Upload
others
View
4
Download
0
Embed Size (px)
Citation preview
Restructuring Market
Review and Outlook
February 2014
Highlights
2014 Outlook
Market expectations for default and restructuring activity remains at
low levels (excluding the pending filing of TXU in early 2014)
— The ratio of S&P downgrades to upgrades at the end of 2013 was
0.8x compared to 1.5x in 2012, while the number of speculative
grade issuances in 2013 declined to 67 from 160 in 2012
The next restructuring cycle will likely to occur in another 12 to 24
months given the current liquidity in the debt markets, as well as the
growth in corporate friendly debt instruments, such as covenant-lite
loans and PIK-Toggle notes
Improving US GDP growth levels of ~3% will also help issuers to
navigate over-levered balance sheets
Sectors exposed to government funding, such as education and
healthcare, as well as those facing secular industry headwinds, such
as coal and shipping, will continue to provide opportunities for
distressed investors
The rising interest rate environment, with the 10-year Treasury
reaching 3.0% at the end of 2013, may taper growth of leveraged
finance volume, but not likely to levels required to boost restructuring
activity during 2014
2013 Year-in-Review
Traditional restructurings were relatively soft, but improved from trough
levels in 2012
— Default rate (by % of principal of LSTA index) increased to 2.11% in
2013 from 1.27% in 2012
— Larger bankruptcies were more prevalent, such as City of Detroit and
Cengage Learning
Amendment activity declined significantly due to a combination of
increased presence of covenant-lite loans, improved cash flow generation
by issuers and lower levels of near-term maturities
Leveraged finance markets remain frothy
— Leveraged loan new issuance volume reached record levels of
$605bn with 57% of the volume being covenant-lite in 2013
— High yield new issuance volume decreased 6% YoY from record levels
in 2012 to $324bn in 2013 but remains robust
— PIK-Toggle Note issuance returned, as some investors and private
equity sponsors are utilizing these securities over preferred equity
investment vehicles
LBO volume surged to comprise 13.8% of leveraged loan issuance in
2013 compared to 10.9% in 2012
Highlights
1
Leveraged Loan Default Rate S&P/LSTA index loan default rate increased to 2.11% in 2013 from 1.27% in 2012, primarily due to several bankruptcies by
large, legacy LBO issuers. However, default expectations have declined over the past several months following a decreasing
trend in the ratio of S&P downgrades to upgrades
Ratio of S&P Downgrades to Upgrades(2) Defaults by Principal and % of LSTA
Note:
1. Dotted red line indicates projections from LCD‟s quarterly buy-side survey conducted in September 2013 (excludes EFH)
2. Rolling Three Month average
Source: S&P LCD
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-130.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
10
20
30
40
50
60
70
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
fau
lt %
$ in
billio
ns
Default ($ billions) Default % of LSTA Index
Dec. 2013: 2.11%
2.51%(1)
The pullback in the ratio of S&P
downgrades to upgrades over
the past year reflects muted
expectations for future
distressed activity
2
480 535
157
77
236
377
466
605
0%
10%
20%
30%
40%
50%
60%
70%
0
100
200
300
400
500
600
700
2006 2007 2008 2009 2010 2011 2012 2013
$ in
billio
ns
Total Cov-Lite (% Outstanding) Cov-Lite (% New Issuance)
US Leveraged Loan Market Issuance reached record levels in 2013 as impressive fund inflows allowed companies to issue covenant-friendly securities
as part of refinancings, LBOs, acquisitions and dividend-related transactions – strong pipeline indicates continued
robustness
Leveraged Loan Volume by Purpose Institutional Leveraged Loan Issuance
Source: S&P LCD
Secondary Spread-to-Worst Weekly Leveraged Loan Fund Flows
47.5%
13.8%
18.6%
9.3%
10.9%
Refinancing LBO Acquisition Dividend Other
46.9%
10.9%
17.9%
10.8%
13.5%
2013 2012
0
400
800
1,200
1,600
2,000
$ in
mill
ions
2013 Net Flows: $54.1bn
2012 Net Flows: $7.8bn
0 bps
400 bps
800 bps
1,200 bps
1,600 bps
BB-/Ba3 B+/B1 B/B2
B-/B3 CCC+/Caa1
3
144 144
68
164
287
218
345 324
0
100
200
300
400
2006 2007 2008 2009 2010 2011 2012 2013
$ in
billio
ns
Secured Unsecured Subordinated
