Financial Crisis Series: Impact on Loans and Credit Markets

Practical Law Article 1-384-0310 (Approx. 15 pages)

Financial Crisis Series: Impact on Loans and Credit Markets

by PLC Corporate & Securities and PLC Finance

Financial Crisis Series

This Article is part of a series on the causes and impact of the financial crisis. The other practice notes in the series are:

Article, Financial Crisis: Series Overview.

Article, Financial Crisis Series: Causes and Effects.

Article, Financial Crisis Series: Impact on Capital Markets.

Article, Financial Crisis Series: Impact on Companies.

Article, Financial Crisis Series: Impact on M&A and Private Equity.

Article, Financial Crisis Series: Long-Term Implications.

What Impact has the Financial Crisis had on Credit Markets?

The freezing of credit markets has led to:

Decreased Liquidity. Investors have redeemed their investments and pulled their money out of banks, mutual funds and other financial institutions in significant amounts. Large sales of investments have had a negative effect on the value of those investments.
Decreased Lending. Despite an injection of over $240 billion in government aid, banks and other financial institutions are still preserving their cash to meet existing obligations and continue to be less willing to extend credit.
Higher Borrowing Costs. Despite historically low base rates, lending margins have increased exponentially in response to a fear of defaults.
Fewer Lenders. The financial industry was rocked with the failure and consolidation of several major financial institutions such as the bankruptcy of Lehman Brothers, the purchase of failed Bear Sterns by JPMorgan Chase and the acquisition of Wachovia by Wells Fargo. In addition, several major investment banks, including Goldman Sachs and Morgan Stanley, elected to become bank holding companies in order to have access to governmental assistance and shore up their financial position. As a result, there are fewer lenders and investment banks available as a source of financing.
Higher Default Rates. The depressed economy and lack of availability of financing as led to increased default rates for bank loans and other debt. These default rates are expected to continue to rise.

Impact of Credit Crisis on Different Kinds of Finance

The financial crisis has affected all sources of financing, from commercial paper to syndicated loans.

Commercial Paper

Companies sell commercial paper, which matures in nine months or less, to meet their short-term financing needs, such as rent and payroll. However, buyers of commercial paper (such as mutual funds, investment banks and other institutional investors) are facing their own liquidity issues and seeking to preserve cash. This makes them less willing to buy commercial paper with maturities exceeding 30 days. The bankruptcy of Lehman Commercial Paper, Inc., a significant purchaser of commercial paper, further tightened the market. As a result, companies are being forced to:

Refinance their commercial paper on a daily or weekly basis at increasingly higher rates.
Use longer term and more expensive financing (such as drawing down on letters of credit or revolving facilities) to repay commercial paper that has become due or to meet their short term financing needs.
Repay their commercial paper using their free cash.
Defer expenditures and cut costs (including reducing their work force) to free up cash.

Other Kinds of Finance

Even the most creditworthy companies are finding it difficult to obtain long term financing such as term loans, revolving loans and high-yield debt.

Where financing is available, companies are operating in a more hostile lending environment where lenders are tightening the terms and conditions on which they extend financing (see What impact has the financial crisis had on the terms of new debt commitment letters and loans? and What effect has the Financial Crisis had on the Pricing of Loans?).

Demand for financing from Chapter 11 debtors-in-possession is high, but DIP financing is especially scarce (see What Impact has the Financial Crisis Had on DIP Financing?).

Government Intervention

The US government has taken steps to end the financial crisis with limited results. Additional programs are likely to be forthcoming as the financial crisis continues. Specifically, the US Treasury Department, the Federal Reserve Bank of New York and the Federal Deposit Insurance Corporation have implemented several programs designed to expand banks' cash sources, provide some protection for banks against borrower defaults, provide a funding backstop for US issuers of commercial paper, facilitate the sale of money market instruments in the secondary market and provide credit relief to consumers and small businesses, including:

The Troubled Asset Relief Program (TARP).
The Capital Purchase Program.
The Temporary Liquidity Guarantee Program (TLGP).
The Commercial Paper Funding Facility.
The Money Market Investor Funding Facility (MMIFF).
The Term Asset-Backed Securities Loan Facility (TALF).

For a detailed discussion of each of these and other programs that have been implemented to ease the financial crisis, see Practice Note, Government Bailout Programs.

Practice Note, Government Bailout Programs

Article, New Liquidity and Capital Alternatives for Financial Institutions: Treasury's TARP Capital Purchase Program; FDIC's Temporary Liquidity Guarantee Program

Article, The FDIC Temporary Liquidity Guarantee Program: Opportunities to Enhance Liquidity and Funding

What Impact has the Financial Crisis had on Existing Credit Facilities?

