Creditors of St. Louis-based KV Pharmaceutical Co. have a pivotal hearing on Thursday.
A bankruptcy judge in New York is expected to decide whether senior noteholders are entitled to recover $32.8 million in post-bankruptcy interest before holders of convertible notes begin recovering on their subordinated claims.
The decision precedes a confirmation hearing, set for Aug. 28, on KV’s reorganization plan.
That plan is based on a compromise in which holders of $200 million in convertible notes can buy the lion’s share of the reorganized business. If they win the interest rate dispute on Thursday, the company they own will be more valuable.
In exchange for the $200 million in convertible debt, holders will receive 7 percent of the reorganized company’s stock, for a predicted recovery of 10.9 percent, according to the revised disclosure statement.
General unsecured creditors with claims ranging from $13.9 million to $18.3 million will share a pot of $10.3 million cash, for a recovery of 56.2 percent to 73.6 percent.
The convertible-noteholder group and Silver Point Finance LLC, one of the senior noteholders, help finance the plan by purchasing 1.85 million shares for $20 a share. An additional 72.2 percent of the new stock will be sold to convertible noteholders in a rights offering for $20 a share. The offering is backstopped by the same investor group and Silver Point.
As a fee for the backstop, the investors and Silver Point will be given 5 percent of the new stock.
The interest dispute pits Silver Point and other senior noteholders against the convertible noteholder group including Capital Ventures International; Greywolf Capital Overseas Master Fund and an affiliate, and Kingdon Capital Management LLC.
KV stopped making and distributing almost all drugs in January 2009 after a discovery that some tablets were oversized.
Its main business is now the sale of Makena, a drug reducing the risk of premature birth. St. Louis-based KV listed assets of $236.6 million and debt totaling $728 million, including $455.6 million in long-term debt. Liabilities include $30 million on a mortgage loan.
The first-lien notes last traded on July 26 for 111 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The secured notes rose almost three times in value since Oct. 9.
The $200 million in 2.5 percent contingent convertible subordinated notes due 2033 traded on Aug. 15 for 77.45 cents on the dollar, according to Trace. They were trading at less than 50 cents as recently as early June and have risen 17 times in value since Oct. 1.