US High Yield Bond Market 2013 issuance retreated from the record levels experienced in 2012 as covenant-lite leverage loans dominated the
marketplace, but nevertheless the high yield markets remain liquid
High Yield Volume by Purpose High Yield Issuance by Tranche Type
Source: S&P LCD, Advantage Data
Secondary Bond Yield-to-Worst Weekly High Yield Fund Flows
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013
Refinancing / Bonds Refinancing / Bank Debt Refinancing / General M&A Recap Other
(6,000)
(4,000)
(2,000)
0
2,000
4,000
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14
$ in
millio
ns
2013 Net Flows: $0.9bn 2012 Net Flows: $22.8bn
0%
4%
8%
12%
16%
Ba2 B2 Caa2
4
Post-Crisis Leverage Levels and
Valuation Multiple Trends Frothy debt market conditions have caused LBO leverage and valuation multiples to rise to the highest levels since the global
financial crisis
LBO Valuation Multiples(2) LBO Leverage Levels(1)
Notes:
1. Defined as issuers with EBITDA of more than $50mm; excludes media and telecom loans; EBITDA adjusted for prospective cost savings or synergies
2. Defined as total sources/pro forma trailing EBITDA
Source: S&P LCD data
8.7x
7.2x
8.1x
8.4x 8.3x
8.4x
6.0x
7.0x
8.0x
9.0x
2008 2009 2010 2011 2012 2013
4.9x
4.0x
4.7x
5.2x 5.3x 5.4x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
2008 2009 2010 2011 2012 2013
5
Middle Market Trends
S&P LCD has observed total leverage in the middle market ascend to an average of 4.9x in 2013, which is the first time it has eclipsed the large corporate market,
which averaged 4.7x for the same period
— Note: LCD’s middle market data is skewed to sponsored deals that are syndicated. LCD’s pool is comprised largely of borrowers that generate $25-$50mm of
EBITDA, and most of them lean toward the higher end of that spectrum. Pro forma EBITDA for sample averages $38mm. LCD typically does not capture much
of the pro rata segment, nor most club-style credits
Even the LBO data shows that more debt is pouring into smaller companies – in another first, middle market LBO leverage equaled that of large LBOs at 5.3x
— Regardless of the limited sample, the data supports a broader view that leveraged lending in the middle market is changing
— Syndicated deals are on the decline, while less visible, club-style credits are becoming more attractive
— Significant amounts of money are pouring into funds and managed accounts from new players
— Senior stretch and unitranche credits are more rampant than before
— Senior stretch is all-first lien to about 4.0x-4.5x (depending upon the size of the issuer)
— Unitranche offers leverage beyond the 4.5x level and can include subordinated or last-out strips within the same loan agreement that can produce
greater yields
Overall middle market senior leverage multiples further help to depict the current situation – senior debt accounted for 4.8x of the 4.9x total leverage and within
middle market LBOs specifically, the senior debt accounted for 5.2x of the 5.3x total leverage
— Note: LCD's senior debt multiples include second-lien term loans, which accounted for approximately 10% of all institutional volume in the middle market for
2013, up from 4% last year and the highest level since 2008
Source: S&P LCD
Companies in the middle market have levered up at unprecedented levels in 2013 as lenders have allowed multiples to climb
despite citing lower leverage often among the benefits of trading in liquidity for investing down market
6
Date Issuer Industry Lead Agent Purpose RC TLA TLB 2nd Lien / Other
5-Dec Atlantic Express Industrials Wells Fargo DIP $37M / NA - - -
5-Dec Longview Pow er Industrials NA DIP - - $150M / L+750 -
14-Nov Global Aviation Holdings Industrials Cerberus Partners DIP - - $51M / L+1000 -
14-Nov Patriot Coal Corp Resources Deutsche Bank / Barclays Exit Financing $125M / NA - $250M / L+725 - 775 -
4-Nov Velti Plc Industrials US Bank DIP - - $26.25M / L+1200 -
25-Oct Green Field Energy Services Inc Resources Gordon Brothers DIP - $30M / L+1000 - -
18-Oct Bennu Oil & Gas Resources Credit Suisse Exit Financing - - - $350M / L+1000
9-Sep Furniture Brands Intern'l Inc Industrials NexBank DIP $40M / NA - $90M / NA -
5-Aug Rural/Metro Corp Industrials Credit Suisse DIP - - $75M / L+850 -
15-Jul Eastman Kodak Co TMET JP Morgan Chase Exit Financing $200M / NA - $420M / L+625 $275M / L+950
