Strategic Value Partners sued in case revealing stress over distressed debt


$18 billion distressed debt investor Strategic Value Partners has taken control of the owner of US commercial properties such as Rolling Oaks Mall in Texas and Tippecanoe Plaza in Indiana in a deal approved by a bankruptcy judge last year.

Now, a group of minority shareholders in the mall company have sued SVP, claiming they were wronged by the fund.

The case is part of a trend in distressed debt investing, in which investment funds snap up the discounted bonds of troubled companies in the hope of swapping that credit position for the control of its assets in a subsequent bankruptcy.

The largest investment groups are increasingly asserting their power to steer the restructuring of target companies. This has led to grievances from small investors who claim they have been crushed.

Washington Prime Group filed for bankruptcy protection in June 2021, citing heavy $4 billion in debt, reduced traffic at its roughly 100 malls and various concessions given to retail tenants trying to stay afloat in the coronavirus pandemic. The New York-listed company was spun off in 2014 from shopping center titan Simon Property Group.

Connecticut-based SVP, founded by Victor Khosla, was WPG’s largest individual creditor at the time of the bankruptcy filing. SVP led a group of creditors who owned the vast majority of the company’s senior debt and junior unsecured bonds. According to the lawsuit, SVP owned 87% of the reorganized company when it emerged from bankruptcy in October 2021 at an aggregate valuation of around $3 billion.

In the lawsuit filed Thursday in Delaware state court, minority shareholders of the reorganized WPG, led by Cygnus Capital, said they were caught off guard and ultimately cheated in a deal earlier this year where SVP ousted shareholders who held just over a tenth of WPG’s remaining equity. Cygnus claimed he only learned of the SVP-led deal when it was struck at a price he deemed “grossly unfair”.

In its lawsuit, Cygnus alleges that “SVP took advantage of the Covid crisis to force and control a rushed bankruptcy process to take WPG Inc private.” The minority investor group is either seeking to reverse SVP’s minority shareholder buyout or seek damages based on a revised valuation from Ohio-based WPG.

In an interview with Bloomberg television last year, Khosla denied that his company engaged in “scorched earth” tactics, while acknowledging that his team could be tough dealmakers. “We’re not trying to find a low angle and make eight points on the bond we bought at 82. It gives you a bad name. . . it’s just not us,” he said.

However, a creditor of WPG before its bankruptcy, who is not involved in the lawsuit, told the Financial Times that he was surprised at the time by what he perceived to be SVP’s aggressiveness in the withdrawal agreement.

The person said that by leading a new $325 million cash investment in WPG during the restructuring, SVP had already done well. The fund was able to buy shares of WPG at a discount of 32.5% to the proposed valuation of the new company, attractive terms linked to SVP’s ability to commit significant capital. WPG had also been looking for alternative transactions to SVP’s restructuring plan, but no credible counter-offer emerged during the bankruptcy.

“Distress has never been an arena for the meek,” said Vincent Buccola, a Wharton School professor and former corporate lawyer. “But in recent years, as standards of proportion and reciprocity have given way, many of the more sophisticated players have found themselves in court testing the limits of legal rights.”

The reorganized WPG is structured like a limited liability company, which generally offers fewer fiduciary protections for minority shareholders than a traditional company. The plaintiffs allege that the transaction process “violated several requirements of the LLC Agreement” and that SVP “obstructed valuations of the company’s assets and withheld critical information from minority unitholders.”

“In many cases, minority limited partners have taken on exactly the same economic risks and yet SVP uses its majority control to create a two-class system that gives all the benefit of the investment to SVP and leaves little to their limited partners,” Christopher said. Swann, president of Cygnus Capital.

Cygnus challenged an independent WPG administrator, Martin Reid, describing him as beholden to the SVP. “Publicly available information indicates that Mr. Reid’s livelihood is dependent on private real estate investors like SVP,” the plaintiffs wrote.

Reid did not respond to a request for comment.

SVP said, “We believe the allegations in the lawsuit are completely without merit and we intend to defend ourselves vigorously.”

The court documents also capture comments Khosla made at a Milken Institute financial conference earlier this year, where he appeared to brag about the startling value of WPG’s assets, describing what plaintiffs said was the trading center. of the company located in Westminster, California.

“The mall is closed and we have had offers for a few hundred million dollars,” he said.


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