The financial crisis has led to fears that lenders will not make good on their commitments to lend money under existing loan facilities. This, combined with borrowers' anticipated need for liquidity, has led many borrowers to draw down their revolving loans preemptively. Other borrowers have drawn on their revolving facilities as other sources of funds have dried up. These unexpected draws have reduced banks' available funds.

Lenders are more likely to insist on strict compliance with covenants and accuracy of representations in loan agreements, as failure to comply may give them the opportunity to renegotiate tighter loan terms or higher pricing or even terminate some loan facilities altogether. As a result, borrowers are hesitant to ask their lenders for any amendments or waivers of the terms of their loan facilities unless absolutely necessary. Those borrowers that are having difficulty meeting their covenants are finding that lenders are requiring such amendments.

On the other hand, amendments seeking covenant relief are on the rise. Due in part to the current discounted prices of loans in the secondary market, loan agreement amendments that result in a higher yield on publicly traded loans (from higher interest rate margins or amendment fees paid to lenders) may also result in taxable cancellation of indebtedness income (COD income) for an issuer. These COD income rules are not new, but will come into play more frequently now as more issuers seek loan agreement amendments for outstanding debt that is trading below par.

Lenders are focusing on "market disruption" and "eurodollar disaster" provisions in loan agreements as a means of finding alternate ways of establishing interest rates, as LIBOR screen rates in recent months did not always cover their cost of funds (see What Effect has the Financial Crisis had on the Pricing of Loans?). While loan interest periods are typically at least one month long, lenders are also considering lending over shorter interest periods, as there is less risk and greater liquidity with very short term loans.

Although not permitted historically, loan buy-back programs are also cropping up, under which borrowers purchase their own loans from individual lenders in a syndicate. Since loans are currently selling at a discount on the secondary market (as low as 65 to 70 cents on the dollar), a buy-back effectively enables the borrower to retire its loans at a discount rather than prepaying them at par (often plus a prepayment premium).

However, the loan agreement would almost invariably need to be amended to permit the borrower to make the buy-back. This means that the terms of the credit agreement must allow a 51% vote to permit the amendment. For many companies, amending the necessary language requires a 100% vote, which in practice is extremely difficult.

Amendments will also be needed to address practical issues a buy-back raises for lenders, such as exercise of voting rights and pro rata sharing of payments between all lenders.

In addition, the company must have sufficient cash to fund the buy-back without tripping loan covenants.

By mid-November 2008, more than 10 companies had attempted to buy back their loans at a discount. Only two (H Donnelley and Rent-a-Center) had succeeded, but three more (Entravision, Fresh Start Bakeries and Manor Care) had their plans accepted. Others had not been so fortunate: Booz Allen Hamilton's buy-back attempt failed despite having buy-back language embedded in its loan agreement when no investors took up the offer.

Some companies with strong cash positions are also looking to repurchase their listed stock and debt (see Article, Financial Crisis Series: Impact on Companies: Are any Companies Buying Back Their Own Stock or Debt? ).

Can Borrowers Invoke Yank-a-Bank Clauses to Replace Lenders?

If a lender fails to fund its portion of a loan, administrative agents and syndicate lenders are not required to make up the shortfall by increasing their loans to the borrower. Nor are borrowers permitted to set-off against payments due from lenders under the terms of the loan facility.

However, some loan agreements contain so-called yank-a-bank provisions, which may allow a borrower to demand that a lender that fails to fund its portion of a loan assign its commitments to another lender.

Yank-a-bank clauses became popular when finding a replacement lender was unproblematic: in the current environment, finding a replacement lender may prove difficult. Even those lenders looking to expand their loan commitments will generally prefer to issue loans with original issue discount (OID) which decreases the amount of cash the borrower receives, rather than fund at par.

What Terms Are Being Changed to Deal with Defaulting Lenders?

