Lynn Tilton's Zohar funds file for bankruptcy

Tilton plans to refinance debt or sell assets of the three structured debt vehicles

Mar 12, 2018 @ 2:07 pm

By Bloomberg News

New York financier Lynn Tilton, who's been at the center of legal battles over three structured debt vehicles she used to finance distressed companies, put the funds into bankruptcy with plans to refinance debt or sell assets.

Filings for Zohar III Corp. and affiliates in Delaware listed up to $10 billion in assets and up to $1 billion in debt in the Sunday filing. Ms. Tilton's Octaluna entities, which control the funds, aren't part of the bankruptcy, according to the filing.

The Zohar funds operate as collateralized debt obligations, which bundle the debt of distressed companies into securities that are sold to investors. Ms. Tilton had been facing allegations of wrongdoing from regulators and investors, but was cleared late last year. The distressed companies in the portfolio had been unable to refinance or sell themselves amid her legal troubles, preventing them from repairing their balance sheets, Ms. Tilton said in a statement Monday.

Zohar's court filing won't disrupt those businesses, and the action will put off pending lawsuits against the fund and could lead to a sale of assets, according to Tilton's statement.

All Clear

Ms. Tilton, a creator of the Zohar funds, had been sued by the Securities and Exchange Commission, which alleged she had bilked investors of $200 million.She was cleared in September, and absolved of separate civil racketeering allegations near the end of 2017 that were contained in a lawsuit brought by the Zohar funds. They were managed at the time by Alvarez & Marsal.

Ms. Tilton's investment firm, Patriarch Partners, previously had managed the funds. Patriarch petitioned to force the funds into bankruptcy in New York, but bond insurer MBIA Inc.'s Insurance Corp. unit fought back. MBIA later took possession of Zohar I at an auction after facing off with Ms. Tilton's Patriarch Partners over the assets. MBIA and Patriarch have fought since at least 2009 over the securities they created together starting in 2003, which comprised three Zohar funds.

The funds "have been tied up in litigation for years — with no effect other than to prevent me from refinancing the portfolio company loans and selling those same companies in order to maximize value for all of the funds' stakeholders," Ms. Tilton said in the statement.

Ms. Tilton said she expects that all claims will be repaid in full, and that no defaults or changes in business contracts will be triggered for the portfolio companies. Patriarch's portfolio companies currently include MD Helicopters, Stila cosmetics and Dura Automotive Systems, according to its website.

Mark Kirschner of Goldin Associates was named as chief restructuring officer for the funds. Bankruptcy counsel is Young Conaway Stargatt & Taylor.

The case is Zohar III Corp., 18-10512, U.S. Bankruptcy Court, District of Delaware (Delaware.)

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