NEW STREAM: Files for Chapter 11 with Prepackaged Plan

Troubled Company Reporter - March 15, 2011

The TCR reports New Stream Capital LLC and three affiliates filed Chapter 11 petitions (Bankr. D. Del. Lead Case No. 11-10753) on March 13, 2011, together with a prepackaged plan of reorganization.

Michael Buenzow, of FTI Consulting, Inc., and currently chief restructuring officer of the Debtors, say the Chapter 11 cases have been filed to resolve claims relating to New Stream's investors, who provided New Stream's capital by making secured loans through three feeder funds.

Before seeking bankruptcy protection, New Stream negotiated a plan of reorganization with creditors. The prepackaged plan was "overwhelmingly approved" by investors.

The Debtors have proposed that the Court hold a combined hearing on adequacy of disclosure statement and prepetition solicitation procedures, and the confirmation of the Prepackaged Plan. The Debtors propose that the combined hearing be set as soon as practicable between the dates of April 21, 2011 and May 3, 2011.

In order to meet the timeline in a Plan Support Agreement and the post-petition financing, the hearing to consider confirmation must take place not later than May 12, 2011.

New Stream Entities

New Stream is an inter-related group of companies that collectively comprise an investment fund, headquartered in Ridgefield, Connecticut. Founded in 2002, New Stream focuses on providing non-traded private debt to the insurance, real estate and commercial finance sectors.

Debtor New Stream Secured Capital, LLC – NSSC -- is the "master fund" and the primary operating entity of New Stream. All of the working capital for the investments made by NSSC was provided by investors that invested through one of three "feeder funds."

Debtor New Stream Secured Capital, Inc. -- NSCI -- is a holding company through which the US/Cayman Funds hold the limited partnership interests in NSSC.

Two of the feeder funds, one in Bermuda (New Stream Capital Fund Limited) and the other in the Cayman Islands, were vehicles for investments made by nonresident aliens and foreign entities. The third feeder fund is the vehicle through which U.S. residents made investments.

The Bermuda Fund is not a debtor in the Chapter 11 cases. However, it is in a judicial liquidation proceeding in Bermuda. None of the Cayman Funds is a debtor in the Chapter 11 cases; however, on March 8, 2011, an involuntary Chapter 11 petition was filed against two of the Cayman Funds

New Stream Capital, LLC -- NSC -- a Delaware limited liability company, is an unregistered investment adviser and asset management company that serves, among other roles, as the general partner and investment manager for NSSC. It is also the sole member of New Stream Capital Services LLC.

Each of eight first-tier subsidiaries of NSSC owns a portfolio of particular investments. Debtor New Stream Insurance, LLC ("NSI"), one of the subsidiaries, owns a portfolio consisting of insurance-related investments, primarily interests in companies and partnerships that invest in life settlements.

NSC is the general partner of, and acts as the investment manager of, NSSC. NSC is indirectly owned and managed by three individuals, David Bryson, Bart Gutekunst and Donald Porter, who had jointly constituted the Debtors' senior management team.

ROAD TO CHAPTER 11

In an affidavit in support of customary first day motions,
Mr. Buenzow said that since 2005, NSSC and its subsidiaries have invested in a specialized portfolio that yielded positive returns for investors.

Mr. Buenzow relates that in late September 2008, a series of fund failures (most notably, the allegedly fraudulent "Ponzi Scheme" funds run by Thomas Petters and by Bernard Madoff) had an adverse effect on many of the Debtors' investors even though there was no connection to New Stream. Other events during September 2008, including the collapse of Lehman Brothers and the near failure of several other financial institutions, compounded this negative effect, resulting in a substantial number of redemption requests by the Debtors' investors, comprising 60% of the value of the Debtors' feeder funds (40% during just the month of September, 2008).

In October 2008, the Debtors took actions in the US Fund and the Cayman Funds to reject all the redemption requests.