In addition to invoking the "yank-a-bank" provision to force a defaulting lender to assign its loan to another lender, borrowers have typically been able to deny defaulting lenders a vote in syndicate matters. But borrowers are often locked into ratable sharing provisions that prohibit denying payment of principal, interest and fees to defaulting lenders. Borrowers may seek further protection from defaulting lenders, as well as letter of credit and swingline loan fronting banks who rely on all lenders to take a risk participation in the letters of credit and swingline loans that they issue. Parties are considering amending existing loan agreements to add (or including in new loan agreements) terms such as:

Allowing borrowers to set-off amounts payable to a defaulting lender against the defaulting lender's unfunded commitments.
Permitting swingline and letter of credit fronting banks to set-off against amounts paid by the borrower for the account of a defaulting lender to satisfy the defaulting lender's obligations owed to the fronting bank.
Allocating repayments from the borrower in accordance with outstanding loans rather than loan commitments.
Providing that commitment and facility fees are not due on the unfunded commitments of defaulting lenders.
Permitting swingline loan and letter of credit fronting banks to reduce their obligations by the amount of the defaulting lender's unfunded commitments.
Requiring borrowers to make suitable arrangements with letter of credit and swingline fronting banks (such as posting cash collateral) to cover the pro rata share of a defaulting lender in letters of credit and swingline loans.
Expanding the definition of defaulting lender for purposes of triggering cash collateralization of a defaulting lender's share of swingline loans and letters of credit.
Adding provisions for early repayment of swingline loans and use of swingline loan and revolving loan proceeds to repay outstanding swingline loans.
Basing pro rata participations in swingline loans and letters of credit on commitments of non-defaulting lenders only.

Article, How to Cut Risk of Dealing with a Defaulting Lender

Article, The Credit Crisis and Emerging Trends in Loan Documents

What Impact has the Financial Crisis had on the Terms of New Debt Commitment Letters and New Loans?

The financial crisis has had a significant impact on the terms of new debt commitment letters and new loans. There have not been many new deals since July 2007, but it is clear from those deals that have taken place that the bargaining power has shifted to the lenders, who are no longer willing to make loans on the same easy terms that characterized the boom market. The principal changes are as follows:

Less Lending; Lower Leverage Multiples. Lenders are less willing to lend money and have decreased the amount of debt being offered as a multiple of the borrower's EBITDA.
Higher Pricing. It is more expensive to borrow money. Lenders have increased interest rates, begun basing interest rate margins on credit default swap (CDS) spreads (of the borrower or an index such as that reported by Markit Group Limited) which are typically higher than traditional margins, issued loans with OID, and introduced LIBOR floors that limit the extent that interest rates may decrease for borrowers. Fees to the arranging banks and commitment fees have also increased (see What Effect has the Financial Crisis had on the Pricing of Loans?).
Tighter Covenants. Covenant-lite loans are no longer being made. Financial covenant tests are once again being added as conditions to closing. More financial covenants are being added for the life of the deal to provide greater protections and more triggers for the lenders if the financial condition of the borrower deteriorates. Lenders are less willing to permit equity contributions to be made by sponsors and parent companies to cure financial covenant defaults.
Market MACs. Market MAC provisions (which protect against a material change in the market generally) are back, after having been negotiated out of most loan commitment letters over the past few years.
In early 2008, in a dispute between Solutia, Inc. and its lenders to provide exit financing for the Chapter 11 debtor, the lenders invoked the Market MAC clause saying that this relieved them of their obligation to provide the financing. The ensuing litigation highlighted the interplay between a Market MAC condition to funding and a "firm commitment" to lend. In the end, the dispute forced the debtor to renegotiate terms that were more favorable to the lenders, which facilitated the agent's ability to syndicate the loans.
Greater Flex. Lenders are requiring greater ability to change the pricing, structure and terms of the deal if they cannot syndicate the loan to other lenders. In part, this offsets the request of sponsors to put more detailed terms in the commitment letter and term sheet so there are fewer terms open for interpretation and negotiation in the loan documentation.
No More PIK Toggles or Incremental Loans. Lenders are no longer agreeing to permit borrowers to toggle between paying interest and deferring cash interest payments by capitalizing the interest. In addition, "accordion" features that pre-approved significant increases in the loan amount are no longer in favor with lenders.
No More "Sponsor Precedent". Lenders are no longer agreeing that the terms of the loan will be similar to prior sponsor deals.
Greater Equity Contributions. Lenders are requiring sponsors or other equity investors to contribute greater amounts of equity to the deal. The requirement is currently as much as 50% of capitalization of the borrower.
Longer Marketing Periods. Lenders are requiring longer time periods to syndicate the loans before funding.
Changes to "SunGard" Language. The "SunGard" language, which limits the lenders' conditions to lending so that they mirror the conditions in the acquisition agreement is still used in sponsor acquisition financings. However, the list of "specified representations" has expanded to include solvency and collateral. Also, greater perfection of collateral is required beyond filing of Uniform Commercial Code financing statements.

