Financial Experts in Chapter 11 Bankruptcies: Unique Situations from Common Assignments

By Allyn Needham, Shipp, Needham & Durham, LLC

needhamWhen disagreements arise in Chapter 11 bankruptcies, debtor and/or creditors’ counsel may seek financial experts to provide information relative to their positions. While engagements of economic experts may cover a broad spectrum of analyses, these engagements generally fall into two areas: determining the appropriate interest rate for the repayment of a secured claim and the liquidation and/or fair market value of certain assets or the bankrupt business as a whole.

The assessment of interest rates and appraising the value of a business are assignments not limited to bankruptcy work alone. Most financial experts are familiar with the methods required to perform these tasks. However, even in the application of these basic analyses, Chapter 11 bankruptcy may present unusual assignments.

This article discusses two unique situations that may arise from common assignments. The first is the application of the cramdown interest rate model when a creditor makes an 1111(b) election. An 1111(b) election allows an under secured creditor to be paid its total allowed claim (both secured and unsecured). This impacts the interest rate and its application toward retirement of the claim. The second considers the concept that the “highest bidder may not be the best bidder” when selling a bankrupt business. The best bid may not be the highest bid due to differing prices, terms, contingencies and impact on the local economy (e.g. closing a business or location) in the competing bids.

To read the full article see here.

Bankruptcy Code With No Repo Safe Harbor — An Evaluation

By Jeffrey Murphy and Lee Smith of Dentons

The ABI Reform Commission recommended that the safe harbors under Section 555 and 559 of the Code be revised to return to their pre-2005 contours and, specifically, that the safe harbors exclude mortgage warehousing, which is a short-term revolving credit facility extended by a financial institution to the loan originator. We believe that excluding mortgage warehousing transactions from the safe harbors will increase “contagion risk” and also reject the Commission’s assertion that mortgages, in comparison with other safe-harbored asset types, are “illiquid” investments based upon our experience with mortgage loan trading.  The largest banks, and ever increasingly, the largest investment funds, are major participants in the mortgage markets as originators, buyers, and market makers (the same cannot be said of, say, municipal bonds), and the financial crisis started with a subset of the mortgage markets: subprime mortgages.

We are not persuaded that repo financing contributed to the excesses of the credit boom of the mid-2000s, nor do we believe that the Bankruptcy Code safe harbors for the liquidation, termination or acceleration of repurchase agreements are to be indicted for causing “runs” on debtors that knowledgeable market actors will not restructure.  To the contrary, mortgage repos are a crucial component of healthy housing markets, and fairness requires that debtors relieved of their margin call obligations by a bankruptcy filing not have options to satisfy their obligations while the repo buyers are exposed to all the market risk.

For our full analysis of the ABI recommendation, please see here.

A New Fulcrum Point for City Survival

posted in: Municipal Bankruptcy | 0

By Samir D. Parikh, Lewis & Clark Law School

ParikhMunicipalities face daunting fiscal challenges that threaten debt repayment and undermine basic service delivery.  Policymakers and scholars have struggled to formulate meaningful restructuring options.  Up to this point, the literature has focused on federal bankruptcy law and the options available under Chapter 9.  But this resource-draining process is not the fulcrum point for any meaningful solution.  Indeed, for the vast majority of distressed municipalities, the lever of municipal recovery will not turn based on the solutions that have to date been offered.

In an article forthcoming in the 2015 William & Mary Law Review, I attempt to radically shift the municipal recovery debate by arguing that state law is the centralized point at which officials can exert the necessary amount of pressure to gain concessions from key creditor constituencies.  I propose a comprehensive system that (i) identifies pressured municipalities at a time where measured adjustments are sufficient to create sustainable viability, and (ii) shepherds distressed municipalities through a dynamic negotiation structure in an effort to capture Chapter 9’s primary benefits without the costs, inefficiencies, and constitutional quandaries.  Animating this proposal is a more nuanced understanding of the Contracts Clause that allows a municipality to explore unilateral contract modification in an effort to facilitate consensual agreements with creditor constituencies.

My proposal offers systemic rehabilitation at a time when a new approach is desperately needed.  The full version of the article is available here.

For previous posts on Municipal Bankruptcy see here and here.

A Constitutional Review of the Draft ‘Macron’ Law Introducing Shareholder Eviction under French Law: The Revolution that Didn’t Happen

By Sophie Vermeille, Jérémy Martinez & Frank-Adrien Papon

In a politically controversial attempt to modernize the French economy, French Minister of the Economy Emmanuel Macron had passed a sweeping law earlier this year, reforming many areas of French business law, including bankruptcy law.  For the first time under French law shareholder removal from decisionmaking will be available for decisions affecting the future of a distressed company.  This law is a step in the right direction to force shareholders to absorb the company’s losses and allow new shareholders to invest fresh money.

Unfortunately, the French government failed to use modern, world-class economic standards to govern a shareholder removal under the new law.  First, by retaining an antiquated trigger of liquidity crisis instead of actual insolvency, the law fails to consider the enterprise value of the company as the proper economic basis to recognize that shares have become worthless, an essential element to provide legitimacy for their removal.   Second, by requiring that a judge justify their removal by finding a “public necessity” to avoid a risk of “serious loss to the economy”, the law offers a weak constitutional safeguard for property rights, a loosely defined public interest standard, and little guidance for a judge to avoid arbitrary decisions and political pressure. This lack of economic and conceptual basis has unfortunately transformed a genuinely potentially useful attempt to reform French law into an inadequate and possibly even unconstitutional new law.

To read the full article see here.