CORRECTED-UPDATE 1-Momentive faces critics as bankruptcy-exit plan goes before court

Tue Aug 19, 2014 12:04pm EDT

(Corrects paragraph 5 to say U.S. Bank is trustee for junior bondholders)

By Nick Brown

NEW YORK Aug 18 (Reuters) - A judge said he will rule on Tuesday whether junior bondholders of Momentive Performance Materials, a quartz and silicone maker owned by Apollo Global Management, are being fairly pushed behind other creditors, a decision that could make or break Momentive's plan to cut $3 billion in debt and exit bankruptcy.

Judge Robert Drain heard hours of argument from the bondholders and the company at the first day of a week-long hearing in U.S. bankruptcy court in White Plains, New York on Monday. Drain said he will offer his ruling when the sides return to court on Tuesday morning.

Waterford, New York-based Momentive filed for Chapter 11 bankruptcy in April with an agreement to transfer control to a class of bondholders, but most other creditor classes have vigorously opposed the plan.

Drain has set aside four days this week - Monday, Tuesday, Thursday and Friday - to hear objections the deal, which is premised on a $1.3 billion loan from JPMorgan Chase & Co and a $600 million rights offering available to holders of second-lien bonds, who would walk away with Momentive's equity.

The key objection comes from junior bondholders, led by U.S. Bank NA as trustee, who would recover nothing under the plan. Owed some $382 million, the group cannot be treated worse than the bondholders participating in the rights offering, U.S. Bank says.

Momentive has cited contract language pushing the U.S. Bank group's debt behind other creditors', but the bank claims the clause applies only to senior secured lenders, and that no other creditor group can stand ahead of it in the payback line.

Parties have acknowledged a win for U.S. Bank on that issue would upend the restructuring and send Momentive back the drawing board. If Drain sides with U.S. Bank on Tuesday, he could ostensibly obviate the rest of the week's schedule.

The other major objection comes from senior secured lenders owed more than $1 billion, led by Bank of Oklahoma and Wilmington Trust. Although they would receive full repayment under the plan, they object to missing out on extra premiums known as make-whole payments they say are owed for early redemption of their bonds.

The case has been tense since the outset, with some creditors hinting in court papers that Apollo, which both owns Momentive and holds some of its second-lien debt, is getting a sweetheart deal that lets it hold onto some equity.

"It's like doing a deal with your wife," one person close to the case told Reuters. "If the other side wins, you still win."

Momentive in court papers called the deal "the culmination of arm's-length negotiations." (Reporting by Nick Brown; Editing by Ken Wills and Andrew Hay)

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