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The $18bn distressed debt investor Strategic Worth Companions seized management of the proprietor of US retail properties equivalent to Rolling Oaks Mall in Texas and Tippecanoe Plaza in Indiana in a transaction authorised by a chapter decide final yr.
Now, a gaggle of minority shareholders within the mall firm have sued SVP, saying they’ve been short-changed by the fund.
The case is a part of a development in distressed debt investing, by which funding funds snap up the discounted bonds of troubled firms within the hope of swapping that credit score place for management of its property in a subsequent chapter.
The most important funding teams are more and more asserting their energy to steer restructurings at goal firms. This has led to grievances from smaller investors who declare that they’ve been steamrollered.
Washington Prime Group filed for chapter safety in June 2021, citing a heavy debt load of $4bn, lowered visitors at its roughly 100 procuring centres and varied concessions granted to retail tenants that had been making an attempt to remain afloat within the coronavirus pandemic. The New York-listed firm had been spun out in 2014 from the mall titan Simon Property Group.
Connecticut-based SVP, based by Victor Khosla, was WPG’s largest particular person creditor on the time of the chapter submitting. SVP led a gaggle of collectors who held the overwhelming majority of the corporate’s senior debt and unsecured junior bonds. Based on the lawsuit, SVP owned 87 per cent of the reorganised firm when it exited chapter in October 2021 at an combination valuation of round $3bn.
Within the lawsuit filed in Delaware state court docket on Thursday, minority holders within the reorganised WPG, led by Cygnus Capital, mentioned that they had been blindsided and in the end cheated in a transaction earlier this yr the place SVP squeezed out the shareholders who owned simply over a tenth of the remaining fairness of WPG. Cygnus claimed that it solely realized of the deal led by SVP when it closed at a worth it deemed “grossly unfair”.
In its lawsuit, Cygnus alleges that “SVP took benefit of the Covid disaster to drive and management a rushed chapter course of to take WPG Inc non-public”. The minority investor group seeks to both unwind SVP’s buyout of minority shareholders or be paid damages primarily based on a revised valuation of Ohio-based WPG.
In an interview final yr with Bloomberg tv, Khosla denied that his agency engaged in “scorched earth” techniques, whereas acknowledging that his crew may very well be powerful negotiators. “We aren’t looking for a little bit angle and make eight factors on the bond we purchased at 82. It offers you a awful repute . . . it’s simply not us,” he mentioned.
Nevertheless, one creditor to WPG earlier than its chapter, who is just not concerned within the lawsuit, instructed the Monetary Occasions that he was startled on the time by what he perceived to be the aggressiveness of SVP within the squeeze-out deal.
The individual mentioned that by main a brand new money funding of $325mn in WPG within the restructuring, SVP had already performed nicely for itself. The fund had been in a position to buy WPG fairness at a 32.5 per cent low cost to the mooted valuation of the brand new firm, enticing phrases associated to SVP’s capability to commit important capital. WPG had additionally sought different transactions to the SVP restructuring plan, however no credible counter provide emerged through the chapter.
“Misery has by no means been an enviornment for the meek,” mentioned Vincent Buccola, a professor on the Wharton College and a former company lawyer. “However in recent times, as norms of proportion and reciprocity have given manner, most of the most subtle gamers have discovered themselves in court docket testing the boundaries of authorized rights.”
The reorganised WPG is structured as a restricted legal responsibility firm, which generally presents fewer fiduciary protections to minority shareholders than a standard company. The lawsuit plaintiffs allege that the transaction course of “violated a number of necessities of the LLC settlement” and that SVP “obscured the Firm’s asset valuations and hid vital data from the Minority Unitholders”.
“Minority restricted companions in lots of instances took the very same financial dangers and but SVP is utilizing is its majority management to create a two-class system that provides all of the upside of the funding to SVP and leaves little for his or her restricted companions,” mentioned Christopher Swann, president of Cygnus Capital.
Cygnus challenged a WPG impartial director, Martin Reid, describing him as being beholden to SVP. “Publicly accessible data point out that Mr Reid’s livelihood relies on non-public fairness actual property traders like SVP,” the plaintiffs wrote.
Reid didn’t reply to a request for remark.
SVP mentioned: “We consider the lawsuit’s claims are utterly with out benefit, and we intend to defend ourselves vigorously.”
The court docket papers additionally seize upon feedback Khosla made at a Milken Institute monetary convention earlier this yr, the place he appeared to boast about how surprisingly invaluable WPG property had develop into, describing what the plaintiffs mentioned was the corporate’s mall positioned in Westminster, California.
“The mall is shut down and we obtained bids for it for just a few hundred million {dollars},” he mentioned.
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