Payment Vs Lien Subordination
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Bankrupt Subsidiaries: the Challenges to the Parent of Legal Separation
ERENSFRIEDMAN&MAYERFELD GALLEYSFINAL 1/27/2009 10:25:46 AM BANKRUPT SUBSIDIARIES: THE CHALLENGES TO THE PARENT OF LEGAL SEPARATION ∗ Brad B. Erens ∗∗ Scott J. Friedman ∗∗∗ Kelly M. Mayerfeld The financial distress of a subsidiary can be a difficult event for its parent company. When the subsidiary faces the prospect of a bankruptcy filing, the parent likely will need to address many more issues than simply its lost investment in the subsidiary. Unpaid creditors of the subsidiary instinctively may look to the parent as a target to recover on their claims under any number of legal theories, including piercing the corporate veil, breach of fiduciary duty, and deepening insolvency. The parent also may find that it has exposure to the subsidiary’s creditors under various state and federal statutes, or under contracts among the parties. In addition, untangling the affairs of the parent and subsidiary, if the latter is going to reorganize under chapter 11 and be owned by its creditors, can be difficult. All of these issues may, in fact, lead to financial challenges for the parent itself. Parent companies thus are well advised to consider their potential exposure to a subsidiary’s creditors not only once the subsidiary actually faces financial distress, but well in advance as a matter of prudent corporate planning. If a subsidiary ultimately is forced to file for chapter 11, however, the bankruptcy laws do provide unique procedures to resolve any existing or potential litigation between the parent and the subsidiary’s creditors and to permit the parent to obtain a clean break from the subsidiary’s financial problems. -
Overview of the Fdic As Conservator Or Receiver
September 26, 2008 OVERVIEW OF THE FDIC AS CONSERVATOR OR RECEIVER This memorandum is an overview of the receivership and conservatorship authority of the Federal Deposit Insurance Corporation (the “FDIC”). In view of the many and complex specific issues that may arise in this context, this memorandum is necessarily an overview, but it does give particular reference to counterparty issues that might arise in the case of a relatively large complex bank such as a significant regional bank and outlines elements of the FDIC framework which differ from a corporate bankruptcy. This memorandum has three parts: (1) background on the legal framework governing FDIC resolutions, highlighting changes and developments since the 1990s; (2) an outline of six distinctive aspects of the FDIC approach with comparison to the bankruptcy law provisions; and (3) a final section illustrating issues and uncertainties in the FDIC resolutions process through a more detailed review of two examples – treatment of loan securitizations and participations, and standby letters of credit.1 Relevant additional materials include: the pertinent provisions of the Federal Deposit Insurance (the "FDI") Act2 and FDIC rules3, statements of policy4 and advisory opinions;5 the FDIC Resolution Handbook6 which reflects the FDIC's high level description of the receivership process, including a contrast with the bankruptcy framework; recent speeches of FDIC Chairman 1 While not exhaustive, these discussions are meant to be exemplary of the kind of analysis that is appropriate in analyzing any transaction with a bank counterparty. 2 Esp. Section 11 et seq., http://www.fdic.gov/regulations/laws/rules/1000- 1200.html#1000sec.11 3 Esp. -
Underwriting; Development of the Restructuring Plan
Chapter 5 Underwriting; Development of the Restructuring Plan Executive Summary Section 5-1 This chapter describes the PAEs actions for financial underwriting of the M2M transaction and the development of the Restructuring Plan. The PAE will determine the project’s rents, expenses, and deposits to the reserves under various scenarios. The PAE will then size the first and second mortgages, and third mortgage, if needed, and determine the amount of claim payable by FHA, as well as the sources and uses in the transaction, and the owner’s financial return. The results of this underwriting, the due diligence described in Chapter 4, the tenant comments, and owner negotiations are consolidated in the draft Restructuring Plan Package submitted to the OAHP Preservation Office. The PAE should work cooperatively with the owner and lender as needed throughout this process. Underwriting Model Section 5-2 A. General. OAHP has provided an Underwriting Model for use in completing the financial underwriting of M2M transactions. A copy of the Model is available on OAHP’s Web site or can be obtained through the OAHP Preservation Office. Use of the Model is required and helps meet the unique requirements of this program that will not be present in other underwriting models. However, the Model is only an aid and may not be appropriate or complete for every case; the PAE remains responsible for its own conclusions, and for appropriately addressing unusual conditions that may not be fully considered by the model or this Guide. B. Using the Model. PAEs are responsible for using the most recent, appropriate model and generally following the procedures reflected therein. -
Policy Brief 13-3: Debt Restructuring and Economic Prospects in Greece