14-Jun Orchard Supply Hardw are Corp Industrials Wells Fargo DIP $140M / NA - $24.405M / NA $12M / NA
12-Jun LightSquared Company TMET Jefferies Finance Exit Financing - - $2000M / L+950 -
11-Jun NE Opco Industrials Salus Capital DIP - - $47.5M / L+525 -
10-Jun Exide Technologies Industrials JP Morgan Chase DIP $225M / NA - $275M / NA -
6-Jun American Airlines Inc(1) Industrials Deutsche Bank DIP $1000M / NA - $1900M / L+375 -
Total 2013 Special Situations Financing Volume $12,870.9
Bankruptcy Trends Bankruptcy filings in 2013 surpassed 2012 levels but remain significantly below 2009-2011 levels. There were 15 filings
with at least $1.0bn of liabilities, and the two largest bankruptcies, City of Detroit and Cengage Learning, had $10.7bn and
$9.7bn in liabilities, respectively
# of Bankruptcy Filings (>$100mm in liabilities)
Notes:
1. $850mm Add-on to the TLB on 7/30/2013
Source: S&P LCD data, The Deal
Recent Special Situations Financings
Top 10 US Bankruptcies in 2013 included:
City of Detroit, Cengage Learning, Dex One
Corp., Anchor BanCorp Wisconsin,
SuperMedia, Rural/Metro Corp., Central
European Distribution Corp., Revel AC, TMT
USA Shipmanagement, Rotech Healthcare
191
400
267
184
62 94
0
100
200
300
400
500
2008 2009 2010 2011 2012 2013
7
42.9%
15.4% 14.5% 14.9% 14.9% 13.2%
6.9%
14.1% 15.2%
7.9%
25.0%
11.5% 10.8% 9.3% 8.2% 6.7% 5.9% 5.8% 4.4% 4.2%
0%
10%
20%
30%
40%
50%
Diversified Aerospace &
Defense
Metals & Mining Technology Media &
Entertainment
Forest Products &
Building Materials
Consumer Products Retail & Restaurants Transportation Financial Institutions
2012 Distress Ratio 2013 Distress Ratio
Distressed Credit Trends Distress Ratio & Default Rate Over Time Commentary
Note: Dotted red line represents total default ratio across all sectors (including those not displayed on chart)
(1) Financial Institutions is a weighted average amongst various subsectors. Chart excludes Automotive, Capital Goods, Chemicals & Packaging, Healthcare, Homebuilders, Oil & Gas,
Telecommunications and Utilities as a result of limited distress in these sectors
Source: S&P Distressed Debt Monitor released January 3, 2014
S&P Distress Ratio Snapshot by Industry(1)
The S&P US Distress Ratio, the measure of the amount of speculative
issues with spreads above 1,000 basis points as a percent of the total
amount of speculative issues, declined to 5.3% in 2013 from 9.7% in 2012
— Actual number of speculative grade issues declined year-over-year from
160 to 67
Sectors experienced a YoY decline in distress ratios across the board,
reflecting muted default expectations as debt capital markets remain frothy
and anticipated fundamental improvement in the US economy over the next
12 months 0%
20%
40%
60%
80%
100%
0%
3%
6%
9%
12%
15%
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
Dis
tre
ss R
ati
o
Sp
ecu
lati
ve
-Gra
de
De
fau
lt R
ate
Speculative-Grade Default Rate Distress Ratio
5.3%
8
2013 Restructuring Trends
9
Retail
Bankruptcies
Increased as a result of shrinking
margins, fixed cost structures,
competition with Internet resellers,
general disintermediation of the retail
segment and negative working capital
among the traditional brick-and-
mortar segment
Restructuring
Activity
Overall rise in middle market
restructurings
Significant increase in terms of
number of engagements
— 2013 rivaled 2010 levels
Companies that saw distressed
activity fell into one of three buckets
— Too small to access the high-yield
bond market
— In industries particularly stressed
by technological or regulatory
changes
— In consumer-oriented industries
impacted by the lackluster
economy
Prenegotiated /
Prepackaged Deals
Level of these transactions became
more prevalent
Represented 8 of the top 10
bankruptcies in 2013
Key constituents favored a shorter
bankruptcy process
363 asset sales have also caused
traditional restructurings to become
largely obsolete
— Usually results in a 3-4 month
process
— Will continue to gain traction in
2014 as businesses seek to
avoid messy in-court cases
Out-of-Court
Restructurings
Continued to be an attractive option
in lieu of a bankruptcy filing
Will likely become more common in
2014 as companies seek to avoid
lengthy, drawn-out and costly Chapter
11 processes and negotiate their
debts with greater flexibility
Litigation
Increased in-court litigation leading to
mediation (e.g. Cengage,
LightSquared, School Specialty, etc.)