On Nov. 28, 2008, AVS Underwriting LLC, the largest rating agency for life settlements, extended its views on mortality and life expectancies, which reduced the implicit value of the life settlements held by NSI. Over the following three months, secondary sales of life settlements progressively dried up.
By late February 2009, the combination of the uncertainty around policy values and the general market illiquidity effectively shut down the life settlement market.

The Debtors took a markdown against the NSI Insurance Portfolio, which was valued at $194 million in November 2008, resulting in $71 million of unrealized losses for NSSC at Dec. 31, 2008.

2009 Restructuring

During April and May 2009, the Debtors attempted to negotiate a restructuring of their relationships with investors. The Debtors, however, were unable to liquidate assets and distribute available funds in the manner anticipated by the 2009 Restructuring after two Bermuda Fund investors who had not consented to the 2009 Restructuring commenced litigation in the Supreme Court of Bermuda.

On June 8, 2010, one of those Bermuda Fund investors obtained a judgment declaring that the terms of the 2009 Restructuring did not apply to Segregated Account Class C or Segregated Account Class I. The Bermuda Court appointed a receiver, John McKenna, to act on behalf of Segregated Account Class C and Segregated Account Class I. As a result, NSC, in its capacity as the investment manager for the Bermuda Fund, caused the Bermuda Fund to petition the Bermuda Court for the appointment of a receiver to act on behalf of the other Bermuda Segregated Account Classes. The Bermuda Court appointed Michael Morrison and Charles Thresh of KPMG Advisory Limited, as interim joint receivers for Segregated Account Classes B, E, H, K, L, N and O of the Bermuda Fund. On Sept. 13, 2010, acting by ex parte summons, the Bermuda Fund
Receivers asked the Bermuda Court to order the winding-up of the Bermuda Fund under the provisions of the Bermuda Companies Act. That same day, the Bermuda Court appointed Messrs. Morrison, Thresh and McKenna as the Joint Provisional Liquidators of the Bermuda Fund. On October 7, 2010, the Bermuda Court ordered that the Bermuda Fund be wound up under the provisions of Bermuda Companies Act and confirmed the appointment of the Joint
Provisional Liquidators.

Financing, Sale of NSI Portfolio

On May 3, 2010, NSI engaged Guggenheim Securities, L.L.C., an independent investment bank with extensive experience in the life settlement market, to help the Debtors explore financing opportunities for the NSI Insurance Portfolio. However, solicitation for a $200 million financing was suspended after entry of the Bermuda Judgment.

Since the appointments of the Bermuda Fund Receivers, the Debtors have been in negotiations with them, as the court-appointed representatives of the Bermuda Fund Segregated Account Classes, concerning an orderly liquidation of the Debtors.

The Bermuda Judgment made it impossible for the Debtors to obtain financing for the insurance premiums from a third-party lender on commercially reasonable terms. On July 20, 2010, a meeting was held among the Debtors, the Bermuda Fund Receivers and representatives of Bermuda Fund investors, at which a decision was reached to cease efforts to obtaining financing and instead to explore an outright sale of NSI's life settlements.

Between July 23, 2010 and July 28, 2010, Guggenheim worked with each of the parties who had expressed interest in, or made offers for, the NSI Insurance Portfolio, including MIO Partners, Inc., a Delaware corporation and an affiliate of several investors in the US Fund and Cayman Funds. On July 29, 2010, the evaluation process concluded with Guggenheim recommending the acceptance of the offer made by MIO (who assigned its rights as purchaser to Limited Life Assets Master Limited and Limited Life Assets Holdings Limited) to purchase the entire portfolio for a cash payment of $127.5 million.

After parties failed to close on the sale by Sept. 30, 2010, the Purchaser agreed to (i) extend the timeline for closing, (ii) increase the principal amount of the "price neutral" bridge financing from $25 million to $39,480,269, which has been used to finance the premiums and maintain the value of the NSI Insurance Portfolio pending the filing of these cases, and (iii) offer
$15 million of postpetition financing under a "price neutral" debtor-in-possession credit facility.

