Debt Dialogue focuses on recent developments and recurring interpretive issues and principles that debt-focused investors commonly encounter. Members of our editorial team discuss matters regarding the interpretation, enforcement and documentation of debt, capital markets debt instrumentation, and credit facilities and other arrangements.
Topics covered in this issue include:
Borrowers, agent banks, syndicate members and secondary market purchasers incur, syndicate, sell and buy bank debt on the assumption that bank debt is not a “security.” However, a recent opinion in the General Motors preference litigation suggests that such an assumption may no longer be valid, at least under the Bankruptcy Code. Whether the implications of the decision will penetrate the realm of the securities laws remains to be seen.
The court in the Lehman Brothers bankruptcy recently held that the termination and liquidation of swaps linked to synthetic CDOs and the distribution of proceeds of the sale of collateral for the CDOs were protected under the Bankruptcy Code safe harbors. The ruling provides investment funds with much-needed certainty with respect to the enforceability of certain waterfall provisions, including so-called “flip” clauses, in structured products containing swaps that would prevent noteholders from being subordinated in the event of a swap counterparty’s bankruptcy.
In the continuing saga over make-whole payments in the bankruptcy of Energy Future Holdings, the bankruptcy court recently held that second lien holders were not required to turn over the amount of a first lien make-whole payment that the court previously found unenforceable. The ruling was not unexpected and is not anticipated to result in changes to the drafting of standard form collateral trust and intercreditor agreements.
The Third Circuit recently affirmed that a debtor in Chapter 11 can use a tender offer to settle claims without running afoul of the Bankruptcy Code. The decision could lead to increased use of tender offers prior to confirmation of a bankruptcy plan. A tender offer mechanism would be particularly attractive where creditors hold oversecured debt, because a bankruptcy settlement may stop the accrual of interest on the debt, thereby preserving assets for the remainder of the estate.
Several recent cases have created ambiguity on when distressed exchange offers violate Section 316(b) of the “TIA.” Plaintiffs’ lawyers are using this ambiguity to challenge distressed exchange offers. The threat of litigation may give minority bondholders a powerful tool to hinder less than fully consensual out-of-court restructurings and provide them with increased leverage in negotiations.
A recent New York Supreme Court decision addressed the question of how far an amendment that does not expressly conflict with other provisions of a trust agreement can go in eliminating rights of non-consenting parties to the agreement. The answer is pretty far, even to the point of termination. Along the way, the court dealt with a variety of other issues of perennial interest.