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In October of this year, the UCC in TPI Composites’ Chapter 11 case filed a motion for standing to bring a derivative suit against Oaktree for its involvement in a 2023 uptier transaction. Pending a ruling on the standing motion, the UCC also filed a complaint to initiate an adversary proceeding.
In the uptier transaction, Oaktree exchanged $350m of preferred shares and $86m of accrued dividends for a $393m senior secured term loan and 3,899,903 shares of common stock. As part of the transaction, Oaktree eliminated $43m of accrued dividends—representing half the amount it was originally owed.
UCC attempts to invalidate uptier transaction and limit Oaktree’s ability to credit bid
The UCC’s complaint seeks to recharacterize Oaktree’s senior secured loan as equity pursuant to Sections 502 and 105 of the Bankruptcy Code. According to the UCC, the senior secured loan was always intended to function as an equity contribution—the loan had no principal repayment schedule and its interest rate was identical to the dividend rate on the preferred equity that was exchanged. The UCC also alleges that Oaktree intended to convert the senior secured loan back into an equity interest through a credit bid in Chapter 11.
The UCC has also asked the court to equitably subordinate or disallow Oaktree’s senior secured loan under Sections 510, 502, and 105 of the Bankruptcy Code. The UCC alleges that Oaktree exploited its position as an insider on TPI’s board to engage in inequitable and wrongful conduct that gave itself an unfair advantage and harmed TPI and its creditors. The UCC also claims that Oaktree acted with knowledge of, or reckless disregard for, the fact that TPI was insolvent or would become insolvent as a result of the uptier transaction.
Pressing on, the UCC has asked the court to find that the uptier transaction was an actual or constructive fraudulent transfer under both the Bankruptcy Code and Delaware state law. As a remedy, the UCC requested the court to avoid the transfer under Section 544 of the Bankruptcy Code and recover the transferred value for TPI under Section 550 of the Bankruptcy Code.
For actual fraudulent transfer under Section 548(a)(1)(A), the UCC claims that Oaktree’s conduct was indicative of the badges of fraud that courts typically analyze when determining whether a party acted with the intent to hinder, delay, or defraud creditors. Specifically, the UCC argues that Oaktree exploited its position as an insider to put itself ahead of other creditors while knowing that TPI was, or would become, insolvent and undercapitalized.
For constructive fraudulent transfer under Section 548(a)(1)(B), the UCC alleges that TPI did not receive reasonably equivalent value for granting Oaktree a lien on substantially all its assets and that TPI intended to, or believed it would, incur debts beyond its ability to pay as a result of the uptier transaction.
Finally, the UCC has asked the court to adjust Oaktree’s claim from $472m to $0 for credit bidding, and to limit the DIP lenders, consisting solely of Oaktree, to credit bidding only on the $7.5m they have already funded to TPI. The DIP Agreement contains a roll-up provision premised on Oaktree having a senior secured claim. But given these allegations, the UCC does not believe that the DIP lenders should be allowed to credit bid the rolled-up amount since the roll-up may be unwound.
Oaktree responds
Although Oaktree’s motion to dismiss the UCC’s complaint is under seal, the UCC’s objection to the motion to dismiss, as well as Oaktree’s own objection to the UCC’s motion for standing, shed light on its arguments.
From the UCC’s objection to Oaktree’s motion to dismiss, it can be inferred that Oaktree believes its senior secured loan should not be recharacterized as equity, particularly because the loan terms contained an absolute repayment provision that Oaktree believes eliminated its exposure to market risk. The UCC insists that the absolute repayment provision is not dispositive. Instead, the UCC believes that the uptier transaction should be examined in its entirety since Oaktree remained exposed to market risk through the common stock it retained from the transaction alongisde its senior secured loan.
Oaktree also appears to believe that the facts of the uptier transaction do not support equitable subordination or disallowance. Oaktree maintains that it did not behave inequitably with regard to its position as an insider of TPI. Furthermore, Oaktree argues that the uptier transaction did not injure other creditors or give it an unfair advantage.
Oaktree’s reply to the UCC’s objection to the motion to dismiss is expected on 21 November.
