Taking a Deeper Look into Momentive

posted in: Valuation | 0

By Michael Vitti, Duff & Phelps

Much has been written about Momentive. Nevertheless, some relevant questions are not often addressed, if at all. I recently attempted to answer some of these questions in a recently published article:

How much economic value was taken from the secured creditors if one believes they should have received the market rate of interest?

The answer (almost $200 million) may be higher than some would have expected. This higher than expected number occurs because the cramdown interest rate decreased, while the market interest rate increased, between August 26, 2014 (the date analyzed in the bankruptcy court’s opinion) and October 24, 2014 (the date the debtor emerged from bankruptcy).

Is there a limit to the amount of implied lender’s costs, profits, and fees that should be removed from the market interest rate when determining the cramdown interest rate?

The answer must be “yes.” To demonstrate this point, consider the first lien debt, which was worth approximately $50 million less than face value on August 26 and approximately $140 million less than face value on October 24. Did the lender’s implied costs, fees, and profits almost triple between August 26 and October 24? Not likely. This is perhaps the simplest way to demonstrate the need for a limit.

Could future courts use the same methodology employed in Momentive yet arrive at the market interest rate by making a reasonable change in one or two assumptions?

The answer appears to be “yes.” Use of the historical average spread between the 7 year treasury and prime rate (instead of the 50 basis points used in Momentive) results in the market interest rate as of August 26. Combining that change with an increase in the credit risk premium to the high end of the range referenced by the plurality in Till (300 basis points) results in the market interest rate as of October 24.

The full article is published in NACVA’s QuickRead. Part 1 is available here while Part 2 is available here.

 

10th Circuit Holds That First Time Transaction Falls Within 11 U.S.C. 547 (c)(2), Ordinary Course of Business Defense

posted in: Avoidance | 0

By Purvi Shah and Michelle McMahon of Bryan Cave

In re C.W. Mining. Co., the United Stated Circuit Court of Appeals for the Tenth Circuit affirmed the lower courts’ decisions holding that in a proceeding seeking to avoid and recover a payment made on account of a first time transaction between a debtor and creditor such payment can be defended under the ordinary course of business defense provided in 11 U.S.C. § 547(c)(2). In reaching its decision, the Tenth Circuit focused on the language of the statute and held that 11 U.S.C. § 547(c)(2) protects payments made in the ordinary course of business or financial affairs of the debtor and the transferee, not between the debtor and transferee. With this decision, the Tenth Circuit joined the Sixth, Seventh and Ninth Circuits that have held first time transactions defensible under 11 U.S.C. § 547(c)(2). In this context, the Ninth Circuit previously explained that “[a] first-time debt must be ordinary in relation to this debtor’s and this creditor’s past practices when dealing with other, similarly situated parties.” Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys. Inc.), 482 F.3d 1118, 1126 (9th Cir. 2007).

The full article is available here.

Earth to Creditors: Triangular Payment Arrangements May Constitute “Reasonably Equivalent Value”

posted in: Avoidance | 0

By Bryce Suzuki and Amanda Cartwright of Bryan Cave

The Eleventh Circuit Court of Appeals recently clarified the meaning of “reasonably equivalent value” in a complex fraudulent transfer case. In In re PSN USA, Inc., Case No. 14-15352 (11th Cir. Sept. 4, 2015), the Court found that payments made to fulfill contractual obligations of third parties were not fraudulent transfers where an economic benefit was directly or indirectly conferred upon the transferor.

This decision provides particular insight into fraudulent transfers in the context of parent-subsidiary and other triangular payment arrangements. Even though the debtor, a cable television channel, was not a party to the underlying satellite services contract at issue, the Court held that payments made from the debtor to the satellite services company pursuant to its parent company’s contracts constituted “reasonably equivalent value” and could not be avoided as constructive fraudulent transfers.

The Court’s opinion hinged on benefits derived by the debtor from those contracts.  Specifically, the satellite services contracts, to which the debtor was not party, permitted the debtor to operate a television channel and earn a service fee from that operation. The indirect benefit to the debtor through the contracts was sufficient to satisfy the “reasonably equivalent value” requirement, and the Eleventh Circuit affirmed the bankruptcy court’s order that the transfers were not avoidable.

The full article is available here.