The Debtors have already received the benefit of prepetition financing of $39,480,269 plus an additional $1,815,184 (both used for to fund on-going premium payments pending the sale of the NSI Insurance Portfolio). In addition, the Purchaser has committed to fund up to an additional $15,000,000 during the pendency of the Chapter 11 Cases. In order for a sale to any party other than the Purchaser to be of greater value to the Debtors' estates, it would require a purchase price of up to $184,350,000, the effective purchase price to be paid by the Purchaser.

DEBT OBLIGATIONS

Over the last eight years, NSSC has invested primarily by making loans and equity investments. The aggregate indebtedness secured by the investment portfolio of NSSC is approximately $688,412,974. This debt is divided into two tranches. The secured claims of the
NSSC Bermuda Lenders, in the approximate amount of $369,066,322, have first priority over the secured claims of the Cayman Fund and US Fund, which are parri passu; the claims of the Cayman Fund and US Fund aggregate $319,346,652.

NSI is indebted to certain segregated account classes of the Bermuda Fund in the approximate amount of $81,573,376.

PREPACKAGED PLAN

According to Mr. Buenzow, differing perspectives on the allocation of asset value among these investors lie at the heart of these cases. "These differences brought the Debtors' activities to a standstill and surrounded the Debtors with an aura of uncertainty that made it impossible to raise capital and perpetuated an escalating cycle of redemption requests, all of which undermined the Debtors' ability to operate."

Over the last several months, the Debtors negotiated the details of the reorganization centered on a closing of the Insurance Portfolio Sale and an allocation of the net proceeds among the Debtors' creditors.

The Debtors have successfully negotiated the prepackaged reorganization that is embodied in the Debtors' Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code, dated January 24, 2011. The Debtors concluded a solicitation of all of the impaired classes of creditors, and these creditors have voted in favor the Plan.

The Plan is predicated on a rapidly executed sale of NSI's portfolio of life settlement contracts on the terms set forth in the asset purchase agreement. The Plan provides for both the implementation of this asset sale and the allocation of the net proceeds among the Debtors' secured creditors.

"Although many of the Debtors' investors, primarily hedge funds and other sophisticated investors, will recover only a portion of their investment, the vast majority have agreed to accept the Plan since the alternatives to confirmation are far less attractive," Mr. Buenzow says.

The Plan provided for the sale of the NSI Insurance Portfolio either pursuant to a "Consensual Process" or a "Cramdown Process". However, since Class 3 (which is described more fully in 104, infra) has voted to accept the Plan, the sale will take place pursuant to the Consensual Process and the Debtors do not presently intend to seek approval of the Insurance Portfolio Sale pursuant to Section 363 of the Bankruptcy Code prior to seeking confirmation of the Plan.

The Plan treats creditors as follows:

-- NSI Bermuda Lenders under Class 1, owed $81,573,376, which
have voted to accept the plan, will receive less than the
full amount owed. Payment will be from the net proceeds of
the Insurance Portfolio Sale

-- NSSC Bermuda Lenders under Class 2, owed $396,066,322,
which hold a first lien on the investment portfolio of
NSSC, will (1) receive will receive a distribution from the
remaining proceeds of the Insurance Portfolio Sale and (2)
substantially all of the remainder of NSSC's assets, except
for certain assets that are being released for the benefit
of the Class 3 Claims. They voted in favor the Plan.

