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.