Momentive: Law Firm Perspectives

On October 28, 2017, the United States Court of Appeals for the Second Circuit handed down its decision in In re MPM Silicones, L.L.C., holding that where an efficient market exists, the appropriate cram-down interest rate in Chapter 11 cases is the market rate, distinguishing the formula rate applied by the Supreme Court in Till v. SCS Credit Corp. in Chapter 13 cases. The Second Circuit wrote that “the market rate should be applied in Chapter 11 cases where there exists an efficient market. But where no efficient market exists for a Chapter 11 debtor, then the bankruptcy court should employ the formula approach endorsed by the Till plurality.” The Second Circuit also disallowed the senior creditors’ claim for a make-whole payment, although the Third Circuit had allowed such a claim in In re Energy Future Holdings Corp.

Law firms have so far reacted unanimously that this decision is a win for secured creditors as it ameliorates the risk that unsecured creditors could extract value from the debtor at the secured creditors’ expense. Weil writes that “it seems like the Bankruptcy Court, now freed from Till, will find that an efficient market exists, and will adjust the interest rate on the replacement notes accordingly.”

Nevertheless, some firms predict that there may still be areas future controversy. Davis Polk warns that this decision “could result in expensive litigations between debtors and secured creditors as to whether there exists an efficient market and, if so, what the efficient market rate should be.” Norton Rose Fulbright also emphasizes that the next step for secured creditors is to focus on when an efficient market exists.

Firms have also noticed the decision’s implication for debtor-side strategy. Baker McKenzie suggests the possibility that “a debtor may engage in forum shopping to file its case in a jurisdiction that applies the formula approach,” or “be even more sensitive to the potential for exit financing quotes to be used as evidence against [debtors] in establishing a market rate.”

On the issue of the make-whole premium, Davis Polk highlights that the circuit split may increase forum shopping for distressed issuers with potentially significant make-whole obligations. It expects future issuers to draft clearly around the issue of make-whole obligation to provide for future Chapter 11 cases.

(By Jianjian Ye, Harvard Law School, J.D. 2018.)

Second Circuit Rules on § 316(b) in Marblegate

posted in: Workouts and Pre-Packs | 0

Last week, the Second Circuit decided Marblegate Asset Management, LLC v. Education Management Corp., holding that § 316(b) of the Trust Indenture Act (“TIA”) protects only bondholders’ formal, legal right to repayment, not their practical ability to recover. The Second Circuit’s 2–1 decision thus resolves uncertainty surrounding out-of-court bond workouts and returns to the pre-Marblegate practice.

The majority viewed the statute’s text as ambiguous and consulted the legislative history; it emphasized legislative history supporting the idea that § 316(b) protects only against the formality of a bondholder vote altering payment terms and discarded legislative history to the contrary as shards. The dissent concluded that the transaction “annihilated” a bondholder’s right to payment and, hence, ran afoul of statute’s plain language — which requires that a bondholder’s right to payment cannot be affected or impaired without the affected bondholder’s consent.

Law firms reacted rapidly to the decision. Wachtell Lipton, which represented the winning appellant, and Weil Gotshal both extoll the opinion. Paul, Weiss and Morgan Lewis see in the decision a clear rule that bars only express changes to core terms. Several firms, such as Shearman & Sterling and White & Case, emphasized that the decision will facilitate out-of-bankruptcy restructurings.

Squire Patton Boggs highlights limitations, arguing that the law remains “neither clear nor predictable” on when an out-of-court restructuring goes so far as to impair bondholders’ right to repayment. They caution against assuming that any action short of a direct alteration of core repayment terms is now permissible.

In his American Bankruptcy Institute column, Bill Rochelle notes that the decision’s focus on legislative history, including views contemporaneous with the statute’s passage, was unusual and, by implication, indicates that the dissent’s textual decision-making mode fits better with current Code interpretation. Seyfarth Shaw notes the decision’s limited practical effect because of the widespread use of binding votes in pre-packaged Code restructurings, which avoid § 316(b)’s restrictions.


The Roundtable has posted previously on Marblegate and § 316(b). In one post, Mark Roe argued that bondholders should not be barred by statute from choosing in their indenture whether to be allowed to reposition their bonds via a fair vote. Other posts include a summary of the National Bankruptcy Conference’s proposed amendments to the Bankruptcy Code to facilitate bond restructuring; a 28-law firm legal opinion white paper on transactional complications arising from the Marblegate district court decision; and an international perspective on the TIA’s prohibition on collective action clauses.

Tinkering with Ipso Facto Provisions Could Send Them Sailing out of Safe Harbors

By Maurice Horwitz (Weil, Gotshal & Manges)

Recently, the United States Bankruptcy Court for the Western District of Louisiana considered whether a bankruptcy termination provision in a forward contract continues to be safe harbored under section 556 if its enforcement is conditioned on other factors – in this case, the debtor’s failure to perform under the contract.  Consistent with prior case law, the court held that termination is only safe harbored if it is based solely on a condition specified in 365(e)(1) (i.e., the financial condition of the debtor, bankruptcy, or the appointment of a trustee).

The contract in Louisiana Pellets contained a standard ipso facto provision that permitted either party to terminate the agreement upon commencement of a bankruptcy case by the other party.  But the debtor’s counterparty could only invoke the provision if the debtor was also in breach of its obligations under the agreement.  The counterparty alleged that both requirements of the ipso facto provision – bankruptcy and breach – had been satisfied, and sought to terminate.

