The Third Circuit recently affirmed that a debtor in Chapter 11 can use a tender offer to settle claims without running afoul of the Bankruptcy Code. Although In re Energy Future Holdings Corp.is limited to its particular facts and circumstances, the decision could lead to increased use of tender offers prior to confirmation of a bankruptcy plan.
Several recent cases in the United States District Court for the Southern District of New York have created ambiguity about when distressed exchange offers violate Section 316(b) of the 1939 Trust Indenture Act (the “TIA”). It appears that plaintiffs’ lawyers are using this ambiguity to challenge distressed exchange offers. The threat of litigation may give minority bondholders a powerful tool to hinder less than fully consensual out-of-court restructurings and provide them with increased leverage in negotiations.
In Essar Steel Algoma Inc. (Re), Justice David Brown of the Ontario Court of Appeal held that the ambit of orders “made under” the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”), and thus requiring leave to be appealed, is broad. Though concluding that the appellant in this case required leave to appeal, he nonetheless ordered the leave motion be expedited.
Virtually all public indentures contain provisions allowing the issuer to cure ambiguities and make other technical changes to the debt documentation without debtholder consent. When the purported ambiguities have substantive consequences, however, issuers may not be able to get away with an amendment that lacks debtholder approval. InGSO Coastline Credit Partners L.P. v. Global A&T Electronics Ltd. (NY App. Div. 1st Dept. May 3, 2016), a New York lower court bought into a “cure of ambiguity” argument and on that basis granted a motion to dismiss.
Market participants involved in distressed exchange offers have become accustomed to grappling with the implications of Trust Indenture Act Section 316(b) in the context of potential exit consents, i.e., are the contemplated amendments to the indenture governing the securities subject to the exchange significant enough to impair or affect the right of a holder to receive payment of principal and interest on or after the due dates of the relevant note?
In his decision in Global Royalties Limited v. Brook, Chief Justice Strathy of the Ontario Court of Appeal explained that the Bankruptcy and Insolvency Act (“BIA”) does not provide a bankrupt with a right to appeal an order lifting a stay of proceedings against him. Despite there being a multi-party bankruptcy, he rejected the submission that “the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings”.
A typical bond indenture provides that prior to the incurrence of an event of default, a trustee’s obligations are limited to those specifically set forth in the indenture. It is only following the occurrence of an event of default that the trustee’s duties of prudent conduct seem to ripen. This often leaves trustees and bondholders in a state of uncertainty over what actions, if any, a trustee may be obligated to take as the financial condition of an issuer worsens but has not yet crossed the default line. A recent case from the Eastern District of Pennsylvania, Becker v.
A recent case out of the Southern District of New York, Citibank, NA, London Branch v. Norske Skogindustrier ASA(S.D.N.Y. March 8, 2016), once again illustrates the difficulty of obtaining injunctive relief against prospective indenture violations of a financially troubled issuer.
The Facts
With the current interest being focused on Section 316(b) of the Trust Indenture Act, this may be a good time to examine the differing rights of noteholders under an indenture governed by the TIA and the rights of lenders under credit agreements governed by New York law.