Litigants have pushed for a court-
appointed examiner to investigate
pre-bankruptcy transactions used as
a basis for settlement – has led to
significant costs and delay in cases
Creditors continue to use fraudulent
transfer and preference litigation to
try to recover money from all parties
that received value from the estate
prior to the bankruptcy
Not uncommon to see fraudulent
conveyance actions brought against
lenders in bankruptcies which follow
LBO transactions
Cross-Border
Insolvencies
Experienced an increase due to an
increasingly global economy, slower-
paced financial recoveries, higher
interest rates overseas, and
increased familiarity with the use of
Chapter 15 in parallel with a Chapter
11 case in the U.S.
Municipal
Restructurings
Detroit likely to be a precedent-setting
case due to the complex pension and
retiree health-care claims involved
Puerto Rico possible to come next…
Healthcare
Restructurings
Rising due to mounting financial
pressures and costs placed upon
hospitals, coupled with widespread
uncertainty with new industry-wide
regulation
Restructuring Activity Outlook Distress indicators convey that restructuring activity is likely to stay muted during 2014 and most of 2015. However, the
combination of significant new leverage finance volume, frothy covenant-lite issuances, rising energy costs and the threat of
an interest rate rise could be the catalyst for an increase in restructuring levels in the medium-term
Distribution of Distressed Issues and Companies
by Rating
0%
10%
20%
30%
40%
BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C
% of Total Distressed Issues % of Total Distressed Companies
Current market conditions expect low default and restructuring activity during 2014
— S&P downgrades to upgrades ratio of 0.8x as of December 2013 is the lowest level since
June 2012
— S&P distress ratio decreased to 5.3% in 2013 from 9.7% in 2012
— Proliferation of covenant-lite loans provides companies the flexibility to temporarily delay
having to address capital structure concerns due to the lack of maintenance covenants
— Continued strong expected capital markets activity
While issuers no longer need to worry about the “maturity wall” in the near-term, new loan
issuances have created a significant amount of outstanding principal in the medium-term,
which may be a catalyst in a rising interest rate environment
— At the end of 2013, there were $45bn, $112bn and $129bn of loans maturing in 2016-2018, respectively
— Maturities of small stressed companies in the “maturity wall” will remain unaddressed in 2014
Due to a limited data set of covenant-lite loan defaults, it is uncertain whether covenant-lite structures create lower ultimate recovery levels for issuers in restructurings.