The court held that because the ipso facto provision contained an additional condition to enforcement (the debtor’s breach), it no longer fell within the 556 safe harbor.  Thus, even if both conditions were satisfied (bankruptcy and breach), the automatic stay applied and the termination clause could not be exercised absent relief from the automatic stay.

The lesson of Louisiana Pellets is that ipso facto provisions in financial contracts should be drafted carefully so that their enforcement depends solely on one of the conditions specified in Section 365(e)(1) of the Bankruptcy Code.

The full article is available here.

Strategies for Purchasing and Selling Assets in Chapter 11

posted in: Cramdown and Priority | 0

By Jacqueline Marcus (Weil, Gotshal & Manges) and Doron Kenter (Robins Kaplan)

Sales of a debtor’s assets pursuant to section 363 of the Bankruptcy Code carry significant benefits for buyers and sellers alike. But pursuing a sale process with the overlay of the Bankruptcy Code can also pose challenges and pitfalls, particularly for participants who are unfamiliar with the intricacies of the bankruptcy process and the applicable statutes, rules, and procedures inherent in 363 sales.

Jacqueline Marcus, a partner with Weil, Gotshal & Manges, LLP, and Doron Kenter, Counsel with Robins Kaplan LLP, recently authored an article for Practical Law Bankruptcy, in which they outline the relative advantages and disadvantages of sales in bankruptcy, from both the buyer’s and the seller’s perspective, and offer a practical guide to participating in section 363 sales. The article discusses the various types of section 363 sales, as well as the forms of sale processes that debtors may choose to employ in selling some or substantially all of their assets.  The article discusses the benefits and drawbacks of finding, or being, a stalking horse bidder, and provides guidance for the marketing process, credit bidding, conducting auctions, and choosing a winning bid. It then discusses the competing views regarding the circumstances under which the bankruptcy court may call the debtor’s decision into question or reopen an auction that has otherwise been closed. Finally, the article discusses the considerations that should be taken into account in determining an exit strategy after a debtor completes a sale of substantially all of its assets.

The full text of the article is available here.

Genco: Dry Bulk Shipping Valuations No Longer Anchored to Discounted Cash Flow Method

posted in: Valuation | 0

By Gabriel A. Morgan, Weil Gotshal LLP

PITCH_Morgan_Gabriel_22091Discounted cash flow analysis is a mainstay among the valuation methodologies used by restructuring professionals and bankruptcy courts to determine the enterprise value of a distressed business. Despite its prevalence, the United States Bankruptcy Court for the Southern District of New York recently concluded that the DCF method was inappropriate for the valuation of dry bulk shipping companies. In In re Genco Shipping & Trading Limited, Case No. 14-11108 (Bankr. S.D.N.Y. July  2, 2014), the bankruptcy court explained that the DCF method is of limited use when projections of future cash flows are unreliable or difficult to ascertain.  The bankruptcy court then found that accurate cash flow projections did not exist for Genco because dry bulk shipping rates are difficult to forecast due to the volatile nature of the dry bulk shipping market.  Interestingly, the bankruptcy court concluded not just that accurate projections were unobtainable in the case of Genco, specifically, but also for dry bulk shippers, generally.  The bankruptcy court observed that the DCF method is inappropriate for the dry bulk shipping market because it is volatile and highly fragmented, has low barriers to entry, and little differentiation exists among competitors, causing charter rates to fluctuate with supply and demand and making revenues unpredictable.  Although the bankruptcy court merely applied existing law to the facts of the case, the decision in Genco could serve as precedent for the valuation of companies in other segments of the shipping industry, and other industries, that experience significant volatility in rates.

The full discussion can be found here.

A Recent Decision in the Fisker Case Brings New Life to the Credit Bidding Debate

posted in: Claims Trading | 0

Author: Nelly Almeida, Weil Gotshal & Manges LLP

On January 10, 2014, the United States Bankruptcy Court for the District of Delaware in In re Fisker Automotive Holdings, Inc., et al., capped a secured lender’s right to credit bid its $168 million claim at $25 million (the amount it paid to purchase the claim). While the court noted that its decision was non-precedential, it may still have serious implications for the future of credit bidding.

Credit bidding has long been considered a fundamental protection afforded to secured creditors by section 363(k) of the Bankruptcy Code. Under section 363(k), at a sale of its assets, a secured creditor may “credit bid” the amount of its secured claim in lieu of cash unless the court “for cause” orders otherwise. The Fisker decision highlights the uncertainty surrounding what constitutes sufficient “cause” for a court to limit or abrogate a lender’s right to credit bid. In almost all cases where courts have found “cause,” the focus has been on whether there is a clearly defined existing dispute to a claim or lien. In Fisker, however, the court emphasized other “fairness” factors, such as the expedited nature of the proposed sale and the interest of promoting a fair auction, even though the opinion suggests that questions existed as to whether the potential credit bidder’s claims were secured. Thus, Fisker leaves us to wonder whether these “additional factors” would have been enough standing alone; indeed, what would have been enough?

A full length blog post discussing the decision and its implications can be found here.

EDITOR’S UPDATE: On February 20th, the US District for Delaware denied the secured creditor’s emergency motion for direct appeal to the Third Circuit.  Nelly Almeida’s description of the decision and the resulting auction can be found here.