Workouts

Question 1

Why would a firm want to avoid bankruptcy?

Answer 1

legal fees, management retention, employee retention, customer retention, supplier retention, distraction, asset substitution increases risk

Question 2

How can bonds be modified?

Answer 2

For provisions other than P/I/Maturity, they can be modified according to the terms of the indenture (prob 50%) per 316a
For P/I/Maturity individual consent per 316b

Question 3

What is the holdout problem?

Answer 3

If some bondholders agree to a workout to make the company more solvent, there is an incentive for some bondholders to refuse to consent so that they will be buoyed up by the increased solvency of the company and be paid in full

Question 4

What factors make exit consents less coercive

Answer 4

If there are majority block holders.

If the bonds had no covenants and were heavily subordinated to begin with

Question 5

Are exchange offers good or bad?

Answer 5

Depends on your valuation of the company and that’s why there is no easy solution to the 316b or exit consent issue. Kind of like equitable subordination

Question 6

What are some barriers to workouts (besides the holdout problem)

Answer 6

Disparate ideas of what the firm is worth and its prospects, debt holders don’t trust equity’s estimates of the firm’s potential, parties can’t agree on who to split the cost savings of bankruptcy, failures to respond

Question 7

What are some solutions to the holdout problem?

Answer 7

Prepackaged bankruptcy, buyout, exit consent

Question 8

Why are exchange offers contingent on a high rate of participation?

Answer 8

The exchanger and offeror don’t want to be screwed by a large number of holdouts and a large buoying up cost

Question 9

What makes prepackaged bankruptcies workable?

Answer 9

1126b allows consents to be obtained before a bankruptcy (could repurpose a failed exit consent into a vote for a prepack)

Question 10

Compare the Katz exit consent to the Assenagon exit consent to a 2 tier tender offer

Answer 10

Katz was to dodge a holdout problem under 316b
Assenagon had no 316b problem and reduced the principal itself to .01 per 1K
A 2 tier tender offer could be evaluated without the coercive effect. There’s only a need for 2 tiers if it couldn’t get a majority on the blended price alone

Question 11

Are Exit consents fair or not?

Answer 11

Depends on if the exchange is in the collective good of the bondholders (might not always be since the debtor is proposing the exchange). Compare to equitable subordination issue in Deep Rock

Question 12

Workout cases are very bankruptcy averse

Answer 12

Compare Katz, Marblegate, Chateaugay to LA Lumber

Question 13

Attempted arguments to invalidate (or preserve) exit consents (accumulated from Katz, Marblegate, and class)

Answer 13

1) This is coercive/breach of good faith/contract claim
2) the company is effectively voting treasury bonds
3) This is not coercive because there are a few large blockholders
4) PI causes greater irreparable injury than would otherwise be caused
5) 316b only protects the legal right to claim; not the practical right to collect

Question 14

What are 3 policy alternatives to 316b?

Answer 14

Allow majority votes but prevent insider or conflicted votes from counting
Allow fidelity’s plan that would leave the tender offer open (vote with your feet without coercion)
Go the admin route and force a judge to value the company and decide if the exchange is fair or not (like a freeze out under entire fairness or an appraisal remedy)

Question 15

Why is OID not allowed in a bankruptcy claim?

Answer 15

It’s basically unmatured interest

Question 16

What is the Chateaugay rule?

Answer 16

A face value exchange cannot create new OID

but a market value exchange can still reduce the value of a bankruptcy claim

Question 17

Why did the Chateaugay court create the weird non-textual rule for OID?

Answer 17

they thought losing part of a bankruptcy claim in a bond workout would discourage workouts and lead to more bankruptcies