However, if these structures were to cause lower recoveries, it would be as a result of not being forced to tackle over-levered capital structures, such as executing
amendments or refinancings, until it is too late
— 46% and 57% of the outstanding S&P/LSTA index and new issuance volume, respectively, at the end of 2013 were covenant-lite structures
— In anticipation of tapering and adjustments to the Federal Reserve monetary policy, the yield curve will likely rise throughout 2015, assuming the ~3.0% US GDP
growth materializes, causing a potentially sharp pullback in the current frothy leveraged loan and high yield bond markets
A slow down in the debt capital markets could limit issuers ability to refinance upcoming debt maturities relative to the current conditions, especially the companies on
the lower half of the high yield rated spectrum – helping to increase restructuring activity
— A 1-3% rise in interest rates will likely make debt service coverage unsustainable for many issuers with floating rate debt
Source: S&P LCD; S&P Distressed Debt Monitor released January 3, 2014
10
Debt Issuance Levels Record levels of leveraged loan and high yield volume outstanding vis-à-vis prior frothy credit market time periods could likely
create significant restructuring opportunities for the next distress cycle
US Leveraged Finance Issuance
346
407
343
232
423 389
624 679
224
595
810
929
0
200
400
600
800
1,000
1997 1998 1999 2000 2004 2005 2006 2007 2008 2011 2012 2013
$ in
billio
ns
Leveraged Loan Issuance High Yield Bond Issuance
Source: S&P LCD; JP Morgan
Pre-Early 2000‟s
Tech Bubble
Pre-Global
Financial Crisis
Today
11
Where are the Distressed
Opportunities?
Coal Education Healthcare
Infrastructure /
Municipalities Merchant Power
Retail /
Restaurants Shipping
Further
curtailments in
metallurgical coal
markets as
weakened demand
driven by the low
cost of alternative
energy sources
have made higher
quality
metallurgical coal
production
uneconomical
Continued
compliance with
tighter
environmental
regulations will
impact margins
Challenges with
Title IV (federal
financial aid) funds
to for-profit
companies
Highly saturated
and competitive
industry – further
exacerbated by the
shift to
digital/online
technology
Providers expected
to experience
challenges
navigating the
Affordable Care Act
resulting in
significantly higher
costs
Exposure to
potential further
government
spending cuts
Vintage 2005-
2008 PPP toll road
and ports
transactions
experiencing traffic
volume
significantly below
original aggressive
projections
Large in-process
restructurings in
Puerto Rico and
Detroit, while out-
of-court
negotiations are
anticipated across
numerous US cities
Industry remains
over-levered and a
rising interest rate
environment will
further adversely
pressure sector
going forward
EFH bankruptcy
expected to occur
in early 2014
Competition for
“bargain hunters“
creates challenges
for discount
retailers and quick-
serve restaurants
Continued growth
of online shopping
including Amazon
further pressuring
margins
Low charter rates
and multiple new
builds entering the
market creates an
increasingly
competitive
landscape,
especially for
vessels not
covered by the
Jones Act
Source: Debtwire, The Deal
12
Potential Catalysts Leading to the
Next Restructuring Cycle
Treasuries and corporate borrowing rates at all time lows
Corporates (and governments) are using more leverage than ever
With Asia growth rates slowing, and US/Euro growth rates already low,
where will growth come from?
Cost cutting was rampant in the last down cycle, but how much longer will it
last?
With globalization in full swing, one geographies‟ issues are becoming
everyone‟s issues!
Numerous countries/regions are experiencing political/social
transformations
Record levels of issuance (including low rated borrowers) cannot continue
indefinitely
Slowing global economies
Rising interest rates
Extreme leverage levels
Declining ability to cut costs
Increasingly globalized economy
Increasing likelihood of international disruption
How much longer will capital markets hold up?
13
BANKRUPTCY
CONSIDERATIONS
February 2014
BANKRUPTCY CONSIDERATIONS
1. Cram-Up • New Loan Approach
• Collateral Sale Approach
• Indubitable Equivalent Approach
2. Reinstatement/Unimpairment • Pros and Cons
• Cramdown v. Reinstatement
3. Credit Bidding • In re Fisker Automotive Holdings, Inc.
4. Vote Designation • In re DBSD North America Inc.
15
Cram-Up – “Fair and Equitable”
• Three Approaches under 11 U.S.C. 1129(b)(2)(A):
1. New Loan (Section 1129(b)(2)(A)(i))
2. Collateral Sale (Section 1129(b)(2)(A)(i))
3. Indubitable Equivalent (Section
1129(b)(2)(A)(i))
16
Cram-Up – “New Loan Approach”
Section 1129(b)(2)(A)(i) Holder of secured claim retains the liens securing such claim, to the extent of the allowed amount of such claim, and receives on
account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder‟s interest in the estate‟s interest in such property
Retains the Liens – The plan can provide for the sale of the property to a third party, over the secured lender‟s objection, so long as the lender retains the lien
Full Payment of Allowed Amount of Secured Claim - Sections 502 and 506 govern allowance of secured claims
—Oversecured creditors entitled to assert post-petition interest (potentially at default rate), fees and expenses as part of allowed claim
—Oversecured Claims limited to the amount of the claim
—Undersecured Claims limited to the value of the collateral.
