Equities

Incora $250M Funding Flawed, Judge Eyes Creditor Rights

Judge to Rule on Flawed $250 Million Rescue Package for Incora, Impacting $1.65 Billion Restructuring Plan

By Jack Wilson

7/10, 12:46 EDT
BlackRock, Inc.
JP Morgan Chase & Co.
article-main-img

Key Takeaway

  • Judge Isgur to rule on a contentious $250 million rescue package for Incora, potentially siding with bondholders like JPMorgan and BlackRock.
  • The decision could reshape distressed debt market practices, impacting creditor rights and liability management strategies.
  • Potential outcomes include restoring collateral rights to excluded bondholders or shared ownership of Incora, valued at $1.65 billion.

Judge to Rule on Rescue Package

US Bankruptcy Judge Marvin Isgur is set to deliver a crucial decision today regarding a contentious $250 million rescue package for Incora, an aerospace parts supplier backed by Platinum Equity. The case has pitted Silver Point Capital and Pacific Investment Management Co. (Pimco) against a group of bondholders, including JPMorgan Chase & Co., BlackRock Inc., and King Street Capital Management. The ruling is expected to test the boundaries of rescue financing and liability management.

Judge Isgur has already indicated that the financing deal for Incora was flawed, suggesting he may side with the bondholders who argue that the deal was made possible through dubious paper shuffling. However, the judge must now determine the appropriate relief for the bondholders. "So my question is: Can I take away the bigger relief and give you the smaller relief if I think that’s the right thing to do?" Isgur asked lawyers for the bondholders last month. Both sides have been asked to submit short answers to a technical point of law regarding the extent of federal court powers.

Implications for Distressed Debt Market

The outcome of this case is highly anticipated among distressed debt investors, who have been exploring the limits of contract law with innovative financing strategies. Disputes over liability management transactions, sometimes referred to as creditor-on-creditor violence, rarely go to full trial, making any new case law potentially impactful for the junk credit market.

The Incora transaction provided the company with much-needed cash and offered the investors a chance for a substantial return. However, it also altered debt terms in a way that left-out creditors claim is unfair, significantly devaluing their investments by weakening their claims to Incora’s assets. The ruling will be pivotal in determining who will ultimately own Incora, which has been undergoing restructuring since filing for Chapter 11 bankruptcy last year.

Potential Outcomes

Judge Isgur's decision could result in a significant win for JPMorgan and its allies, stripping Silver Point, Pimco, and other investors of their collateral rights and providing no credit for their rescue efforts. Isgur has expressed concerns about the fairness of such an outcome, stating last month that it would be unjust for those investors to receive nothing for their loan.

A smaller win for the JPMorgan side could mean the restoration of their collateral rights while allowing the Silver Point group to retain some of their liens. In this scenario, both sides might share ownership of Incora, which the company’s restructuring plan values at $1.65 billion.

The dispute originated in 2022 when Pimco and Silver Point helped Incora raise $250 million by exchanging their bonds for new debt securities, positioning them first in line to claim Incora’s assets in bankruptcy. This transaction provided Incora with the necessary cash to continue operations. However, JPMorgan, BlackRock, and other bondholders were excluded, resulting in their debt being stripped of collateral protections.

Management Quotes

  • Judge Marvin Isgur, US Bankruptcy Court for the Southern District of Texas:

    "So my question is: Can I take away the bigger relief and give you the smaller relief if I think that’s the right thing to do?"
    "I hope you’ll let me do the right thing."