All items from Kieselstein Law Firm

When a borrower has deleveraged its balance sheet, distressed investors that received both new loans and enough shares to designate a director of, or otherwise exercise control over, the borrower can find themselves in the uncomfortable role of fiduciary to the borrower’s other creditors if the borrower subsequently becomes insolvent.  A recent bankruptcy court decision suggests that such insider lenders’ fiduciary duties may actually require them to preserve litigation rights against themselves simply to avoid having the right to repayment of their loans equitably subordinated.

Posted 2 years 2 weeks ago

For the past few months, a working group of the LSTA’s Trade Practices and Forms Committee has been debating changes to the form of Collateral Annex.  Sellers of loans on the secondary market use this form when their inability to obtain agent or borrower consent to a pending sale of loans requires them to close the sale on a participation basis.  The purpose of the form is to collateralize any ongoing funding obligations the purchasers may have.  The realities of transacting in a post-Lehman world have contributed to an increasingly vociferous call by buysiders for seller segregation, or third-party custody, of any cash collateral posted by purchasers under the Annex.
The Federal Reserve has now published the results of a survey that appears to support the buysiders’ position that market practice in this area is under pressure to change.  The Fed’s Senior Credit Officer Opinion Survey on Dealer Financing Terms, released on March 29, 2012, includes the following special question:
“How has the intensity of efforts by your institution’s clients to negotiate arrangements for the custody by third parties of collateral and margin posted to  your institution changed over the past six months?”1

Posted 2 years 3 weeks ago

When the Texas bankruptcy judge reviewing the Vitro plan of reorganization recently enjoined state court collection proceedings by certain of the Company’s noteholders, he left unaddressed the Company’s allegations that the holders had leaked confidential information to scuttle the plan in violation of a non-disclosure agreement that the holders claim they never actually signed.
For a distressed investor seeking to remain on the “public side” of a given credit,1 not executing an NDA does not assure that you won’t be bound by it.  An NDA binding upon, though not executed by, an investor may, for example, have been executed by an agent acting within the scope of its previously-granted authority.  This occurs when a financial advisor engaged by an agent bank shares with its lending group confidential financial information obtained from the borrower under an NDA that expressly binds recipients of the information to the NDA’s terms.

Posted 2 years 3 weeks ago

The concept behind delayed compensation1 — the settlement adjustment intended to prevent counterparties from delaying the closing of a secondary loan sale for economic gain — has always been relatively straightforward.  Give each party to a trade that closes late2 what it would have received if the trade closed on time.  For seller, that generally means the “cost of carry” represented by interest on the purchase price, calculated per the LSTA3 rules at LIBOR.4  For buyer, it’s the contract interest it bargained for.5

Posted 2 years 6 weeks ago

Below, my preliminary notes from the LSTA’s 16th Annual Conference on November 2, 2011.
4:47 PM
Breakout session on Material Non-public Information in the Syndicated Loan Market. Best practices are under pressure due to occurrences in the market, including especially the desire for increased transparency. History of LSTA involvement on MNPI. Sophisticated party expectation of unequal information of parties trading loans. Syndicate Level Information discussed. Sources of authority: state asset protection rules, federal securities laws. Big boy provisions as “contractual disclaimers of reliance” that operate by reverse engineering a fraud claim. Limits on effectiveness of same: securities transactions (SEC not require to prove reliance); prohibition against circumventing securities laws; ineffectiveness against breach of fiduciary duty claims unaffected by CDRs; “blockbuster” information (read, Borrower Restricted Information on material issues) arguably unprotectable.

Posted 2 years 24 weeks ago

Last quarter, as the YRC Worldwide Inc. (“YRC”) restructuring sped towards a conclusion, buyers and sellers with open trades of YRC’s bank debt pedaled furiously alongside in an attempt to negotiate, finalize and eventually fund side-letter agreements under which buyers issued directions regarding sellers’ rights, as record holders of the bank debt, to subscribe for additional YRC securities1.  As an illustration of how events unfolding during the gap between trade date and closing date of a sale of loans can require coordinated action by buyers and sellers, this situation was hardly unique.

Posted 2 years 24 weeks ago

Despite their best efforts, buyers of single-name credit default swaps still sometimes make technical errors when notifying their counterparties of “credit events”1 or other grounds upon which to terminate their contracts. Details required to be included in the notice may have been listed imprecisely; the notice may have been misdated or misdelivered; what the swap documentation requires to be included in the notice may be ambiguous.
For obvious reasons, credit protection sellers that have received a credit event notice are likely to claim that virtually any defect in the notice, no matter how small, renders the notice ineffective and compromises the credit protection buyers’ recourse. The paucity of case law on point may add to credit protection buyers’ reluctance to litigate this issue.
But a recent New York appellate decision suggests that elevating form over substance in interpreting CDS notices with minor defects makes no more sense in the derivatives context than under general contract law.

Posted 3 years 9 weeks ago

The disallowance provision is probably the most distinguishing feature1 of the typical bankruptcy claim2 assignment. This provision obligates the seller of the claim to rebate buyer’s purchase price to the extent the enforceability of the claim has been impaired3, subject to certain conditions.4 The assignment also typically contains seller representations and warranties that the claim is not subject to “impairment” of any kind.5

Posted 3 years 11 weeks ago