After a hiatus of several months, we are resuming publication 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:
- Unconventional CDS Credit Events: Hovnanian Enterprises
Earlier this year, District Court Judge Laura Taylor Swain denied a preliminary injunction sought by Solus Alternative Asset Management against K. Hovnanian Enterprises and GSO Capital Partners LP, to prospectively restrain an unconventional credit event with respect to credit default swap (CDS) contracts written on Hovnanian. This article addresses the CDS-related structuring in Hovnanian and the legal issues in the Hovnanian litigation.
- CDS Market Integrity After Hovnanian
Hovnanian is another link in the evolution of CDS contracts from a pure hedging or bespoke investment product to an opportunistic, stand-alone investment strategy. The CDS market currently shows few signs of disruption on account of engineered credit events involving financially distressed reference entities. That could change, however, if events of this nature were to proliferate to a level that threatens the ability of protection sellers to achieve risk-commensurate pricing.
- Tax Reform Act Changes to CFC Attribution Rules
The recently enacted tax reform act significantly altered the U.S. taxation of foreign income. One change that has received little attention is a modification of the attribution rules that apply in determining whether a foreign corporation is a controlled foreign corporation (CFC). The new attribution rules could have significant Section 956 implications in certain debt structures, including existing structures.
- District Court Upholds Damage Limitations for Lender’s Refusal to Fund: Lyondell Revisited
District Court Judge Denise Cote affirmed the bankruptcy court’s ruling in the Lyondell Chemical Co. bankruptcy case upholding a damages waiver provision in a credit agreement. The dispute relates to the refusal of a lender under a revolving credit facility to fund a draw request in the immediate run up to the Lyondell bankruptcy. Judge Cote affirmed the bankruptcy court’s ruling upholding the damages waiver provision and limiting the borrower to restitutionary damages, but reversed the bankruptcy court on the quantum of damages. Judge Cote’s decision should provide some comfort to lenders faced with the prospect of lending to a borrower facing imminent bankruptcy.
- Are There Limits to the Remedial Powers of an Indenture Trustee?
In the recent case of Cortlandt St. Recovery Corp. v. Bonderman, the New York Court of Appeals held that so long as a trustee is acting on behalf of all noteholders pro rata, the trustee can pursue virtually any cause of action, against any party. What a trustee cannot do is assert claims that are not shared ratably by all noteholders. The court’s holding may also have implications for the application of standard no-action clauses.
- Compelling a Muni Indenture Trustee to Arbitrate Before FINRA
A recent decision of the federal district court in Nevada, BOKF, NA v. Estes, held that an indenture trustee for municipal bonds could be compelled to arbitrate bondholder claims in accordance with FINRA’s arbitration procedures. The decision creates precedent in the muni bond world, but because it relies on MSRB regulation, it would not ordinarily extend to trustees for corporate debt instruments.