-- All holders of US-Cayman Claims, under Class 3, in the
aggregate amount of $319,346,653, will each receive a
percentage share of periodic distributions of the net
proceeds from the liquidation of the common stock of North
Star Financial Services Limited and specific assets and
certain real estate and commercial loans (collectively
identified as USC Wind Down Assets). In addition, holders
of Class 3 Claims who voted to accept the Plan, and thereby
grant the third-party releases provided for in section 12.5
of the Plan, will be entitled to receive a cash payment
from the Global Settlement Fund upon the Plan's Effective
Date. Under the Global Settlement, the Purchaser and
Creditors in Classes 1 and 2, in exchange for the "yes"
vote and the third-party releases, have agreed to provide
funding for cash payments (expected to aggregate
$15 million) to Class 3 claimants.

-- Holders of general unsecured claims against NSI and NSCI,
under Classes 4(a) and (d), will be paid in full and are
not impaired under the Plan. Each holder of allowed
general unsecured claim against NSC, in Class 4(c), will
share, on a pro rata basis, in a cash distribution of.
Holders of general unsecured claims against NSSC, in Class
4(b), will not receive any distribution or retain any
property on account of such Claims and pursuant to
Bankruptcy Code Sec. 1126(g) this Class is deemed not to
have accepted the Plan.

-- Holders of the Class 5(a) Interests in NSI that are
currently held by NSSC will continue to be held by NSSC and
the Class 5(d) Interests in NSCI that are currently held by
the Cayman Funds will continue to be held by the Cayman
Funds. Class 5(b) Interests in NSSC and Class 5(c)
Interests in NSC will be extinguished and the Holders of
Interests in Class 5(b) and Class 5(a) shall not receive or
retain any property on account of such Interests.

Each holder of a claim in Classes 1, 2, 3 and 4(c) was entitled to vote either to accept or reject the Plan

A copy of the Plan is available for free at:

http://bankrupt.com/misc/NewStream_Plan.pdf

A copy of the Disclosure Statement explaining the terms of the Plan is available for free at:

http://bankrupt.com/misc/NewStream_DS.pdf

The Debtor is represented by Kurt F. Gwynne, Esq., at Reed Smith LLP, in Wilmington, Delaware, as counsel.

Kurtzman Carson Consultants LLC is the Notice, Claims and Solicitation Agent.

Three U.S./Cayman Funds Involuntaries

On March 7, 2011, when New Stream was still soliciting votes on the Chapter 11 plan, certain investors filed a petition (Bankr. D. Del. Lead Case No. 11-10690) seeking to force three new stream funds -- New Stream Secured Capital Fund (U.S.) LLC, New Stream Secured Capital Fund P1 (Cayman), Ltd. and New Stream Secured Capital Fund K1 (Cayman), Ltd. -- to Chapter 11 bankruptcy.

The petitioning investors in the New Stream investment enterprise say they are collectively owed over $90 million, representing roughly 28% of the approximately $320 million owed to all U.S. and Cayman investors.

The Investors filed together with the petitions a request for an immediate appointment of a Chapter 11 trustee to take over management of the assets. The prepackaged plan offered by New Stream, according to the Investors, "offers a mere pittance to the
US/Cayman Investors, funded primarily with 'gifts' from allegedly
senior classes traceable to funds supplied by the US/Cayman
Investors in the first place; gives the Bermuda feeder fund, the
purported senior lien holder, the vast majority of all plan
distributions; and grants releases to all wrongdoers; this after
admitting to losing almost $500 million on assets that the Fund
Manager valued at $800 million less than three years ago."

The Petitioners are represented by (i) Joseph H. Huston, Jr., Esq., Maria Aprile Sawczuk, Esq., Meghan A. Cashman, Esq., at Stevens & Lee, P.C., in Wilmington, Delaware, and Beth Stern Fleming, Esq., at Stevens & Lee, P.C., in Philadelphia, Pennsylvania, and Nicholas F. Kajon, Esq., David M. Green, Esq., and Constantine Pourakis, Esq., at Stevens & Lee, P.C., in New York, (ii) Edward Toptani, Esq., at Toptani Law Offices, in New York, and (iii) John M Bradham, Esq., and David Hartheimer, Esq., at Mazzeo Song & Bradham LLP, in New York.