$18 billion distressed debt investor Strategic Value Partners took control of the owner of U.S. retail properties including Rolling Oaks Mall in Texas and Tippecanoe Plaza in Indiana in a transaction approved by a bankruptcy judge on last year.
Now, a group of minority shareholders in the mall company have sued SVP, saying the fund has been short-changed.
The case is part of a trend in distressed debt investing, in which mutual funds snap up the discounted bonds of troubled companies in hopes of trading that credit standing for control of their assets in a subsequent bankruptcy .
Larger investment groups are increasingly asserting their power to direct restructurings at target companies. This has led to complaints from smaller investors who claim they have been ripped off.
Washington Prime Group filed for bankruptcy protection in June 2021, citing a heavy debt load of $4 billion, reduced traffic at its approximately 100 malls and several concessions granted to retail tenants trying to keep afloat in the coronavirus pandemic. The New York-listed company was spun off in 2014 from mall titan Simon Property Group.
Connecticut-based SVP, founded by Victor Khosla, was WPG’s single largest creditor at the time of the bankruptcy filing. SVP led a group of creditors that held the vast majority of the company’s senior debt and junior unsecured notes. According to the lawsuit, SVP owned 87 percent of the reorganized company when it emerged from bankruptcy in October 2021 with an aggregate valuation of about $3 billion.
In the lawsuit filed Thursday in Delaware state court, the minority holders of the reorganized WPG, led by Cygnus Capital, said they were blindsided and ultimately misled in a transaction earlier this year where SVP squeezed out shareholders who owned just over a tenth of WPG’s remaining capital. Cygnus claimed it only learned of the SVP-led deal when it closed at a price it deemed “grossly unfair”.
In its lawsuit, Cygnus alleges that “SVP took advantage of the Covid crisis to force and control a rushed bankruptcy process to take WPG Inc private.” The minority investor group is seeking to untie SVP’s acquisition of minority shareholders or receive damages based on a revised valuation of Ohio-based WPG.
In an interview last year with Bloomberg Television, Khosla denied that his company engages in “scorched-earth” tactics, although he acknowledged that his team could be a tough negotiator. “We’re not trying to find a little angle and make eight points with the bond we bought in 82. It gives you a bad name. . . it’s just not us,” he said.
However, a creditor of WPG before its bankruptcy, who is not involved in the lawsuit, told the Financial Times that he was surprised at the time by what he perceived to be the SVP’s aggressiveness in exit agreement
By leading a new $325 million cash investment in WPG in the restructuring, SVP had already done well for itself, the person said. The fund had been able to buy WPG shares at a 32.5% discount to the new company’s proposed valuation, attractive terms related to SVP’s ability to commit significant capital. WPG had also sought alternative transactions to the SVP restructuring plan, but no credible counteroffers emerged during the bankruptcy.
“Distress has never been an arena for the meek,” said Vincent Buccola, a Wharton School professor and former corporate attorney. “But in recent years, as the rules of proportionality and reciprocity have loosened, many of the more sophisticated players have found themselves in court testing the limits of legal rights.”
The reorganized WPG is structured as a limited liability company, which typically offers fewer fiduciary protections to minority shareholders than a traditional corporation. Plaintiffs in the suit allege that the transaction process “violated several requirements of the LLC agreement” and that SVP “hidden valuations of the company’s assets and withheld critical information from minority shareholders.”
“In many cases, the minority limited partners assumed exactly the same financial risks, and yet SVP is using its majority control to create a two-class system that gives all of the investment’s benefit to SVP and leaves little for its limited partners,” Christopher said. Swann, president of Cygnus Capital.
Cygnus challenged an independent director of WPG, Martin Reid, describing him as responsible with SVP. “Publicly available information indicates that Mr. Reid’s livelihood depends on private equity real estate investors like SVP,” the plaintiffs wrote.
Reid did not respond to a request for comment.
SVP said, “We believe the claims in the lawsuit are completely without merit and we intend to vigorously defend ourselves.”
The court documents also draw on comments Khosla made at a Milken Institute financial conference earlier this year, where he appeared to brag about how WPG’s assets had become surprisingly valuable, describing what the plaintiffs say it was the company’s commercial center located in Westminster, California.
“The mall is closed, and we had offers in the hundreds of millions of dollars,” he said.