NEW YORK — U.S. private equity firm Patriarch Partners LLC has filed to put the Zohar I debt fund into Chapter 11 bankruptcy to protect against efforts by MBIA Inc. to obtain the assets of Zohar, which invested in Patriarch portfolio companies such as the Old Town Fuel & Fiber mill.
“We believe the Chapter 11 process now presents the best way for Zohar I to restructure its finances while preserving the value of the portfolio companies it owns on behalf of its key stakeholders,” Patriarch Chief Executive Officer Lynn Tilton said in a statement.
Tilton created Zohar I in 2003 and through Patriarch bought the Old Town mill in 2008. The mill, set to close by the end of this year, was purchased out of a separate bankruptcy auction in December to Expera Specialty Solutions.
Patriarch is the fund’s largest creditor, holding $286.5 million of its notes, the statement said. MBIA is another Zohar I creditor, Patriarch said.
Patriarch is seeking court approval for a reorganization plan that will repay MBIA in full, while “maximizing value” for Patriarch, said Tilton, alleging MBIA and MBIA Insurance Corp. had acted in “bad faith” in restructuring discussions.
MBIA called Tilton’s allegations “utterly baseless.”
“This proceeding, like her recent lawsuit, is a desperate and transparent effort to deflect attention and blame from her own failures and misconduct,” said the insurer in a statement.
Rather than have Zohar file a voluntary bankruptcy petition, Patriarch on Nov. 22 filed what is known as an involuntary bankruptcy against Zohar because Patriarch no longer controls the fund. MBIA took control after Zohar defaulted on $149 million of notes on Friday. Those notes were insured by MBIA.
Patriarch has likely set up a fight against MBIA for control of the case, and Tilton’s firm fired the opening shot in papers filed Sunday with the U.S. Bankruptcy Court in Manhattan seeking control.
“Zohar I’s restructuring will not move forward if MBIA is left in charge,” Patriarch said, adding “MBIA’s scheme is to take Zohar I’s assets in a fire sale.”
Patriarch said MBIA has its sights on other Tilton-created debt vehicles.
The U.S. Securities and Exchange Commission has accused Tilton and Patriarch of fraud related to the Zohar loan funds. That case has been put on hold by a federal appeals court.
Tilton is known as the “Diva of Distressed” for her efforts to turn around troubled companies.
The Zohar funds are three collateralized loan obligation funds that have raised more than $2.5 billion from investors used to make investments to distressed companies, according to the SEC complaint.