The Trouble with Unneeded Bankruptcy Reform: The LSTA’s Response to the ABI Chapter 11 Commission Report

[Editors’ Note: The post below from the Loan Syndications and Trading Association (LSTA), summarizes their Report responding to the ABI Commission Report and Recommendation on the Reform of Chapter 11, released in December of 2014; for our previous post on the ABI report see here.]

The LSTA Report argues that:

  • The Commission Report is based on the “perception” that the system has failed. But that perception is not supported by reliable empirical evidence. The data that do exist generally support the conclusion that the system is functioning well.
  • The principal objective of current bankruptcy law is the maximization of value for all stakeholders. With few exceptions, it respects principles of non-bankruptcy law regarding the distribution of that value, as reflected in bankruptcy’s “absolute-priority” rule. The Commission Report breaks from those principles, arguing that market changes have led to distributions of value in bankruptcy that are “subjectively unfair,” and seeks to achieve results that it believes are fairer. But a clear, objective process that respects non-bankruptcy entitlements wherever possible is fair.
  • Many of the changes proposed by the Commission would reduce recoveries by secured lenders in the event of default. That would necessarily result in the increased cost, and reduced supply, of secured credit.

The LSTA Report reviews a number of specific proposals in the ABI Commission Report, including (i) calculating adequate protection based on a hypothetical foreclosure value; (ii) limitations on 363 sales and DIP loan provisions; (iii) “redemption option value”—which would require senior creditors in large bankruptcy cases to pay junior creditors even when the senior creditors have not been paid in full; and (iv) proposals for small and medium size enterprises. The LSTA concludes that these and other proposals would add cost and complexity to, and lengthen Chapter 11 cases.

For the full report, see here.