Leading Law Firms Publish White Paper Regarding the Complications of Debt Restructuring and the Court's Departure from Established Opinion Practice under Section 316(b) of the Trust Indenture Act | Practical Law

Leading Law Firms Publish White Paper Regarding the Complications of Debt Restructuring and the Court's Departure from Established Opinion Practice under Section 316(b) of the Trust Indenture Act | Practical Law

Leading US law firms published a white paper that addresses the US District Court for the Southern District of New York's broad interpretation of Section 316(b) of the Trust Indenture Act of 1939 (TIA) to protect a bondholder's right to payment.

Leading Law Firms Publish White Paper Regarding the Complications of Debt Restructuring and the Court's Departure from Established Opinion Practice under Section 316(b) of the Trust Indenture Act

by Practical Law Bankruptcy & Restructuring
Published on 09 May 2016 • USA (National/Federal)
Leading US law firms published a white paper that addresses the US District Court for the Southern District of New York's broad interpretation of Section 316(b) of the Trust Indenture Act of 1939 (TIA) to protect a bondholder's right to payment.
On April 25, 2016, 28 leading US law firms published a white paper (available here) that addresses the interpretation of Section 316(b) of the Trust Indenture Act of 1939 (TIA) (15 U.S.C. § 77ppp(b)) by the US District Court for the Southern District of New York (SDNY), in its decisions in Marblegate Asset Management v. Education Management Corp., (S.D.N.Y. Dec. 30, 2014); Marblegate Asset Management v. Education Management Corp., (S.D.N.Y. Jun. 23, 2015); Meehancombs Global Credit Opportunity Funds, LP v. Caesars Entertainment Corp., (S.D.N.Y. Jan. 15, 2015); and BOKF, N.A. v. Caesars Entertainment Corp., (S.D.N.Y. Aug. 27, 2015).
The SDNY's decisions, currently on appeal to the US Court of Appeals for the Second Circuit, issued interpretations of Section 316(b) that protect a bondholder against unqualified modifications of an indenture that may not constitute a debt restructuring in the terms of the indenture language, but may limit the issuer from being able to make all future payments on the principal and interest.

General Principles

Under the decisions, section 316(b) comes into play when there is either:
  • An amendment that affects the core terms of the indenture.
  • A debt restructuring agreement between the issuer and some or all of its creditors that impairs the issuer's ability to make future principal and interest payments to non-consenting noteholders.
If the amendments affect only non-core terms of the indenture outside of a debt restructuring action or if in the context of a debt restructuring and the issuer's ability to pay non-consenting noteholders when due, then a law firm may issue an unqualified opinion to the trustee.
The White Paper cautions that whether or not a transaction is a debt restructuring is fact sensitive and may be difficult to determine. Similarly, whether or not an issuer is able to make future payments to non-consenting noteholders is fact sensitive and will depend on the issuer's situation.

Opinion White Paper

Given these general principles, the White Paper discusses where unqualified modifications of an indenture should still be permitted. These include amendments to:
  • Indentures that release guarantees or collateral when allowed with less than a unanimous vote of noteholders.
  • Waivers of a change of control offer or definition of change of control when allowed with less than a unanimous vote of noteholders.
  • Non-core terms, such as an exit consent for a customary covenant strip or terms that refinance outstanding notes that are implemented with a cash tender offer or exchange offer.
  • Non-core terms of a leveraged buyout, even if it increases debtors' indebtedness or changes indebtedness seniority of the notes.
  • Coordinate an internal reorganization involving asset transfers of an issuer and its subsidiaries.
Also, customary closing opinions provided to a financing source, a dealer manager of an exchange offer, or a trustee of newly issued notes are still appropriate notwithstanding the SDNY decisions. These include:
  • Routine opinions that address the enforceability of a qualified indenture under TIA in accordance with its terms.
  • Routine no-conflict opinions that address new financing transactions that do not violate existing indentures, or a new indenture that does not violate another financing agreement.
The authors note, however, that opinion givers may determine an unqualified opinion is inappropriate in circumstances of no-conflict and enforceability opinions, if the opinion givers both:
  • Have reason to believe the related transactions constitute a debt restructuring.
  • Have not received satisfactory evidence that the issuer will likely make all future payments of principal and interest to non-consenting noteholders.