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:
A recent case in the New York State Supreme Court, Good Hill Master Fund L.P. v. Deutsche Bank AG, provides important guidance to market participants, particularly distressed-debt investors that transact in both credit default swaps (“CDS”)and the debt instrument underlying the swap (the “reference obligation”) or other securities of the borrower or issuer of the underlying debt. The case held that a party to a CDS trade was within its contractual rights, and did not act in bad faith, where it entered into arm’s length transactions with respect to the reference obligation. This was so even though the transactions in the reference obligation had the direct effect of substantially decreasing the payout it was required to make as seller of credit protection under the CDS and was solely motivated by the party’s own self-interest in that respect.
Conditions and Covenants in Debt Documents: Strict vs. Substantial Performance
In the recently decided case of The Bank of New York Mellon Trust Company, N.A. v. Morgan Stanley Mortgage Capital, Inc. (2d Cir. April 27, 2016), a divided panel of the Second Circuit addressed the question of whether a trustee had timely exercised its right to require the seller of a mortgage loan deposited to a securitization vehicle to cure the breach of an underwriting representation.
Curing Substantive Ambiguities in Debt Documentation (and More)
Virtually all public indentures contain provisions allowing the issuer to cure ambiguities and make other technical changes to the debt documentation without debtholder consent. When the purported ambiguities have substantive consequences, however, issuers may not be able to get away with an amendment that lacks debtholder approval.
The Power of a Negation Clause
A recent decision of an Illinois appeals court in Republic Bank of Chicago v. FBOP Corp. (Ill. App. April 29, 2016) addressed the effect of an indenture provision, commonly referred to as a negation clause, that denies the benefits of an indenture other than those awarded to its parties.
On June 27, 2016, the Supreme Court of the United States denied the petition for certiorari in Madden v. Midland Funding, a case closely watched by the financial industry. With the Second Circuit’s decision remaining good law, existing transactions with exposure to bank-originated debt transferred to nonbanking entities are at risk.
Five Business Day Exchange Offers and the ‘Identical in All Material Respects’ Requirement
Market participants involved in distressed exchange offers have become accustomed to grappling with the implications of TIA Section 316(b) in connection with potential exit consents; that is, whether amendments to the indenture governing the securities subject to the exchange are significant enough to impair or affect the right of a holder to receive payment of principal and interest on or after the due dates of the relevant note. However, similar issues can also arise in “Five Business Day Tender Offers” associated with more straightforward economic trading decisions.