Bloomberg reports on slowing U.S. growth as trade wars weigh on businesses [Yahoo News, Bloomberg; July 26, 2019]

Windstream’s dispute with its REIT spinoff Uniti heats up, as Windstream seeks to recharacterize its $650 million-per-year lease agreement with Uniti as a disguised financing [Law360; July 25, 2019]

Virginia congressman’s bill on small business bankruptcy reform heads for Senate vote with bipartisan support [Radio WVTF; July 25, 2019]

Luxury department store chain Barney’s prepares for possible bankruptcy filing [CNBC; July 25, 2019]

Experts predict recession no later than second half of 2020 [Fox Business; July 25, 2019]

Economists find that higher inflation target by the Fed ahead of the 2008 recession likely would have resulted in a substantially faster recovery [WSJ; July 25, 2019]

The Momentive Performance Materials bankruptcy resulted in a number of disputes on issues germane to bankruptcy practitioners, including on intercreditor agreements (as we wrote about here), the enforceability of makewhole premiums and the proper interest rate in the context of a Chapter 11 cramdown plan.  On that third issue, Judge Drain entered an order on remand in April addressing the proper cram-down rate for two classes of senior noteholders that had been issued replacement notes under Momentive’s Chapter 11 plan. Given the notices of appeal filed just days later, it looked like another round of appellate review might occur.  But on May 15, Momentive announced that it had elected to refinance those notes, resulting in a voluntary dismissal of the appeals.

In its decision in Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2d Cir. 2017), the Second Circuit had ruled that the proper approach in a Chapter 11 cramdown dispute requires, as step one of a two-step process, that the trial court “assess whether an efficient market rate can be ascertained, and, if so, apply it to the replacement notes.”  See Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2d Cir. 2017). Only if such an efficient market did not exist should a court proceed to second step and use a “formula” or “prime-plus” approach to calculate the cramdown rate (by starting with an essentially risk-free interest rate and applying appropriate risk adjustments).

On remand, Judge Drain interpreted the Second Circuit’s directive as requiring him to determine whether there was either “traditional market efficiency or efficiency in the form of a fair and transparent competitive process involving sophisticated parties that arrives at a potential exit loan with a term, size and collateral comparable to the proposed forced cram down ‘loan.’”  In assessing the cram-down rate for the 1L notes, Judge Drain concluded that while there was no “traditional market efficiency” for the notes, the Debtors had “negotiated backup exit financing with a term, size and collateral comparable to” the first lien replacement notes “at a time sufficiently close to the confirmation of the Plan to serve as a reliable comparison” to those replacement notes.

As a result, the court was able to determine a rate, based on certain adjustments in market conditions, that it believed met this so-called “process efficient” requirement. The court ruled that the appropriate cramdown interest rate for the 1L replacement notes was “LIBOR [calculated on a three-month basis] + 4.50%, which includes .50% of OID and .375% of market flex, with a floor of 1.00%” – which was a significant step-up from the original rate under the confirmed plan.

With respect to the 1.5 Lien replacement notes, the court concluded that “[t]here was no similar back-up exit financing negotiated comparable in term, size and collateral” to those notes.  However, the court concluded it could nonetheless determine a “process efficient” market for exit financing of a term, size and collateral comparable to the 1.5 Lien Replacement Notes by combining the terms set forth in “a proposed bridge facility commitment letter” with “expert testimony employing a reasonably reliable methodology to calculate a step-up from the negotiated ‘process efficient’ back-up first lien exit financing.”  Based on this approach, the court ruled the interest rate for the 1.5 Lien replacement notes was 7.9%.

For bankruptcy practitioners, the refinancing and dismissal is notable as it means that Judge Drain’s rulings applying the so-called “process efficient” standard will not receive further review, at least for now.

Could the US already be in a recession?  [USA Today; June 25, 2019]

Puerto Rico’s Financial Oversight and Management Board proposes bankruptcy plan framework that would cut debt payments by half over the next 30 years [CNBC; June 16, 2019]

As part of proposed agreement between CFPB, attorneys general from 43 states and defunct for-profit college ITT Tech,  more than 18,000 students will have $168 million in private loan debt discharged [MarketWatch; June 17, 2019]

Lease transaction leading to Windstream bankruptcy following challenge by Aurelius last year, is scrutinized as non-market in Windstream bankruptcy potentially subjecting it to rejection by debtor [WSJ; June 17, 2019]

On June 19, Nicole Saharsky, co-leader of Mayer Brown’s Supreme Court & Appellate practice, discussed how free enterprise fared in the latest US Supreme Court term.  A webinar of the program is available here.

