Charter and lenders face off over bankruptcy plan

* Charter seeks approval for bankruptcy plan

* Lenders mount opposition

* Under plan Allen, Apollo appoint Charter directors

By Emily Chasan

NEW YORK, July 20 (Reuters) - U.S. cable operator Charter Communications Inc CHTRQ.PK asked a U.S. bankruptcy judge on Monday to approve its fast-track bankruptcy exit plan, but faced vigorous opposition from senior lenders who argued the plan was full of "gimmicks" and violates the bankruptcy code.

In U.S. bankruptcy court in Manhattan, lawyers for Charter and several of its senior lenders sparred over Charter's "prepackaged" bankruptcy plan which, if approved, would allow the company to shed more than $8 billion in debt while also reinstating about $11 billion of its senior bank debt at below-market interest rates upon its emergence from bankruptcy.

The hearing before Judge James Peck is expected to last for days and has been closely watched in the restructuring industry as a test of the debt reinstatement concept, which has been rarely used but is supposed to be allowed under U.S. laws if the company has no other default under its debt agreements except for its bankruptcy filing.

Charter, which is controlled by Microsoft Corp (MSFT.O) co-founder Paul Allen, filed for bankruptcy protection in March, buckling under the weight of $21.7 billion in debt, but said at the time it had reached agreements with key stakeholders that would allow it to exit bankruptcy in a matter of months.

In court on Monday, Paul Basta, a Kirkland & Ellis lawyer representing Charter, said that when the company was considering filing for bankruptcy its financial advisors had quickly realized the low interest rates on its senior debt were one of the company's greatest assets if they could be reinstated.

He said the company avoided defaulting on its senior debt by continuing to make payments until it filed for bankruptcy, and coming to an agreement with Allen that would allow him to retain a 35 percent, controlling voting stake in the company, and a 2 percent equity stake.

Without the agreement on the plan, Charter would have "liquidated the business in the worst economy since the depression," Basta said.

But lender JPMorgan (JPM.N), on behalf of itself and other holders of $8.5 billion of the company's senior debt, led an opposition to the plan, claiming that Charter has violated its loan agreements and the bankruptcy reorganization plan would change the control of the company, constituting a default that would make debt reinstatement impossible.

"The whole thing, Your Honor, really is a gimmick," Peter Pantaleo, a bankruptcy lawyer at Simpson Thacher representing JPMorgan, told Judge Peck. "This is a deliberately designed plan to achieve a takeover that was planned well before this bankruptcy ... it's nothing more than just gaming to get around an agreement we had."

Pantaleo and other senior lenders, including Wells Fargo (WFC.N), argued that the bank lenders had been kept out of negotiations around the company's reorganization plan, so that a group of private investment funds that hold Charter's debt will be able to control the company post-bankruptcy despite technically "keeping" Allen in control.

Pantaleo said it "defied logic" that the investors would give "control" of the company to someone with such a small economic stake in the entity, and claimed that private equity firm Apollo Management had been planning a loan-to-own strategy for the company since 2007, when it first began accumulating positions in Charter's debt.

Under the plan, Paul Allen would be able to appoint four of the reorganized company's 11 directors, while Apollo could appoint two, and Oaktree Capital Management and Franklin Advisers Inc would be able to appoint one director each, Alan Kornberg, a Paul Weiss lawyer representing the investors, said in court.

Kornberg said that the investors were "very unhappy" about Charter's bankruptcy, wanted the company to hold off for at least a year and "had no secret agendas."

Attorneys for JPMorgan argued that Charter had been unable to pay its debt prior to filing for bankruptcy, and had come up with a one-time method of making its payment. JPMorgan said that one-time payment put Charter in default under its bank agreement because even though JPMorgan received its money, Charter would have been unable to pay its debt going forward.

Lawyers in support of Charter's plan said JPMorgan had never before tried to declare a "prospective default" and was simply seeking more money.

If Charter, the fourth-largest U.S. cable operator, were unable to reinstate its debt at pre-bankruptcy levels, it would have to renegotiate with its banks and reprice the debt at significantly higher interest rates. The company's interest payments could increase by more than $500 million annually if that were to occur, according to court papers.

The hearing will resume at 9:30 a.m. on Tuesday, and is expected to include testimony from Charter's Chief Executive Neil Smit.

The case in re: Charter Communications Inc., U.S. Bankruptcy Court, Southern District of New York, No. 09-11435. (Reporting by Emily Chasan)