Debt for Equity Exchanges Outside Bankruptcy

The recession has highlighted a new risk for borrowers – the risk that a lender will be insolvent and default on its obligation to fund loans under the credit agreement. This has created unexpected issues under credit agreements, which were written at a time when lender insolvency was not a perceived risk.”34

The recent case of Mervyn’s LLC v Lubert-Adler Group IV, LLC, et al. (In re Mervyn’s Holdings, LLC),1 serves as a warning to sellers and equity firms participating in leveraged buyouts to be wary of the effect such buyouts will have on creditors of the target company.

On March 22, 2010, the Third Circuit released its long-awaited ruling in the Philadelphia Newspapers case regarding the applicability of credit bidding.

A new wrinkle in the Lehman Brothers bankruptcy cases emerged recently when a U.S. bankruptcy judge issued an opinion directly at odds with the decisions previously rendered by certain English courts regarding priority of payment provisions (the “Priority Provisions”) with respect to collateral under the “Dante Program.”

The Dante Program

The Ontario Court of Appeal released its decision in Hydro One Inc. v. Ontario (Financial Services Commission) on January 11, 2010. This was an appeal from the Ontario Divisional Court – see our Labour & Employment in the News dated April 18, 2008, that reported on the Divisional Court’s decision. The court dismissed the appeal, in favour of members of the Hydro One Pension Plan (the “Plan”).

As we count down the days until the New Year, we are reminded of the momentous year we will leave behind us on December 31. While memorable for many things, 2009 may long be remembered as a year of record corporate insolvency. In 2009, General Motors, CIT, Chrysler, and Thornburg Mortgage filed four of the ten largest corporate bankruptcies in U.S. history. Equally notable are the number of corporate filings made in 2009.

Many companies secured their financing several years ago when the credit market featured advantageous pricing and loose loan covenants. Because these favorable terms would be impossible for borrowers to obtain in today’s lending environment, many viable companies with highly leveraged capital structures are looking for strategies to remove debt and, at the same time, to preserve, or “reinstate,” the favorable financing deals they secured before the markets crashed.

On October 13, 2009, a Florida bankruptcy judge in the TOUSA, Inc.

Almost all large (and many small) companies in today’s economy use derivatives in one way or another to hedge against future risk.