As discussed in our earlier post, during this term, Nicole and a Mayer Brown team which included partner (and blog co-host) Aaron Gavant along with  partner Andy Tauber and associates Matt Waring and Minh Nguyen-Dang, secured a resounding victory for creditors in the United States Supreme Court in a case involving when a bankruptcy court can impose contempt sanctions on a creditor for seeking to collect on a debt when it was unclear if that debt that was discharged in bankruptcy.

 

In this four-part You Tube series, Mayer Brown partner Jason Elder offers practical insights on high-yield debt for Asia-based issuers seeking to understand important covenants and trends.

 

Supreme Court agrees to review constitutional challenge to board overseeing bankrupt Puerto Rico’s finances [WSJ; June 20, 2019]

In this post, the LSTA questions the alleged opacity of CLOs as well as their potential for long-term stabilizing or destabilizing effects on financial markets [LSTA Website; June 20, 2019]

The question of whether a debtor’s plan of reorganization can include non-consensual releases for non-debtor parties has been hotly contested for several years, with circuit courts oftentimes split.  In his recent decision on the topic in the Aegean case,  New York Southern District Bankruptcy Judge Michael E. Wiles explored the limitations on such releases even in permissive jurisdictions such as the Second Circuit.

Specifically, as discussed further in this article by Mayer Brown attorneys Barbara Goodstein, Joaquin C De Baca, and Anastasia Kaup, Judge Wiles emphasized that such releases “are not a merit badge that someone gets in return for making a positive contribution to a restructuring … not a participation trophy, … not a gold star for doing a good job.”  Instead, permissible non-consensual, third-party releases must among other things, be tailored to particular claims and must be tied to specific actions taken by the third party as part of a debtor’s restructuring.

Bipartisan proposal for new small business provisions in Bankruptcy Code [American Bankruptcy Institute Journal; May 2019]

Latest memo from Oaktree’s Howard Marks on why this time market cycle isn’t different [OakTree; June 12, 2019]

Is the “vast” liquidity in the market a mirage?  Bloomberg chimes in [Bloomberg; June 13, 2019]

Morgan Stanley Business Conditions Index fell by 32 points in June, the largest one-month decline on record [CNBC; June 13, 2019]

Commodity Prices Set 50-Year Lows Relative to U.S. Stocks [Bloomberg Radio’s Dave Wilson Tumblr Post; June 12, 2019]

Without additional explanation, the Supreme Court recently denied NextEra’s request for further review of its $275 million break fee request following the scuttling of its multi-billion dollar transaction to acquire the majority of Energy Future Holdings Corp.’s assets (see item 8 under “Certiorari Denied” list here).

Following the bankruptcy court’s reconsideration (and reversal) of its prior approval of such fee, and the Third Circuit’s opinion affirming that decision, NextEra petitioned the Supreme Court, arguing that the issue deserved further review.  In particular, NextEra noted that different Courts of Appeal were applying different standards to determine when break up fees were justified, with the Fifth Circuit applying the more liberal “business judgment” standard under Bankruptcy Code Section 363 and the Third Circuit applying the more exacting “actual, necessary cost or expense” standard under Bankruptcy Code Section 503.  Absent additional clarity from the Supreme Court, NextEra argued, the “skittishness of some lower courts to approve” break up fees, “or, worse still, the willingness  to employ Section 503 to retroactively rescind” them (as happened in the NextEra case) would “inevitably chill” potential bids in bankruptcy auctions, potentially costing debtors “millions or billions of dollars.”

Because the Supreme Court refused to grant certiorari, courts in the Third Circuit (notably Delaware bankruptcy courts) will continue to apply the more exacting standard, and some doubt will remain regarding the proper standard for break up fee review in other jurisdictions without binding Circuit-level precedent.  It’s an issue worth watching going forward.

 

 

Over the past several years in the US, commentators have noted the resurgence of covenant lite deals, including increasingly in the middle market and direct lending space.  When (as?) the credit cycle turns, naysayers worry that these structures may impact lender recoveries, as borrowers lack incentive to start restructuring discussions with their lenders until it may be too late.

Here Stuart Brinkworth, the European head of leveraged finance at Mayer Brown, discusses similar developments in the UK market, where sponsors are picking and choosing from the high yield bond and syndicated loan markets and also borrowing from US-style documentation.  Among other things, Stuart discusses the evolution of “cov-less” transactions, where loan agreements include fewer covenants that, along with generous addbacks result in the “cumulative effect” of “covenants with little teeth.”