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Scottish Re trust preferred holders balk at proposed sale process

One of the holders of Scottish Re Group Ltd. subsidiary trust preferred securities is among several parties urging a federal bankruptcy judge to slow the process that could culminate in the sale of Scottish Annuity & Life Insurance Co. (Cayman) Ltd. and Scottish Re (U.S.) Inc.

Scottish Holdings Inc. motions regarding the proposed bidding procedures and protections for stalking-horse bidder Hudson Structured Capital Management Ltd. are among the matters scheduled to be addressed during a Feb. 21 hearing in the U.S. Bankruptcy Court in Delaware. Funds linked to Hildene Capital Management LLC, which hold certain of the Scottish Re trust preferreds, asked for the hearing to be put off for two weeks to allow for the formation of an official committee of unsecured creditors.

Orders granting certain of the Scottish Re motions due to be considered Feb. 21 "would propel these cases down an irreparable course that would hinder any value-maximizing alternatives and ensure minimal recovery for these estates," Hildene argued in a filing. "That desire to rush the process, at the expense of the Committee and these estates, is without justification."

HSCM Bermuda Special Opportunities Fund Ltd., an affiliate of Hudson Structured Capital Management, agreed to pay $12.5 million upon the effectiveness of the Scottish Re debtors' Chapter 11 reorganization plan, including a $2.5 million good-faith deposit, in the proposed acquisition. Those funds would be allocated to cover unpaid costs of the administration of the bankruptcy cases and the implementation of the plan, as well as to facilitate distributions to creditors. The buyer would pay another $12.5 million to recapitalize Scottish Annuity & Life and its operating subsidiaries.

Hildene criticized the speed that Scottish Re is seeking to proceed with the transaction and faulted the process for fielding alternative offers, arguing that it contained "numerous deficiencies" that would have the effect of chilling bidding.

"By Debtors' admission, it has been an extensive and demanding process for the Stalking Horse to perform due diligence and submit the ... bid, which itself is not yet finalized," Hildene said, in reference to what it described as a proposed bid deadline of approximately six weeks from the date of the court's prospective approval of the bidding procedures. "It strains credulity to believe that the short marketing timeline proposed by the Debtors (or dictated by the Stalking Horse) will allow any new potential bidders sufficient time to perform the requisite due diligence to submit the unconditional competing bids that are essential to creating a value-maximizing, competitive bidding process."

Hildene also expressed concern that it had not received any guidance about the size of the recovery that holders of Scottish Re's trust preferreds might stand to obtain through the Chapter 11 process.

Scottish Re affiliates issued five series of trust preferreds between 2002 and 2004: $17.5 million in capital securities due 2032; $20 million in preferred trust securities due 2033; $10 million of trust preferreds due 2033; $32 million of trust preferreds due 2034; and $50 million in trust preferreds due 2034. The company acquired $43 million of its trust preferreds in after-market transactions.

Hildene argued that the stalking-horse agreement with HSCM appeared to have represented the product of "long and careful planning" that had been "undertaken without any input from the non-insider holders of Trust Preferred Securities, such as Hildene, the sole economic constituency affected by the Debtors' plan."

Scottish Re previously detailed the marketing process for its assets, which involved outreach to 51 prospective strategic or financial acquirers. None was willing to proceed with a transaction outside of the bankruptcy process due to the company's capital structure. Two parties submitted second-round bids for a transaction to be conducted in conjunction with a Chapter 11 proceeding.

U.S. Bancorp's US Bank NA and M&T Bank Corp.'s Wilmington Trust Co., acting solely in trustee capacities, also objected to certain of Scottish Re's pending motions. Wilmington Trust, for instance, argued that the proposed sale process was "antithetical to a number of fundamental policies that undergird the Bankruptcy Code."

The trustee alleged that there are no circumstances that warrant an expedited sale process and expressed optimism that the filing of the Chapter 11 case might either lead other potential purchasers to emerge or rekindle interest among those parties that had already taken a look at the assets.