar-I.

A lawyer for Zohar-I couldn’t immediately be reached Wednesday to weigh in on the latest development in the attempted forced bankruptcy of the CLO fund. Zohar-I countered the involuntary bankruptcy petition by asking that the case be dismissed. Existing litigation between Patriarch and MBIA should be sufficient to resolve the differences between the two, Zohar-I said.

When MBIA stepped in to cover Zohar-I’s default, it gained some control over the fund’s fate. In court papers, Ms. Tilton said she feared a precipitous foreclosure on the loans in the CLO would tip her $2.5 billion distressed investing empire into deep trouble.

MBIA has said it has no interest in damaging the value of any of the Zohar CLO funds or in the troubled companies whose loans are held by the funds. The bond insurer has already had to cover Zohar-I’s $149 million default and faces a greater exposure if Zohar II collapses—$800 million or more, according to court papers.

Ms. Tilton’s Patriarch owns equity in the distressed companies whose loans are tied up in the Zohar funds. The Zohar funds also own equity, although the amount isn’t clear. The three funds are linked through the companies, and trouble at Zohar-I threatens to spread throughout Ms. Tilton’s operation.

Ms. Tilton says chapter 11 bankruptcy offers an opportunity to restructure Zohar-I, preserving the rest of her business. However, the default put MBIA in charge of many decisions involving Zohar-I, and the directors in the Cayman Islands have let it be known they won’t sit by quietly.

IMAGE: New York financier Lynn Tilton arrives for an appeal hearing at the U.S. District courthouse in New York, in September. Ms. Tilton has lashed out at the Cayman Islands corporate directors who moved to block her attempt to force one of her debt-investing vehicles into bankruptcy. PHOTO: REUTERS

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Relayed story:

A fund led by ‘Diva of Distressed’ Lynn Tilton has filed for bankruptcy

lynn-tilton.pngBy Jonathan Marino From Business Insider Nov. 23, 2015

Lynn Tilton, the so-called Diva of Distressed, announced late Sunday that her Zohar I credit fund was filing for Chapter 11 bankruptcy.

The fund, which is structured as a collateralized loan obligation, or CLO, issued notes to investors and used the proceeds to make loans to companies owned by Tilton’s Patriarch Partners.

In a statement, Tilton blamed the insurer MBIA for refusing to extend the fund’s deadlines.

“We did not make this decision to file Zohar I for Chapter 11 protection lightly and have done so only after numerous good-faith attempts to accomplish a fair and transparent restructuring of Zohar I with MBIA outside of court,” Tilton said in the statement.

Patriarch spent more than $100 million to buy out a Zohar I noteholder that MBIA had indicated was an “impediment” to an extension, according to the statement. MBIA, however, still refused to agree to an extension.

Tilton said: “Our decision to file Zohar I for bankruptcy and to seek court approval for a plan of reorganization that will pay MBIA in full, while maximizing value for Patriarch, only emerged when it became clear that MBIA had acted in bad faith throughout our discussions.

Two credit funds, Zohar II and Zohar III, are not part of the Chapter 11 filing, according to the statement, and they will not be subject to any cross-defaults.

The law firm Skadden, Arps, Slate, Meagher & Flom and the financial adviser Moelis & Co. are advising Patriarch Partners on the restructuring.

MBIA disputed Tilton’s characterization of events. In a statement, it said [emphasis ours]:

On Friday, MBIA Insurance Corp. honored its obligations and paid a claim on its insurance policy for the Zohar I CDO, which had suffered a payment default and for which Ms. Tilton has now filed a petition to place into an involuntary bankruptcy proceeding. Her accusations in the moving papers are utterly baseless, and this proceeding, like her recent lawsuit, is a desperate and transparent effort to deflect attention and blame from her own failures and misconduct as the Zohar I collateral manager, a role which she has held since 2003 and which culminated in Friday’s default. MBIA intends to vigorously pursue its rights and remedies, and at the same time continue its efforts toward a global restructuring of all the Zohar transactions in order to maximize recoveries for itself and other investors.

The Chapter 11 filing of a key credit fund that supported some of her private-equity firm’s investments comes at a bad time for Tilton.

She is being sued by her investors in the Zohar funds, who said they were misled about their accounting standards.

She is also being sued by the Securities and Exchange Commission, which charged her with fraud, accusing her of hiding poor performance in her debt funds.

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