Two Creditor Groups Object to Smith Plan to Escape Bankruptcy

Two large groups of Smith International Inc.’s creditors have filed objections that threaten Smith’s plan to pull itself out of bankruptcy by Dec. 31.

The challenges, filed Monday in U.S. Bankruptcy Court in Los Angeles, are the first to attack Smith’s plan to emerge from Chapter 11 bankruptcy proceedings by repaying creditors a total of $415.5 million.

One set of objections was filed by the Wall Street law firm of Weil, Gotshal & Manges on behalf of a trio of mutual funds with unsecured creditor claims totaling $44.1 million. Another law firm, Stroock & Stroock & Lavan, filed the second objection, representing six investment companies with claims totaling at least $34 million.

Together, the two objecting groups’ claims make up almost one-third of the nearly $280 million owed to Smith’s unsecured creditors other than arch-competitor Baker Hughes of Houston, which is owed $95 million as settlement of a patent suit.

The remaining money is owed to a small group of secured creditors, principally several banks.

Sources close to the case said that at least some of the objectors are speculators who bought Smith creditors’ claims at discounted prices after the Newport Beach company filed for bankruptcy, hoping to profit when the company finally repaid its debts.

Smith, a major oil services company, has been operating under Chapter 11 bankruptcy protection for the last 16 months. The company filed for bankruptcy reorganization shortly after a Los Angeles federal judge ordered Smith to pay $205 million to Hughes Tool Co. in a patent infringement suit.

Payment Due Dec. 31

In early June, after Hughes had merged with Baker International to form Baker Hughes, the new company agreed to accept $95 million from Smith to settle the case. Smith has until Dec. 31 to make the payment, or Baker Hughes officials have said they will demand the entire $205 million.

The two investor groups opposing Smith’s plan ostensibly are attacking the company’s disclosure statement, which describes how the proposed plan will affect creditors and shareholders. Attorneys in the case said, however, that the objections actually challenge parts of the reorganization plan itself--a legal tactic that may or may not be allowed at this stage.

In responses filed Tuesday, lawyers for Smith said the objections are premature because they attack the plan itself and not the disclosure statement--which is what U.S. Bankruptcy Judge James Dooley will consider at a hearing set for Aug. 24 in Los Angeles.

Terms of Payment

When the payment to Baker Hughes is excluded, Smith’s reorganization plan would give unsecured creditors a repayment package that includes $30 million in cash, $145 million in interest-bearing notes, $50 million of eight-year preferred stock and $54.5 million in common stock. The proposal would repay the unsecured creditors an amount equivalent to 100 cents for each dollar of their claims, the company says.

But the objections filed this week contend, among other things, that Smith’s statement does not adequately explain why the company believes unsecured creditors would be fully repaid. Peter Langerman, a lawyer and analyst with Heine Securities Corp., which manages the objecting mutual funds, said he believes that the mutual funds will get “substantially less” than 100%.