Legal developments affecting participants in the debt markets.
We present the June 2018 issue of Debt Dialogue, Kramer Levin’s online newsletter devoted to legal developments of interest affecting borrowers and issuers, lenders and security holders, agents and trustees, and buyers and sellers of derivatives in the debt markets. We welcome reader feedback. Comments may be emailed to the individual authors or to debtdialogue@kramerlevin.com.
Topics covered in this issue include:
Over the past few years, the CDS market has seen an increase in activism and the evolution of creative refinancing and restructuring strategies intended to achieve particular outcomes in the CDS market. With the proliferation of unconventional credit events, opportunistic CDS strategies may have appeared available only to protection buyers. However, this does not reflect reality as protection sellers can also benefit for those strategies via succession event and orphan CDS related tactics. Ultimately the CDS market has created a parallel source of financing for reference entities, where both CDS protection buyers and sellers can engage with reference entities, and offer economic incentives in exchange for cooperation that enhances their CDS positions.
McClatchy and Sears were two recent situations in which a proposed refinancing significantly affected the CDS market for the reference entity because of the reduction in the risk that the CDS contract on those entities be triggered. Although these cases may or may not have been driven by CDS considerations, they illustrate how CDS strategies may be effectively implemented to benefit CDS protection sellers.
A recent ruling of a New York State court in the Global Marine litigation is positive news for noteholders, with the court lending a sympathetic ear to plaintiffs seeking to avoid the draconian consequences of the statute of limitations at the pleading stage. The ruling allowed the plaintiff noteholders the opportunity to access information through discovery on the basis of which they might be able to end-run the statute and pursue their claim that the issuer impermissibly divested itself of substantial assets.
A key consideration for investors in securities of bankrupt issuers is the extent to which the securities received upon consummation of a Chapter 11 Plan will be freely transferable. In addition to transferability and holding periods, investors will have to consider whether they will be an affiliate of the reorganized entity and whether they will have reporting obligations. These issues should be discussed with restructuring counsel, securities counsel and in-house compliance during the reorganization process, to ensure that investors will understand the status of the securities received and any reporting or other requirements on exit from bankruptcy.
In a recent case in the Southern District of New York, the court precluded inquiry into the conduct of the trustee where a bankruptcy plan intervened. Alleging misfeasance by the trustee prior to the commencement of the bankruptcy case would have been barred by the statute of limitations. Allegations of misfeasance subsequent to the commencement of the case were swept away by confirmation of the plan. The case offers a number of takeaways, including that plaintiffs will face a high hurdle to establish liability against fiduciaries whose determinations were effectively absorbed into plan confirmation.
In yet another decision spawned by the Energy Future Holdings bankruptcy, the Delaware District Court addressed the question of what constitutes collateral, and proceeds of collateral, in a complex Chapter 11 reorganization. The court agreed with the bankruptcy court below that neither the securities issued in the reorganization nor certain other distributions were collateral, raising a cautionary flag for drafters of intercreditor documentation.