Practice Note, Sponsor/Lender Negotiating Issues in Acquisition Finance

Article, Happy Birthday, Mr Borrower

What Impact has the Financial Crisis had on DIP Financing?

The October 2008 financial crisis has had a severe impact on the DIP financing market in several ways including:

Interest rates. Interest rates on DIP loans have risen significantly since July 2007. According to figures from Reuters, interest rates have increased from 2.5% to between 5% and 7%. In addition, interest rate floors have become standard, operating to keep the base interest rate on DIP loans at 4% or 5%, even if base interest rates drop outside of bankruptcy.
Maturities. Loan maturities have reportedly decreased to six to 12 months from 18 months to two years.
Lenders. The number of lenders willing to provide DIP financing has decreased from a high of about 30 in 2006-2007 to about five or six currently. Hedge funds and private equity firms with spare capital that wish to acquire distressed companies may become bigger players in this area, although they have generally retreated from this market. New DIP lenders are hard to find, leaving the debtor's existing lender, which has the incentive to protect its existing loan, as the only lender willing to provide DIP financing (see Practice Note, DIP Financing: Overview: Special Advantages for Existing Lenders Providing DIP Financing).
Demand. Despite tight credit market conditions, demand for DIP financing has greatly increased since 2007 due to an increase in bankruptcy filings. By some estimates, demand so far in 2008 is $10-$12 billion, up from $2 billion in 2007. This has increased competition among debtors for the limited DIP financing available.
Dynamics. Lack of interested lenders and increased demand among debtors have given DIP lenders more leverage in negotiating the terms of the DIP loan, allowing them to demand higher interest rates, shorter terms and more restrictions (such as shorter deadlines to sell assets or to sell the entire company). In an emerging trend, lenders are insisting that the extra fees attached to DIP loans be kept secret, claiming this is commercially sensitive information.
Outcomes. The scarcity of DIP financing may result in increased liquidations rather than successful reorganizations.

Practice Note, DIP Financing: Overview

What Effect has the Financial Crisis had on the Pricing of Loans?

Interest rates and other fees charged by lenders for new loans have increased since July 2007, and the pricing of existing loans has also been affected by the financial crisis.

Existing Loans

As lenders restricted lending, LIBOR rates rose dramatically. Prior to Lehman Brothers' collapse, three-month LIBOR was at 2.816; on October 10, 2008 it peaked at 4.819. Since then LIBOR has fallen, but for some time the LIBOR screen rate was higher than the base rate.

While the situation has now stabilized, for a time this meant that borrowers were able to lower their costs by choosing interest rates based on the base rate plus margin rather than LIBOR, under the terms of their existing loan agreements. This meant that lenders were committed to making loans at a rate below LIBOR which, they argued, did not in any event accurately reflect their actual cost of funds.

As a result, in existing loan agreements, lenders have considered invoking the "market disruption" provision, which allows them to base the LIBOR rate on sources other than the LIBOR screen rate (for example, quotes from one or more reference banks).

In addition, lenders have considered invoking the "eurodollar disaster" provision, which typically allows the required lenders or the agent bank to negotiate an alternative interest rate with the borrower or convert to using the base rate, if the LIBOR screen rate does not reflect the lenders' actual cost of funds.

However, neither of these provisions apply to base rate loans. This meant that lenders with base rate loans had no option but to lend at base rate, even if it was below their actual cost of funds.

New Loans

In light of these developments, lenders have sought new pricing arrangements for new loan facilities or renewals, including:

Restricting the borrower's ability to choose the base rate, for example by tying the interest rate to the higher of LIBOR plus margin or base rate plus margin.
Increasing the margin so that the overall interest rate covers the cost of funds.
Redefining LIBOR and/or base rate to include the higher of two or more alternate options so that the rate covers the cost of funds.
Adding LIBOR floors, so that the LIBOR rate at which interest is calculated cannot go below a certain level, even if the LIBOR screen shows a lower figure.
Shortening the interest period to reduce the risk of being locked in to an inadequate long term interest rate.
Lowering the percentage of required lenders necessary to invoke "market disruption" or "eurodollar disaster" provisions.
Reverting to "reference bank" pricing, where interest is calculated based on actual LIBOR rates of one to three reference banks rather than the LIBOR screen rate.
Basing margins on the price of the borrower's CDSs or a CDS index. This would result in substantially higher margins, and subject borrowers to fluctuations in instruments that are not currently listed on any exchanges.

Article, The Credit Crisis and Emerging Trends in Loan Documents

What are the Legal Consequences if a Bank Fails?