Policy Brief NUMBER PB13-3 FEBRUARY 2013 a significant part of even the reduction for private holdings. A Debt Restructuring and December package of official sector relief (in the form of lower interest rates and support for a buyback of about half of the Economic Prospects restructured privately held debt) set the stage for resumption of IMF and euro area program disbursements and restored the conditions for managing the remaining debt over the next few in Greece years if reasonable growth and fiscal expectations are achieved. Over the longer term, however, it is unclear that Greece William R. Cline will be able to reenter private capital markets by 2020 even if its debt level is down to the range of about 120 percent of William R. Cline, senior fellow, has been associated with the Peterson GDP. The damage to its credit reputation from restructuring Institute for International Economics since its inception in 1981. His with a large haircut seems likely to leave it in a more difficult numerous publications include Resolving the European Debt Crisis (coed- borrowing position than other euro area sovereigns even if itor, 2012), Financial Globalization, Economic Growth, and the Crisis it achieves comparable debt levels. Further relief on official of 2007–09 (2010), and The United States as a Debtor Nation (2005). sector claims thus seems likely to be needed in the future, Note: I thank Jared Nolan for research assistance. For comments on an but is not urgent at present because almost all of Greece’s earlier draft, I thank without implicating Joseph Gagnon and Edwin borrowing needs should already be covered for the next few Truman. -
Creating a Framework for Sovereign Debt Restructuring That Works 1
Creating a Framework for Sovereign Debt Restructuring that Works 1 Martin Guzman2 and Joseph E. Stiglitz3 Abstract Recent controversies surrounding sovereign debt restructurings show the weaknesses of the current market-based system in achieving efficient and fair solutions to sovereign debt crises. This article reviews the existing problems and proposes solutions. It argues that improvements in the language of contracts, although beneficial, cannot provide a comprehensive, efficient, and equitable solution to the problems faced in restructurings—but there are improvements within the contractual approach that should be implemented. Ultimately, the contractual approach must be complemented by a multinational legal framework that facilitates restructurings based on principles of efficiency and equity. Given the current geopolitical constraints, in the short-run we advocate the implementation of a “soft law” approach, built on the recognition of the limitations of the private contractual approach and on a set of principles – most importantly, the restoration of sovereign immunity – over which there may be consensus. We suggest that in a context of political economy tensions it should be impossible for a government to sign away the sovereign immunity either for itself or successor governments. The framework could be implemented through the United Nations, or it could prompt the creation of a new institution. Keywords: Sovereign Debt Crises, Sovereign Debt Restructuring, Debt Contracts, International Lending 1 We are indebted to Sebastian -
10.11.3.D Equitable (In)Subordination − Considerations for Sponsors Lending to Portfolio Companies
10.11.3.d Equitable (In)subordination − Considerations for Sponsors Lending to Portfolio Companies By Joe Basile, Ron Landen and Rose Constance of Weil, Gotshal & Manges LLP Private equity sponsors are increasingly providing additional capital to their portfolio companies either to address liquidity issues at those companies or as part of a negotiated debt restructuring. From a sponsor's point of view, it is often preferable to invest that additional capital in the form of debt rather than equity. However, in structuring that transaction sponsors should be aware that the priority of this debt in a portfolio company's capital structure could be attacked by other creditors if that portfolio company ends up in bankruptcy under the theories of equitable subordination or recharacterization. It is important that sponsors structure any such investments to reduce the risk of a successful attack on the priority status of their debt. Equitable Subordination Section 510(c) of the Bankruptcy Code provides that bankruptcy courts may exercise principles of equitable subordination to subordinate all or part of one claim to another claim. Conceptually, this gives the bankruptcy court power to demote a higher priority claim to a lower priority claim under certain circumstances. In some instances, this can convert an otherwise first priority secured claim into a general unsecured claim ranking pari passu with all other general unsecured claims. Although the statutory authority for equitable subordination is clear, the application is not. However, there are some general principles that can be applied as a guide in properly structuring a credit arrangement. Generally, the courts consider three factors in determining whether to equitably subordinate a claim. -
223(A)(7) Underwriting Standards Comparison Between Normal Housing Processing and OMHAR Debt Restructuring Transactions*
