On Thursday, February 21, 2008, Syntax-Brillian (BRLC), makers of the Olevia branded television, filed an 8K within which the company disclosed a letter from Silver Point Finance which outlined events of default in addition to an amended credit agreement. In response, the company's stock fell more than 40% on Friday. It is believed that much of the selling was due to fear of the company filing for bankruptcy in the near future. But that fear may be unfounded.
Silver Point has a history of helping companies that are struggling through a liquidity crisis. In the cases of Krispy Kreme and Salton, they helped the companies to avoid bankruptcy. In late March, 2005, Krispy Kreme's lenders agreed to extend until April 11, 2005 the date on which the company would be in default on a $150 million credit facility for failure to deliver its financial statements for the quarter ended Oct. 31 of 2004 [i]
On Monday April 4, 2005, one week before Krispy Kreme would be in default, Silver Point, along with Credit Suisse First Boston, loaned Krispy Kreme $225 Million to help the company through the cash crisis and ease the threat of bankruptcy [ii].
Krispy Kreme used the loan to pay off a $90 million debt owed under Krispy Kreme's existing credit facility at that time. In response to the relief provided by Silver Point and CSFB, the Krispy Kreme president and COO Steve Panagos said, "We are pleased to have found partners like CSFB and Silver Point who understand and believe in the power and potential of Krispy Kreme. With more liquidity and no near-term repayment deadlines, we look forward to getting back to the business of selling doughnuts and coffee." Perhaps Silver Point sees a similar power and potential in Syntax-Brillian.
The loan provided by Silver Point and CSFB consisted of a $75 million first lien senior secured revolving credit facility, a $120 million second lien senior secured term loan and a $30 million second lien prefunded revolving credit and letter of credit facility [iii].
Second lien loans give lenders the second highest importance in the event of a bankruptcy, after the first lien lenders are paid. Because of this, second tier loans are more risky for the lender.
One of the concerns about hedge funds, like Silver Point, providing these second tier loans is that they often protect their higher risk investment by shorting the stock of the company to which they are lending the money. Detractors claim that these hedge funds can then benefit from the company going bankrupt because the value of the shares they shorted will go to zero. But Silver Point has been very careful to avoid this conflict of interest. In cases where it has become the agent for the credit facility, Silver Point, in the past, has closed out any short positions it may have held before becoming the debt agent. Silver Point "has a policy of not using a bank-loan position to cause a company to file for bankruptcy to benefit a short position," a spokesman for the fund has said [iv].
Another concern raised in these situations is that hedge funds can use inside information, acquired through their position as a lender, to drive decisions with respect to trading the stock of the company to which they are lending the money. According to Lisa Einhorn from Haynes and Boone, LLP, "Many hedge funds have instituted information barriers to prevent trading on inside information. Silver Point has instituted an information wall which includes physically separating the people who have inside information from those who do not. Both Silver Point and Highland Capital Management restrict their trading – when they receive any nonpublic information about a company through the "public side" of their operations, they refrain from trading in any securities in that company."
When companies failed to avoid Chapter 11 or continued to struggle, after getting credit relief from Silver Point, it has been because the companies continued to create their own problems or drove themselves into bankruptcy, not because Silver Point drove them to bankruptcy or caused them to continue to struggle. Silver Point seems to have taken a strong interest in helping Syntax-Brillian through this period. That makes me believe they are playing the part of Sir Larry Wildman, not Gordon Gekko.
Disclosure: Long BRLC
[ii] "Krispy Kreme gets help with debt," Associated Press, April 4, 2005
[iii] Nichola Groom, "Krispy Kreme gets $225 million, cash crunch alleviated," Reuters, April 4, 2005
[iv] Theresa A. Einhorn, "The Corporate Debt Market And Credit Derivatives," American Bar Association Section of Business Law Spring Meeting, March 2007