The consequences depend on the type of bank:

Commercial banks are regulated by the Federal Deposit Insurance Corporation (FDIC) and are subject to the Federal Deposit Insurance Act (FDI Act), but not the Bankruptcy Code.
Most other financial institutions, such as uninsured domestic banks, bank holding companies and multilateral clearing organizations, are subject to the Bankruptcy Code.

The following table summarizes the principal issues that arise if a bank fails under either regime, from various perspectives.

Relationship to failed bank	Bankruptcy Code (non-commercial banks; other financial institutions)	FDIC (commercial banks)
*Depositors of failed bank*	Financial institutions eligible for Chapter 11 are typically not depository institutions. The Bankruptcy Code does not apply to commercial banks that take deposits.	Depositors are insured for up to $250,000 per account owner for funds in deposit accounts. Principal and accrued interest are paid up to this limit through the date of the failed bank's closing. Depositors have a claim against the failed bank's estate for amounts in excess of $250,000, paid periodically over several years as the bank's assets are sold, to the extent money is available. Stocks, bonds, mutual fund shares, life insurance policies, annuities and municipal securities are not covered. On January 1, 2010 the coverage limit will return to $100,000, except for certain retirement accounts.
*Borrowers of failed bank*	The borrower remains obligated to repay the loan (and fees) until the failed bank rejects, assumes or assigns the credit agreement. If the failed bank rejects the credit agreement, the borrower is still contractually obligated to the other members of the syndicate. The failed bank cannot demand immediate repayment of outstanding advances. The failed bank can breach the credit agreement and refuse to meet further funding requests. The borrower can file a proof of claim for damages, if any. The borrower may not exercise set-off rights against the failed bank, if any, unless it obtains relief from the automatic stay. Cashless rollovers of existing revolving loans are possible, but depend on the exact terms of the credit agreement and the prior conduct of the parties under that agreement. The borrower may rely on yank-a-bank provisions to replace the failed bank, although this usually requires the borrower to pay off the failed bank at par. Also, it may be difficult to find a replacement lender.	The borrower remains obligated to repay the loan (and fees) under the credit agreement. The FDIC will sell the loan. The borrower will be notified and given payment instructions. If the loan is delinquent, FDIC will set off the loan against the borrower's deposits (if any) before paying deposit insurance. If the loan is not delinquent, the borrower can elect to set off the loan against its uninsured deposits (if any) to minimize the amount of uninsured funds.
*Lender to failed bank*	Lenders to the failed bank do not have to continue funding during bankruptcy. As a result of the automatic stay, lenders to the failed bank cannot demand immediate repayment of outstanding advances.	Lenders to the failed bank do not have to continue funding during receivership. No court can issue an attachment or execution over the assets in possession of the FDIC and so in practice lenders to the failed bank cannot obtain immediate repayment of outstanding advances.
*Syndicate member of loan group which included failed bank*	Other lenders under a syndicated loan agreement remain obligated to lend their pro rata share of the loan under the credit agreement. Syndicate members are not responsible for the failure of the failed bank to fulfill its obligation. If the administrative agent funds the full borrowing request, its recourse is against the borrower, not the failed bank. The borrower must return the defaulted amount, with accrued interest, to the administrative agent. If the borrower fails to repay this amount, the administrative agent may exercise set-off rights against the borrower.	Other lenders under a syndicated loan agreement remain obligated to lend their pro rata share of the loan under the credit agreement. Syndicate members are not responsible for the failure of the failed bank to fulfill its obligation. If the administrative agent funds the full borrowing request, its recourse is against the borrower, not the failed bank. The borrower must return the defaulted amount, with accrued interest, to the administrative agent. If the borrower fails to repay this amount, the administrative agent may exercise set-off rights against the borrower.
*Loan participant who bought participation interest from failed bank as grantor*	If the participation agreement is a true sale (meaning, a sale of an interest in the underlying loan as opposed to a loan from the participant to the failed bank) and: a fiduciary relationship is created between the failed bank and the participant, then the participant will likely obtain relief from the bankruptcy court to elevate the loan to a direct assignment, or no fiduciary relationship is created, the participant may still argue that it is the beneficial owner of the failed bank's rights in the underlying loan based on the automatic perfection of security interests in payment intangibles under Article 9 of the UCC. In either case, the participant is entitled to all proceeds of the underlying loan from the failed bank's estate, whether received before or after bankruptcy. This right is subject to the risk that such proceeds are deposited in the failed bank's general accounts and commingled with its other funds. If so, the participant's security interest in the loan may not attach to such cash proceeds. If the participation agreement is a disguised loan, a debtor/creditor relationship is created between the participant and the failed bank. The participant would only have an unsecured claim against the failed bank's estate, unless the participant previously perfected a security interest in the underlying loan.	