—Deficiency unsecured claim is not subject to cram-up test for secured claims
Effective Date of Plan – For purposes of valuing collateral and secured claim, use effective date of plan. Plan itself determines effective date
17
Cram-Up – “Collateral Sale”
Approach Section 1129(b)(2)(A)(ii)
The sale of the prepetition collateral (subject to section 363(k)) free and clear of the secured creditor‟s liens, with the lien attaching to the proceeds
Sale – Plan must anticipate a sale, either contained in the plan itself, or post-confirmation. Section 1123 expressly anticipates that a sale of some or all of assets can be a means to implement the plan
Section 363(k) – Secured lender gets to credit bid
Prepetition Collateral – Sale must be of current collateral, and lien must transfer to proceeds of that collateral. Can‟t sell different collateral and transfer lien to those proceeds
Free and Clear of the Secured Creditors’ Liens - Free and clear under a plan is more powerful than a regular sale fee and clear under 363(f)
Lien Attaching to Proceeds - The lien attaches to the proceeds, be they cash, notes or other property received in exchange
18
Cram-Up – “Indubitable Equivalent”
Approach Section 1129(b)(2)(A)(iii)
The realization of the indubitable equivalent of the allowed amount of the secured claim
Indubitable Equivalent – generally must (a) provide the secured creditor with the present value of its claim and (b) insure the safety
of its principal
—Abandonment or transfer of collateral to secured creditor satisfies requirement
—A substitute lien in property of a value that equals or exceeds the value of the secured claim
—Cash payment equal to the allowed amount of the secured claim
—Payment stream with present value of less than secured claim will not suffice
—No hard and fast rules
Allowed Amount of Secured Claim – see above
—Unsecured deficiency claim treated with other general unsecured creditors
19
Reinstatement/Unimpairment
Two Standards for “Unimpairment”
1124(1): Plan does not alter the legal, equitable and contractual rights to which the holder of a claim is entitled on account of such
claim or
1124(2): Notwithstanding any acceleration due to a default, the plan
—“cures” the default, except with respect to defaults under section 365(b)(2) of the Bankruptcy Code that need not be cured (i.e.,
bankruptcy related defaults and the satisfaction of any penalties relating to nonmonetary defaults);
— reinstates the maturity of such claim as it existed prior to the default;
—compensates the holder for damages incurred as a result of any reasonable reliance by such holder on the contractual provision
that provided for acceleration;
— if such claim arises from any failure to perform a non-monetary obligation, compensates the holder of such claim for any actual
pecuniary loss incurred by such holder as a result of such failure; and
—does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder
20
Advantages
No cramdown or cram-up fight
Take away ability of creditors to vote against plan –
reduce administrative burden of soliciting class
Potentially avoid make wholes / prepayment premiums
being asserted as part of claim
Preservation of below-market terms
Disadvantages
Reinstatement may be impracticable and/or impossible
No third party releases in plan
Need to reinstate entire contract (can‟t pick and choose
terms)
Technical provisions (change of control, financial
reporting) may immediately trigger post-bankruptcy
defaults, which go to feasibility
2005 Amendments to Code provide that certain
nonmonetary defaults -- except for those relating to
nonresidential real property leases -- must be cured.
