Key WorldCom Bankruptcy Player Now Finds Itself in Chapter 11

MatlinPatterson Global Advisers LLC, a distressed-debt investor that once played a major role in WorldCom Inc.’s bankruptcy, is now seeking Chapter 11 protection following a string of losses.

Hammered by soured bets on Brazil’s airline industry, the fund filed Wednesday for bankruptcy protection in New York with plans to liquidate and return capital to investors. MatlinPatterson Global Partners II LLC, its general partner, also sought Chapter 11.

MatlinPatterson’s fund has been trying to dissolve “for many years,” but it’s faced three lawsuits stemming from the Brazilian investments that have hampered those efforts, according to a declaration filed by Matthew Doheny, the fund’s chief restructuring officer.

The fund’s parent was co-founded almost two decades ago by David Matlin and Mark Patterson, who worked together at Credit Suisse’s brokerage unit. The company made an almost immediate splash with WorldCom, the telecommunications firm that fell into bankruptcy in 2002 amid an accounting scandal. MatlinPatterson’s significant bond holdings put it in line to get 17% of the equity of the reorganized company, named MCI Inc., though it ended up taking a smaller stake.

‘Substantial Loss’

It made a series of investments in the Brazilian airline industry starting in 2006, which has generated a “substantial loss,” according to court papers.

MatlinPatterson’s liabilities include $58 million in intercompany promissory notes, and $423 million in claims stemming from the litigation, according to the declaration. It has $142 million in cash. The fund expects to object to the litigation claims and pay low-ranking creditors in full, according to the liquidation plan.

Funds managed by MatlinPatterson invested in Volo dB, which then purchased VarigLog, a cargo airline, according to court papers. Variglog filed for Chapter 15 bankruptcy in 2009.

MatlinPatterson also bet big on Puerto Rico debt, investing at least $150 million as of 2015. It was forced to unwind those positions and shut its distressed business two years later after its largest investor, Allied World Assurance Co., pulled its cash. At the time, the fund managed $4.5 billion of assets, including about $500 million in distressed funds.

After winning big on debt issued by MCI Inc. and Huntsman Corp., the fund had performance issues stemming from its investments in Thornburg Mortgage Inc. and failing bond brokerage Gleacher & Co., Bloomberg News previously reported. As of 2014, its $1.65 billion fund that closed in 2004 had a negative 28% net internal rate.

It listed assets between $50,001 and $100,000, and liabilities of as much as $50,000 in a Chapter 11 petition filed in the Southern District of New York.

The case is MatlinPatterson Global Opportunities Partners II, 21-11255, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Jeremy Hill and Michael B. Marois.

To contact the reporter on this story:
Allison McNeely in New York at amcneely@bloomberg.net

To contact the editors responsible for this story:
Claire Boston at cboston6@bloomberg.net

Nick Baker, Dawn McCarty

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