In its objection to the UCC’s motion for standing, Oaktree elaborated on the benefits of the uptier transaction for TPI and rebutted the UCC’s allegations of actual and constructive fraudulent transfer. According to Oaktree, the uptier transaction was not an actual fraudulent transfer because it was negotiated at arm’s length and in good faith, endorsed by TPI’s independent financial advisor, approved by a disinterested board, and applauded by the market through a 73.4% increase in the share price following the announcement of the transaction.
Oaktree also contends that the uptier transaction was not a constructive fraudulent transfer because, according to Oaktree, TPI received reasonably equivalent value from the transaction in the form of liquidity relief from the elimination of required dividend payments, a reduction of cash obligations associated with the accrued dividends, $50m of committed new-money incremental financing, operational flexibility from the loosening of covenants, maturity extensions on cash payment obligations, and a waiver of early redemption cash payments.
Oaktree also contends that the uptier transaction did not leave TPI insolvent under either the cash-flow test or capital adequacy test. Oaktree declined to address the balance sheet test for solvency because it was not raised by the UCC. With regard to the capital adequacy test, Oaktree emphasizes that business projections and forecasts made at the time of the transaction to determine capital adequacy should not be subject to second-guessing in hindsight. Oaktree also points to TPI’s surging share price following the announcement of the uptier transaction as important evidence that the transaction increased the company’s solvency.
Finally, Oaktree argues that even if the uptier transaction was a constructive fraudulent transfer, it is protected from avoidance by Section 546(e) of the Bankruptcy Code which provides a safe harbor for transactions involving financial participants that are made in connection with securities contracts.
In its reply to Oaktree’s objection to its motion for standing, the UCC maintains that the uptier transaction was an actual fraudulent transfer because Oaktree’s conduct was indicative of the badges of fraud. The UCC also maintains that the uptier transaction was a constructive fraudulent transfer because TPI did not receive reasonably equivalent value. The UCC emphasizes that the securing of an antecedent debt does not automatically constitute reasonably equivalent value. The UCC also maintains that the uptier transaction left TPI insolvent due to inadequate capital and insufficient cash-flow.
TPI enters the battle
In late October, TPI filed a motion to intervene in the adversary proceeding with respect to the UCC’s claims for recharacterization and equitable subordination or disallowance and join Oaktree’s motion to dismiss these claims.
According to TPI, its application for intervention is timely because the adversary proceeding was initiated only recently, Oaktree’s motion to dismiss was filed not long ago, and neither Oaktree nor the UCC would suffer any prejudice from the intervention especially because TPI does not plan to file its own motion to dismiss.
TPI also argues that it has a direct and substantial legal interest in the subject of the adversary proceeding because the UCC’s claims for recharacterization and equitable subordination or disallowance could significantly impact its capital structure. Furthermore, TPI believes that its interests in its capital structure and strategy for emerging from Chapter 11 would be impaired if it were not allowed to intervene.
Finally, TPI asserts that its interests are inadequately represented. As the debtor, TPI believes it has a critical role in the restructuring process which may diverge from those of the UCC and Oaktree.
In its objection to TPI’s motion, the UCC argues that TPI does not have a substantial legal interest in the subject of the adversary proceeding. According to the UCC, the dispute over whether Oaktree is a secured creditor or a preferred equity holder does not confer a legally protectable interest to TPI, particularly when recharacterization or equitable subordination or disallowance would benefit all creditors except for Oaktree. The UCC further argues that TPI did not sufficiently demonstrate that its emergence from Chapter 11 would be impaired if it were not allowed to intervene.
The UCC also highlights TPI’s peculiar position of intervening only on the claims for recharacterization and equitable subordination or disallowance claims not the claims for actual and constructive fraudulent transfer, avoidance, and the limitation of credit bidding rights.
Finally, the UCC contends that TPI’s interests are adequately represented by Oaktree. The UCC asserts that TPI and Oaktree share the same objectives and positions with regard to the adversary proceeding and that such unity is evidenced by TPI’s plans to join Oaktree’s motion to dismiss instead of filing its own.
A hearing for the motion is scheduled for 24 November at 10:00am EST.
The Chapter 11 docket can be found here, and the adversary proceeding docket can be found here.