Many of these (e.g., financial reporting requirements)
may be historical facts that simply cannot be cured
Reinstatement/Unimpairment Pros and Cons
21
Cramdown v. Reinstatement
Cramdown more effective for dealing with undersecured creditors
—Undersecured creditor won‟t get post-petition interest, fees, or prepayment premiums
—Won‟t reinstate undersecured claims because original contract terms would cause undersecured creditor to receive
more than it would be entitled to under the Code (i.e. – “payment in full” under reinstatement and a bifurcated claim
and less than payment in full if impaired)
Cramdown more effective when interest rates have substantially declined since original loan, because a debtor can use
“New Loan” to stretch out the secured creditors‟ loan at a present market rate
Cramdown necessary when need to stretch out term of original loan
If rates have substantially increased and if the debtor does not need to extend the terms of the loan, reinstatement may
make sense if lender is oversecured
—Reinstatement more effective tool for dealing with oversecured claims when secured creditor has enforceable claims
for default rate interest or prepayment premiums under section 506(b). Under cramdown, an oversecured creditor
could assert these claims. Reinstatement may allow debtor to limit the secured creditor to its prepetition rights so long
as default was triggered by Bankruptcy Code
22
Credit Bidding
Section 363(b) provides that “after notice and a hearing, [the debtor] may use, sell, or lease, other than
in the ordinary course of business, property of the estate”
Section 363(k) specifically provides for the ability of secured lenders to credit bid:
—“At a sale under [section 363(b)] of property that is subject to a lien that secures an allowed claim,
unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the
holder of such claim purchases such property, such holder may offset such claim against the purchase
price of such property”
23
Credit Bidding (cont.)
Limits to Credit Bidding
In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Jan. 17, 2014)
—The debtors sought to conduct a private expedited sale of its assets through a credit bid to party that bought a senior
secured position. The committee objected arguing that the debtors should conduct an auction
—The issue was whether the creditor could credit bid the face value of its claim and, if so, whether the court may cap the
creditor‟s right to credit bid
—The bankruptcy court noted that although pursuant to section 363(k), a secured creditor is generally allowed to credit
bid (it is “beyond peradventure that a secured creditor is entitled to credit bid its allowed claim”), the Bankruptcy Code
provides that a court may disallow credit bidding “for cause”
—Ruling: The bankruptcy court capped the creditor‟s right to credit bid its $168 million claim at only $25 million (the
amount it paid to purchase the claim) because:
—the credit bid would chill the bidding process;
—an expedited private sale via credit bid would result in an unfair and hurried process, and is inconsistent to
principles of fairness; and
—the amount of the secured claim was uncertain
Ruling under appeal
24
Vote Designation
Section 1126(e):
—"the court may designate any entity whose acceptance or rejection of such plan was not
in good faith, or was not solicited or procured in good faith or in accordance with the
provisions of this title”
This allows a bankruptcy court to disqualify or discount a creditor‟s vote for plan
confirmation purposes if the court determines that the vote was not made in good faith
25
Vote Designation (cont.)
DISH Network Corp. v. DBSD North America Inc. (In re DBSD North America Inc.)
The Second Circuit upheld the bankruptcy court‟s designation of a creditor‟s votes to reject a chapter 11 plan because the creditor purchased a blocking position after the plan had been filed, in order “to use status as a creditor to provide advantages over proposing a plan as an outsider, or making a traditional bid for the company or its assets” it voted with “ulterior motives” and not in good faith. 634 F.3d 79, 104 (2d Cir. 2011) (quoting In re DBSD, 421 B.R. 133, 139-40 (Bankr. S.D.N.Y. 2009) (J. Gerber))
—The bankruptcy court reasoned that:“[w]hen an entity becomes a creditor late in the game paying . . . [100
cents] on the dollar, as here, the inference is compelling that it has done so not to maximize the return on its
claim, acquired only a few weeks earlier, but to advance an “ulterior motive” condemned in the case law”
—Note - the Second Circuit limited its ruling: “[the] ruling . . . should deter only attempts to „obtain a blocking
position‟ and thereby „control the bankruptcy process for [a] potentially strategic asset‟ . . . our opinion
imposes no categorical prohibition on purchasing claims with acquisitive or other strategic intentions”
—See also In re Derby Development Corp., 2012 WL 2501064 (Bankr. D. Conn. June 27, 2012); In re
Lichtin/Wade LLC, No. 12-00845-8-RDD, 2012 WL 6576416 (Bankr. E.D.N.C. Dec. 17, 2012)
26