In the first article of this two-part series on sell-side opportunistic engineering in the CDS market, we surveyed a number of strategies that could be used by sellers of CDS protection to create sell-side gains. In this second part, we analyze two recent situations where a proposed refinancing dramatically affected the CDS market for the reference entity because of the reduction in the sell-side risk. Although these cases may or may not have been driven by CDS considerations, they illustrate how sell-side CDS strategies may be effectively implemented.
The Bottom Line
Indentures and other agreements governing complex, multitiered structured debt products will typically contain a series of reserves, the adequacy of whose funding will take precedence over payments to noteholders. While the funding requirements of the reserve accounts will be set forth in the agreement, the formulation of these provisions will leave administrators considerable leeway in determining the cash maintenance levels appropriate for the various accounts. In a recent case, UMB National Association v. Airplanes Limited (S.D.N.Y.
The Bottom Line
On Jan. 17, the U.S. Court of Appeals for the Second Circuit vacated the decision of the District Court for the Southern District of New York in Marblegate Asset Management, LLC v.
Borrowers, agent banks, syndicate members and secondary market purchasers incur, syndicate, sell and buy bank debt on the assumption that bank debt is not a “security.” However, a June 30, 2016, opinion in the General Motors preference litigation1shows that such an assumption may no longer be valid, at least under the Bankruptcy Code.
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On August 9, 2006, Judge Burton R. Lifland of the United States Bankruptcy Court for the Southern District of New York entered a Final Order Establishing Procedures for Trading in Claims and Equity Securities of Dana Corporation (the “Dana NOL Trading Order”). The Dana NOL Trading Order is materially different from NOL trading orders that have been approved by other bankruptcy courts and, from the perspective of investors in claims and distressed securities, represents a material improvement.
Treatment of NOLs in Business Reorganizations