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Debt Dialogue: August 2017

August 31, 2017

This month’s issue of Debt Dialogue addresses recent developments and recurring issues that debt-focused investors commonly encounter in connection with enforcement of rights, interpretation of documentation and other relevant matters.

Topics covered in this issue include:

  • When Is a Loan Participation a Sale, When Is It a Loan and Why Does It Matter?
    If a participation agreement is not characterized as a true sale of a participating interest or a true participation but rather as a loan from the participating lender to the originating lender, the participating lender will be exposed to the credit risk of the originating lender. This risk is greater if the originating lender is not an FDIC-insured institution. The LSTA form of participation agreement standard terms and conditions has language that is inconsistent with language upon which a court has recently relied in finding a true sale had occurred. When purchasing a participation in a loan, we would recommend negotiating certain changes to the LSTA form of participation agreement standard terms and conditions.
  • Admitting an Inability to Pay Debts as They Become Due: What Does It Mean?
    Among the litany of events of defaults often found in indentures and other credit documents is an issuer’s admission in writing of its inability to pay its debts as they come due. Like other insolvency events of default, this one is automatic. The issues of what is considered an “admission” for these purposes and in what context such an admission needs to be made have been addressed by two New York cases, although neither dealt with circumstances in which creditors were seeking to put an issuer into default, so that question remains.
  • The IRS Withdraws Proposed ‘Net Value’ Regulations
    The IRS announced in July that it has withdrawn proposed regulations that provided guidance regarding corporate formations, reorganizations and liquidations of insolvent corporations. Those regulations, which were proposed in 2005, required the exchange or distribution of “net value” in order for the transaction to qualify for nonrecognition treatment under the Internal Revenue Code. The withdrawal of the net value regulations leaves in place the uncertainty that previously existed in this area with respect to certain transactions involving insolvent corporations.
  • Setoff and Recoupment in Bankruptcy: A Brief Overview
    Setoff is recognized in the Bankruptcy Code to offset the claims of creditors and the debtor in a bankruptcy proceeding. Recoupment is a common-law doctrine of similar effect. Sometimes overlooked by debtors and creditors alike, these doctrines can be of critical consequence in the settling of accounts between a creditor and the bankrupt debtor.

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  • Kramer Levin
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