The FDIC can reject participation agreements, although its current policy is not to do so. As a matter of policy, the FDIC will not recharacterize a participation agreement as a disguised loan, if the failed bank received adequate consideration for the transfer and the evidence shows the parties' intent to treat the transaction as a true sale. If the participation agreement is a true sale, the participant is entitled to all proceeds of the underlying loan from the receivership, whether received before or after the failed bank went into receivership. If the participation agreement is a disguised loan, the participant has a secured claim against the receivership if it previously perfected a security interest in the underlying loan.
*Counterparties to swap agreements with the failed bank* Same principles apply to counterparties to the following agreements with the failed bank: Securities contracts. Commodities contracts. Repurchase agreements. Forward contracts. Master netting agreements.	The non-defaulting party's contractual rights to liquidate, terminate or accelerate a swap agreement cannot be stayed or avoided by the bankruptcy trustee. This right is immediate. The bankruptcy trustee cannot challenge prepetition transfers made in connection with swap agreements as fraudulent conveyances or preferences, unless made with actual intent to defraud. Non-defaulting party nets all gains and losses from other swaps entered into under the same Master Agreement and calculates a termination value (the close-out amount), to determine damages. Damages must be calculated based on "commercial reasonableness" and "good faith" under state law. Non-defaulting party can set-off losses from out-of-the-money swaps against its collateral, without obtaining relief from the automatic stay. It can also take possession of the collateral (up to the amount of its claim) in satisfaction of its claim. The damages calculated after the application of collateral and netting agreements are allowed or disallowed as a prepetition claim subject to allowance or disallowance as per the bankruptcy claims process. If the non-defaulting party posted collateral to the failed bank it must wait until the estate makes distributions to all creditors to recover its collateral and any other amounts owed by the failed bank on termination of the agreement (unless it obtains earlier relief from the court).	The non-defaulting party's contractual right to terminate and offset amounts under a swap agreement cannot be limited by the FDIC once the failed bank is in receivership. The non-defaulting party must wait until the next business day to terminate and calculate the close-out amount. If the non-defaulting party can rely on another event of default, such as the bankruptcy of a credit support provider, the one-day stay does not apply. The FDIC cannot challenge any transfers made in connection with swap agreements, unless made with actual intent to defraud. The FDIC can reject burdensome swap agreements. The failed bank’s obligation to perform under the contract is terminated. The FDIC must either terminate all of the swaps with that counterparty, or none. The FDIC will reject out-of-the-money swap agreements, for which it must calculate and pay close-out amounts. The FDIC will sell in-the-money swap agreements to other institutions. All swaps with the same counterparty must be transferred to one depository institution. The buyer is not permitted to terminate unless and until an event of default occurs by the swap counterparty.
*Other counterparties to contracts with the failed bank*	The Bankruptcy Code only allows the failed bank to assume or reject executory contracts. The failed bank must assume or reject the contract in its entirety.	The FDIC can reject any contract it finds burdensome. The FDIC can reject one part of a contract and assume the rest.
*Other creditors of failed bank*	Creditors are paid according to the distribution scheme specified in the Bankruptcy Code. Secured claims are satisfied by the collateral securing the claims. Unsecured claims are generally satisfied out of unencumbered assets. Certain unsecured claims (such as superpriority claims and administrative claims) usually receive full payment in Chapter 11.	Secured claims are satisfied by the collateral securing the claims. Unsecured claims are paid in the following order: administrative expenses, insured depositors, uninsured depositors, all other general creditors, and stockholders. Unsecured non-deposit creditors usually receive little or no recovery on their claims. They generally cannot set-off their claims against the failed bank.

FDIC: Banking & Your Money

FDIC: Industry Analysis

FDIC: Failed Banks (To access information on how accounts and loans of particular banks are affected when a bank fails and the FDIC is appointed as receiver, follow the link to the list of Failed Banks, select a bank from the list and then click on "Part IV: Question and Answer Guide".)

Article, Financial Institutions Derivatives Alert: Bankruptcy of a Dealer - An Overview of Derivatives Issues

Article, How to Cut Risk of Dealing with a Defaulting Lender

Financial Crisis Series: Impact on Loans and Credit Markets | Practical Law