Solutia May Have Upper Hand Against Lenders

New York, NY, February 18, 2008--Solutia's bankruptcy lenders who are being sued for backing out of the deal could have a difficult time addressing the main issue in the case, a law professor told ICIS News.

The issue is whether the lenders were justified in canceling an obligation to fund $2 billion in financing for the company to exit bankruptcy.

The banks have used a clause in the exit financing agreement that let them back out of the funding commitment if there were an adverse change in credit markets.

The banks said in the suit that such a change had occurred, citing the turmoil in the world's credit markets.

However, relying solely on the clause will pose challenges for the lenders' defense, said Jack Williams, a bankruptcy professor and a resident scholar at the American Bankruptcy Institute.

Solutia filed the suit against Citigroup, Deutsche Bank and Goldman Sachs, arguing that they were still obligated to fund the $2 billion exit financing package.

The lenders had planned to syndicate the loans, the suit said. If syndication failed, the banks would fund the financing themselves.

However, the banks would be freed from the funding commitment if they could prove that credit markets had adversely changed.

Such language, which refers to a "market material adverse change", or MAC, is often included in exit financing agreements, Williams said.

However, he said he is unaware of any lender backing out of a financing arrangement based solely on the market MAC clause so late in the bankruptcy process.

As such, the lenders have a significant burden of proof in the case, Williams said. They will need to demonstrate that the change was adverse enough and material enough to catch them off guard.

Moreover, the banks involved are heavyweights in the financial community, he said. They can devote enormous resources to study credit markets.

"That's a tough argument for a very sophisticated lender to make," he said.