Debt Dialogue: April 2018

We present the April 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:

• Custodial Receipts: A Useful Tool for Restructuring Insured Municipal Bonds
  
  Restructuring insured municipal bonds poses various unique challenges that require creative and tailored solutions. In appropriate circumstances, custodial receipts, an instrument borrowed from the secondary insurance market, can be a powerful tool in achieving a successful restructuring that effectively preserves the economic expectations of insured bondholders.

• LIBOR Replacement Begins Publication
  
  

  As the New York Federal Reserve Bank launches its Secured Overnight Financing Rate as its alternative to LIBOR, a new report details the transition period and the pursuit of a baseline level of liquidity for derivatives contracts using the new rate.

• Avanti Bankruptcy Court Enforces Nonconsensual Third-Party Releases in Chapter 15 Proceeding
  
  In the Avanti Communications Chapter 15 bankruptcy proceedings, the court recently found that enforcement of the nonconsensual third-party releases contained in a restructuring plan formulated under the laws of the United Kingdom was appropriate. This ruling presents an opportunity to examine the role of comity and cooperation with foreign courts in determinations of whether to recognize and enforce foreign restructuring schemes.

• Open Market CLO Managers Are Not ‘Securitizers’
  
  

  The D.C. Circuit Court of Appeals has ruled that the Credit Risk Retention Rule, adopted pursuant to Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, does not apply to open market CLO managers. Only time will tell how different managers, investors and the market will react to the D.C. Circuit’s interpretation of Section 941 — for example, whether deals will continue to be structured as retention-compliant.

• Treating Debt as Equity — Emerging Standards in Insurance Regulation
  
  

  Hybrid debt and other types of debt with equity-like features have long been the focus of rating agencies and financial regulators, particularly in the banking sector. Now, the National Association of Insurance Commissioners, the principal insurance-law standard-setting body in the United States, is considering changes in the ways insurance companies account for these types of instruments as well as holding company leverage resulting from affiliate transactions. These possible changes stem from the ongoing development of group-wide capital standards for insurance companies, whose capital has historically been regulated principally at the legal entity level.

• Enforcing a Breakup Fee in a Financing Term Sheet
  
  

  A case this past year in the District of New Jersey addressed the enforceability of a breakup fee provision in a term sheet for second lien financing. The case is notable because the court was prepared to enforce the breakup fee on summary judgment, even though it was not at all clear that the financing could have ultimately closed. While the plaintiff prevailed, the case offers some lessons for the careful drafting of a breakup fee provision in a financing term sheet.