Bankrupt polyester and plastics maker Wellman will seek creditors' nod for a revamped reorganisation plan involving conversion of part of its debt into equity shares.

Wellman said it has received approval from a bankruptcy court in Manhattan for the revamped reorganisation plan formulated after it realised that an exit loan won't be forthcoming.

Under the plan, the debt of the first and second lien holders will be converted into equity of the reorganised company - `Reorganised Wellman'. The first lien holders will receive 70 per cent, and the second lien holders will receive 30 per cent of the common stock of reorganised wellman on the plan's effective date, subject to dilution by the conversion of the newly issued convertible notes.

The first and second lien lenders will be able to purchase $120 million in convertible notes at a rights offering for $90 million in cash. The notes can be converted into 60 per cent of the common stock in a reorganised Wellman.

As much as $28 million from the rights offering will be used to cover administrative expenses, about $51 million outstanding on Wellman's debtor-in-possession loan and certain other costs. The rights offering is expected to be backstopped by first- and second-lien lenders.

First-lien lenders, due $185 million, will convert their prepetition debt into 70 per cent of the new common stock, subject to dilution from the rights offering and a management incentive plan. The first-lien lenders will also receive all the proceeds from the assets sold related to Wellman's idled facility in Darlington County, SC.

First-lien lenders are estimated to recoup 34.4 per cent of their claims, down from 50 per cent under the previous plan.

Second-lien lenders, meanwhile, will convert their debt into the remaining 30 per cent of Wellman's common stock. That figure is also subject to dilution from the rights offering and management incentive plan.

The second-lien lenders will also get 75 per cent of the first $1 million in proceeds brought in by a liquidating trust that will pursue causes of action and 80 per cent of the proceeds exceeding $1 million. All told, the second-liens are slated for just a 9.3 per cent recovery on $265 million in claims, down from 15 per cent under the previous plan. (The recovery figure, though, does not include potential payouts from the trust.)

Unsecured creditors will get the remaining 25 per cent of the first $1 million in proceeds reaped by the trust and the remaining 20 per cent of any proceeds exceeding $1 million. The unsecureds' recoveries were not estimated by the plan, given that they are entirely dependent on litigation.
 
If Wellman's first- and second-lien lenders do not vote in favor of the plan, it will be forced to liquidate.

The company has amended its DIP to set out a series of milestones attached to the plan. Specifically, Wellman must have an official backstop commitment for the rights offering by 25 November, must win plan confirmation by 16 December and must emerge from bankruptcy by 31 December.

Mark Ruday, Wellman's Chief Executive Officer, stated "We have worked very hard in extremely difficult economic times to preserve value for all of our stakeholders. Based on our current situation, we believe the Plan provides the best opportunity for our creditors to maximize their recoveries in these Chapter 11 cases. We look forward to working with our customers, vendors, employees and other stakeholders to emerge from bankruptcy as a stronger, more profitable and highly competitive company."

Wellman was forced to reorganize because of a cash crisis triggered by competition and the price of purified terephthalic acid used to make its PET resins. The dilemma left Wellman unable to service its debt, triggering a Chapter 11 filing on Feb. 22 in Manhattan.

Wellman is the second-largest manufacturer of PET packaging resins in the US.

Warburg Pincus Private Equity VIII LP, a fund of New York private equity firm Warburg Pincus, invested $126 million in Wellman in June 2003 to acquire preferred shares convertible into a roughly 35 per cent common equity stake. The PE firm holds 100 per cent of Wellman's preferred stock, which will be wiped out in the company's reorganisation plan.