Distressed Download - July 2015

The Distressed Download Newsletter is a roundup of recent news from Orrick's Distressed Download blog, a resource for the latest news and industry trends in the distressed debt and restructuring markets.

Top Story

First Circuit Rules Bankruptcy Code Preempts Puerto Rico's Recovery Act
By Lorraine McGowen and Douglas Mintz

On Monday, July 6, the Court of Appeals for the First Circuit affirmed the February 6, 2015 order and injunction of the Puerto Rico District Court and held that section 903(1) of the Bankruptcy Code preempts the Puerto Rico Debt Enforcement and Recovery Act (the "Recovery Act"). Franklin Cal. Tax Free Trust, et al. v. Commonwealth of Puerto Rico, et al., (1st Cir. July 6, 2015) (Case No. 15-1218): On February 10, 2015, we reported on the district court's decision holding that the Recovery Act was unconstitutional.

As a result of amendments to the Bankruptcy Code in 1984, Puerto Rico, unlike states, may not authorize its municipalities, including its public utilities like PREPA or PRASA, to seek federal bankruptcy relief under chapter 9 of the Bankruptcy Code. In considering the appeal of the district court's order, the Court first confirmed that it had jurisdiction to consider the bondholders' claims of preemption, that those claims were ripe and that they had become ripe immediately upon adoption of the Recovery Act. The Court then ruled that the Commonwealth's effort to allow its public corporations to restructure their debt by enacting the Recovery Act is expressly preempted by the federal Bankruptcy Code. Rejecting the Commonwealth's arguments that the 1984 amendments made the preemption provisions of section 903(1) of the Bankruptcy Code inapplicable, the Court stated that "§ 903(1) has applied to Puerto Rico since the predecessor of that section's enactment in 1946. The statute does not currently read, nor does anything about the 1984 amendment suggest, that Puerto Rico is outside the reach of § 903(1)'s prohibition. Op. at 4. Because the Court affirmed the district court's order and injunction, the Court declined to consider the Commonwealth's appeal of the district court's order denying motions to dismiss the bondholders' Contracts Clause and Takings Claims. Op. at 21.  Read More.

European Restructuring Developments

Bank Resolution in Greece
By Stephen Phillips, Scott Morrison, Michael Crosby, Raniero D'Aversa, Douglas Lahnborg, Nikiforos Mathews, David Syed and Simon Willis

The result of Sunday's referendum (July 5, 2015) which rejected the latest proposed bailout by the European authorities was unequivocal. The next steps in this crisis are far less clear, ranging from a swift renegotiation of the terms of the bailout together with an injection of liquidity into the Greek banking system in the most benign scenario to, at the other end of the spectrum, Greece exiting the Eurozone and attaining "pariah status" in the international capital markets.

In this client alert we focus on one aspect of the issues facing Greece – the liquidity crisis facing the Greek banks. We discuss bank resolution procedures available to the Greek authorities.  Read More.

Implications for the Imposition of Capital Controls in Greece
By Stephen Phillips, Michael Crosby, Raniero D'Aversa, Douglas Lahnborg, Nikiforos Mathews, David Syed and Simon Willis

Introduction

Following the recent event over the weekend (June 27 - 28, 2015), we set out below a short guide on the current status in Greece.

Background

Months of negotiations on a deal to restructure Greece's debts appear to have failed. Greek Prime Minister Alexis Tsipras has called a referendum for July 5, 2015 on the draft bailout proposals (the "Proposals") from the EU[1]. Mr Tsipras government will campaign against the Proposals which required a number of measures relating to VAT increases, budgetary restraints, pension reforms and privatisation measures. On Saturday, June 27, Eurozone finance ministers refused to extend the current EU bailout programme which expires on June 30, 2015. In response on Sunday, July 28, the Greek government announced the imposition of capital controls.  Read More.

The Restructuring Mid-Summer Review: Europe and the Emerging Markets
By Stephen Phillips, Daniela Andreatta, Saam Golshani, Colin Graham, Dmitry Gubarev, Maurice Hoo, Scott Morrison and Anthony S. Riley

For those focused on the debt restructuring market, the Greek sovereign crisis (covered extensively in our recent updates1) has drowned out news of other debt restructuring matters this year. Our Alert below addresses key trends in Europe and the Emerging Markets this year which may have gone unnoticed given the understandable emphasis on Greece. Opportunities for Distressed Debt Funds to buy attractively priced distressed corporate assets and work them out have been few and far between in recent terms. Prices of distressed assets have been high, and often par lenders have decided to extend and amend loans (rather than engage in loan sales to funds or effect fundamental work outs of problem loans). Risk has not been fairly reflected in the price of either primary or secondary market debt. The risk/reward dynamic has been skewed in favour of high risk and low yields; not an attractive combination. The main driver of the activities of Distressed Debt Funds is the default rate. In the 2015 Deutsche Bank Annual Default Survey, Deutsche Bank commented, 'We can't overstate how low defaults are…the 2010-2014 cohort [of High Yield Bonds] is the lowest 5 year period for HY defaults in modern history'. Hence, the low level of distressed debt activity. Poor European growth rates, the difficult backdrop of the Greek debt restructuring talks, and major geopolitical risk, have yielded surprisingly few loan defaults and insolvencies in recent times. In Europe, restructuring activity has tended to be concentrated more in Southern than Northern Europe.  Read more.

U.S. Case Updates and Analysis

Supreme Court Rules Against Fees For Fee Application Defense
By Douglas Mintz and Peter Amend

Issuing its third bankruptcy ruling in a month, the Supreme Court held, by a 6-3 margin, that the Bankruptcy Code does not permit awarding fees to debtor's counsel, when counsel incurred those fees defending its own fee application. The Court held that services defending fee applications were not rendered to the debtor's estate, and therefore the fees did not constitute "actual, necessary services" payable under section 330(a)(1) of the Bankruptcy Code as reasonable compensation. This decision could increase leverage on parties seeking to rein in bankruptcy litigation by threatening to challenge attorney's fees. Baker Botts L.L.P. et al. v. ASARCO LLC, No. 14-103, 2015 WL 2473336 (S. Ct. June 15, 2015) (hereinafter, the "Opinion").  Read More.

Additional Articles of Interest

Decoding the Code: Reclamation Under Section 546(c) of the Bankruptcy Code
By Debra Felder and Amy Pasacreta

This is the second post in our "Decoding the Code" Series. The Series intends to discuss various sections of the Bankruptcy Code in a clear and easy to understand manner. Today's post addresses enforcement of reclamation rights in a bankruptcy case.  Read More.

2015 Oil & Gas Outlook Follow-Up Report
By Orrick Restructuring Group

Orrick's Restructuring Practice Chair, Raniero D'Aversa, recently sat on The Deal Pipeline's expert panel, a 60 minute round table which addressed the present issues in the oil and gas industry and provided viewers with an insight into the key factors for their success in 2015.

Please click here here for this follow-up report.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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