Restructuring

Contributed by Conray C. Tseng.
Following-up on a previous post, we continue to monitor the prepayment issues related to the acquisition of U.S. Oncology by McKesson Corporation.  As a brief refresher, on November 1, 2010, McKesson Corporation announced the acquisition of U.S. Oncology.  As part of the transaction, significant portions of U.S. Oncology’s debt would be refinanced or retired including, among other things, certain 9.125% senior secured notes due 2017.
The 9.125% senior secured notes required the payment of a prepayment premium if called before August 15, 2015.  A dispute arose as to how to calculate the prepayment premium. The 9.125% notes calculate the prepayment premium as follows:

the greater of (1) 1.0% of the principal amount of [the 9.125% notes] at such time and (2) the excess of (A) the present value at such time of (i) the redemption price of such [9.125% note] at August 15, 2013 . . . plus (ii) any required interest payments due on such [9.125% note] through August 15, 2013 (including any accrued and unpaid interest) computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such [9.125% note].

The crux of the dispute appears to be the appropriate discount rate to calculate the present value of the redemption price plus any applicable interest payments.  The higher the discount rate, the lower the present value of the redemption price and interest payments and, in turn, the lower the make whole premium that must be paid.
The 9.125% notes define Treasury Rate as “with respect to any redemption date, the rate per annum equal to the yield to maturity of the Comparable Treasury Issue, compounded semi-annually, assuming a price for such Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.”
A “Comparable Treasury Issue” is defined as follows:

the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the [9.125% notes] that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such [the 9.125% notes] . . . .

What is the appropriate “Treasury Rate” thus appears to turn on what it means for a treasury to have “a maturity comparable to the remaining term” of 9.125% notes.
U.S. Oncology takes the position that such a U.S. treasury note is one due at the maturity of the 9.125% notes (i.e., 2017).  Dissenting bondholders believe it is one due when the 9.125% notes become callable (i.e., 2013).  The difference between the two positions is approximately $40 million.
On February 22, 2011, U.S. Oncology commenced a proceeding before the Supreme Court for the State of New York for declaratory relief that that “a maturity comparable to the remaining term” means a note due in 2017.  On April 20, 2011, U.S. Oncology filed a motion for summary judgment.
Recently, on August 15, 2011, Justice Bernard J. Fried of the New York Supreme Court heard oral arguments on U.S. Oncology’s motion for summary judgment.  Justice Fried engaged both sides during oral arguments.  Of U.S. Oncology, Justice Fried inquired on a variety of issues, including, whether the underlying language was ambiguous and whether, as U.S. Oncology’s bondholders suggest, the language “should be read in the common-sense way. . . .”  Of the bondholders, Justice Fried asked, among other things, whether the parol evidence rule – a rule that prohibits using extraneous evidence when interpreting unambiguous contract language – applied and prohibited the use of the bondholders’ proffered expert testimony.  Ultimately, Justice Fried stated that he would take the matter under advisement and would issue a decision this fall.
For the pleadings filed in the New York state court proceeding, click here.  You can also find the transcript from the August 15, 2011 hearing.  We’ll continue to monitor the situation and provide updates as they develop.