223(a)(7) Underwriting Standards Comparison Between Normal Housing Processing and OMHAR Debt Restructuring Transactions* HUD Multifamily Hub or Program Center OMHAR To refinance existing loan to reduce interest rate To refinance existing loan, re-underwrite at market Purpose of program and/or extend amortization period in order to rents/expenses/interest rates and restructure debt in reduce risk of default. order to prevent default upon reduction of rents. 2530 Required for new or proposed principal partners. Required for all restructurings. Debt Service 1.11 Generally 1.2 to 1.4 to determine supportable debt. Coverage Ratio Loan-to-Value Ratio LTV not relevant. Less than or equal to 100% LTV. Lesser of original principal balance, or current Lesser of current UPB, or DS coverage or LTV Loan Ceiling UPB plus rehab and transaction costs, or DS criterion. coverage criterion. Loan Term Remaining term + 12 years. Remaining term + 12 years. 100% financeable, to the extent it can be Owner/borrower responsible for 50% of transaction Transaction Costs supported in mortgage. Refund half of fees costs for new takeout. Appraisal Standards Not required for A7. PAE obtains limited-scope appraisal for restructuring. Inspection Owner is required to submit their work write-up and Standards/ Owner/mortgagee is required to submit work estimates for 20-year reserve for Replacement write-up and estimates for 12-year reserve for replacements/repairs. PAE obtains independent Reserve replacement. HUD Field Office reviews. inspection (PCA), OMHAR reviews. OCAF applied Requirement annually to required deposit. PAE prepares draft environmental review for all Environmental HUD Field Office performs environmental review projects undergoing restructuring. -
When It Comes to Restructuring Corporate Debt, Care Needs to Be
Legal and Regulatory | Debt restructuring When it comes to restructuring corporate debt, care needs to be taken that trade is prioritised and the “each lender for itself” approach is suppressed for a better collective outcome, says Geoff Wynne n a market of low commodity prices and global trade growing at marginally less than world GDP, it is no surprise that some trade finance facilities are looking distinctly fragile. This article takes Ia closer look at restructurings involving trade finance obligations and, importantly, sets out the advantages of giving “true” trade debt priority. Historic context The argument started way back in the 1980s, particularly with the Latin American debt crises, where short term debts were paid – country restructurings paid short term debts because they matured quickly and should be outside long term restructurings. There was an assumption that because it was short term, it was trade debt, but this was www.tfreview.com 69 P69_TFR_Vol19_Iss10_Geoff Wynne.indd 69 06-Sep-16 2:39:02 PM Legal and Regulatory | Debt restructuring “The first question not always the case. would be paid because it was required for business There is certainly no evidence that any legal continuity. is, where does the system actually grants trade debt priority. But as Here is another clue that there could be better many know, the argument resurfaced in 2008–09 treatment for these trade receivables. A payer will creditor rank if its after the financial crisis, particularly when looking argue that they will pay their trade receivables loan or receivable is at the bank restructurings in Kazakhstan.1 in an ongoing business because they want to Definitions were crafted for trade debt and its guarantee the source of supply. -
Recent Trends in Second Lien Loans
VEDDERPRICE ® Finance and Transactions Group Winter 2008–2009 Special Report “SECOND LIEN” LOANS Executive Summary. During the past few years, the financial markets have enabled borrowers to issue multiple layers of debt in sophisticated fi nancings, particularly in the case of highly leveraged companies. Thus, second lien fi nancing has not only become a recognized part of the capital structure of such fi nancings, but has experienced impressive expansion. The “market” terms that govern the second lien layer of debt evolved in light of increased involvement of nonbank investors (i.e., private equity sponsors, hedge funds, distressed debt funds, etc.). As the continued level of involvement of these nonbank investors remains uncertain and the credit markets tighten, the relationships between senior and junior secured lenders will change and certain provisions not typically found in recent intercreditor agreements may once again surface. This article discusses in detail the recent progression of second lien fi nancing structures and certain relevant intercreditor provisions (including payment subordination, enforcement actions, amendment rights and rights in bankruptcy) that may face increased scrutiny by fi rst lien and second lien lenders alike. WWW.VEDDERPRICE.COM VEDDERPRICE RECENT TRENDS IN SECOND LIEN LOANS Over the past several years, lenders have offered quarterly reviews, between 2003 and 2005, borrowers many alternative fi nancing vehicles as second lien loan volume spiked from $3.1 billion to options for fi nancing their acquisitions, corporate $16.3 billion. By 2006, LCD that reported the restructurings or operations. The creative and volume increased to $28.3 billion; in 2007, the complex fi nancing structures that resulted gave volume grew to nearly $30 billion, with more than rise to many different classes and types of lien 90% of the loans funded during the fi rst three priorities. -
Structuring and Restructuring Sovereign Debt: the Role of a Bankruptcy Regime∗
Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime∗ Patrick Bolton Columbia University∗∗ Olivier Jeanne IMF§ This version, November 2007 ∗This paper has benefited from the comments of Anil Kashyap (the editor) and three anonymous referees. The views expressed in this paper are those of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its man- agement. Also affiliated with the National Bureau of Economic Research (Cambridge), the Center∗∗ for Economic Policy Research (London) and the European Corporate Governance Institute (Brussels). Contact address: Columbia Business School, 3022 Broadway, Uris Hall 804, New York, NY 10027; phone: (212) 854 9245; fax:(212) 662 8474 ; email: [email protected]. § Also affiliated with the Center for Economic Policy Research (London). Contact address: IMF, 700 19th street NW, Washington DC 20431; phone: (202) 623 4272; email: [email protected]. 1 abstract In an environment characterized by weak contractual enforcement, sov- ereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure ex post. We show however, that competition for repayment between lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium. This inefficiency may be alleviated by a suitably designed bankruptcy regime that facilitates debt restructuring. 2 1 Introduction The composition of sovereign debt and how it affects debt restructuring ne- gotiations in the event of financial distress has become a central policy issue in recent years. There are two major reasons why the spotlight has been turned on this question. First, the change in the IMF’s policy orientation towards sovereign debt crises, with a proposed greater weight on ‘private sector involvement’ (Rey Report, G-10, 1996), has brought up the question of how easy it actually is to get ‘the private sector involved’; that is, how easy it is to get private debt-holders to agree to a debt restructuring. -
A Primer on Second Lien Term Loan Financings by Neil Cummings and Kirk A
A Primer on Second Lien Term Loan Financings By Neil Cummings and Kirk A. Davenport ne of the more noticeable developments in can protect their interests in the collateral by requiring the debt markets in the last year has been second lien lenders to agree to a “silent second” lien. Othe exponential increase in the number of Second lien lenders can often be persuaded to second lien fi nancings in the senior bank loan mar- agree to this arrangement because a silent second ket. Standard & Poor’s/Leveraged Commentary & lien is better than no lien at all. In addition, under Data Team reports that second lien fi nancings raised the intercreditor agreement, in most deals, the more than $7.8 billion in the fi rst seven months of second lien lenders expressly reserve all of the 2004 alone, compared with about $3.2 billion for all rights of an unsecured creditor, subject to some of 2003. important exceptions. In this article, we discuss second lien term loans All of this sounds very simple, and fi rst and second marketed for sale in the institutional loan market, lien investors may be tempted to ask why it takes with a goal of providing both an overview of the pages of heavily negotiated intercreditor terms to product and an understanding of some of the key document a silent second lien. The answer is that business and legal issues that are often at issue. a “silent second” lien can span a range from com- In a second lien loan transaction, the second lien pletely silent to fairly quiet, and where the volume lenders hold a second priority security interest on the control is ultimately set varies from deal to deal, assets of the borrower. -
The Subprime Mortgage Crisis: Underwriting Standards, Loan Modifications and Securitization∗
The Subprime Mortgage Crisis: Underwriting Standards, Loan Modifications and Securitization∗ Laurence Wilse-Samsony February 2010 Abstract This is a survey of some literature on things that have been going on in housing mainly. Because it’s interesting. I highlight some aspects of the bubble, then some causes of the crash. I add some notes on the mortgage finance industry, and a little bit about the role of securitization in the crisis, and in posing hurdles for resolving the crisis. Those familiar with this area will be familiar with what I write about. Those not might find better surveys elsewhere. So you’ve been warned. Keywords: housing; securitization; subprime. ∗Notes on institutional detail written for personal edification. Thanks to Patrick Bolton for helpful and kind comments. [email protected] 2 1. Introduction This paper is a survey of some of the literature on the subprime mortgage crisis. I focus on two aspects of the debate around securitization. First, I consider securitization as a possible mechanism for a decline in underwriting standards. Second, I review some evidence about its role in inhibiting the restructuring of loans through modification. These aspects are related, since creating a more rigid debt structure can facilitate bet- ter risk management and permit the greater extension of credit. However, it can also result in inefficiencies, through externalities on non-contracting parties. This might justify intervention ex post (Bolton and Rosenthal, 2002 [7]). I then consider some of the recent government modification programs and their problems. A concluding sec- tion tentatively suggests topics for research. We begin by outlining the shape of the non-prime mortgage market by way of back- ground, tracing its rapid expansion from the mid-1990s, but in particular its rapid de- velopment since the turn of the century.