Distressed Download - October 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.

European Restructuring Developments

Orrick Launches Report on Restructuring European High Yield Bonds
By Stephen Phillips, Scott Morrison and Jack Mead

Over the past few years the European high yield bond market has been on a roll. Issuance has increased, yields have come down and the default rate has been close to zero. Institutional demand for European high yield bonds has been exceptional. Yet a near zero default rate is an historic anomaly which cannot go on forever. What happens when liquidity dries up and issuers default? How should issuers protect themselves and manage creditors threatening to enforce security? What are the key issues for stakeholders to implement a high yield restructuring? How can conflicts of law be managed where the bond is New York law governed, the intercreditor agreement is English law and the guarantors and assets are spread throughout Europe? Drawing on our European and US restructuring experience we address these issues in our report on Restructuring European High Yield Bonds.

If you would like to receive a printed copy of this report, please let us know.

Investing in Southern Europe
By Orrick Restructuring Group and Stephen Phillips

Leaving aside the drama of the Greek crisis, Southern Europe is in recovery from a long recession.  Our recent panel of experts discussed investment opportunities in Italy, Spain and  Portugal.

Topics covered include the nature of the opportunities they are working on and the commercial environment facing investors who are looking to undertake  new money debt,  equity and distressed debt investments in the region. The audience was updated on the significant recent developments in the  insolvency laws in Spain and Italy which are designed to facilitate corporate restructuring. We also addressed some of the English law restructuring procedures which investors have used where local law measures have not proved suitable.

The live video presentation from this event is available here, and the presentation materials from this seminar are also available at this link.

Recent EU Insolvency Regulation
By Stephen Phillips, Michael Crosby, Scott Morrison and Tom Wild

The EC Regulations on Insolvency Proceedings (the "EIR") came into force throughout the European Union (the "EU") (except Denmark) on May 31, 2002 with the purpose of setting out the rules governing where in the EU insolvency proceedings should be opened, which law applies to the proceedings and to ensure that such proceedings are recognized across the EU. EIR provided that a company should file in the jurisdiction where its center of main interest or "COMI" is located and that there was a rebuttable presumption that this is the jurisdiction of incorporation. This led to a number of EU groups filing in the jurisdiction of the head office – for example the Rover Group had many offices around the EU but its insolvency process was run out of the UK. In addition groups frequently file where it is apparent that an insolvency procedure in a particular jurisdiction may have some advantages, for example the Eurotunnel group which has English and French companies which operate the tunnel filed in France to take advantage of a French insolvency procedure. It is often the case that European groups avail themselves of English scheme and administration procedures. In over 10 years of insolvency practice in the EU the benefits of this experience has led to a new Recast Regulation on Insolvency 2015/848 (the "Recast Regulation"), which was published by the European Parliament and Council on May 20, 2015. It came into force on June 26, 2015 and applies to relevant insolvency proceedings from June 26, 2017. This client alert addresses the key features of the Recast Regulation:

  1. a broadened scope, covering a range of commercial insolvency proceedings such as the Italian reorganization plan procedure which were not previously within the ambit of the regulation;
  2. a framework for group insolvency proceedings, which will allow for the coordination of insolvency procedures at an EU level;
  3. COMI – there is no mention of the controversial two year look-back period initially proposed by the European Parliament, but the presumption that COMI is in the place of the registered office will not apply if the registered office has shifted in the preceding three months;
  4. interconnected insolvency registers – national insolvency registers may be accessed on the European e-Justice Portal; and
  5. provisions which allow the officeholder in main proceedings to give an undertaking to foreign creditors to avoid secondary proceedings in other member states being opened.  Read More.

U.S. Case Updates and Analysis

Solus v. Perry: Case Update
By Raniero D'Aversa, Amy Pasacreta and Matthew Fechik

In May, we wrote about a number of recent cases addressing the enforceability of oral agreements in syndicated loan and bankruptcy claims trading. One of those cases, Solus v. Perry, is still active at the trial court level in New York. Last month, the court entered an order denying both parties' motions for summary judgment.

At issue in Solus v. Perry is whether the parties agreed to all of the material terms of a transaction in which Solus would purchase Perry's participation interests in claims against the bankruptcy estate of Ponzi schemester Bernie Madoff's investment firm. Although Solus and Perry never signed a written contract, Solus argues that the parties agreed to all of the material terms necessary to create a binding oral agreement under New York law (i.e., asset, quantity, and price) in recorded telephone conversations, emails, and Bloomberg messages.  Perry contends that no agreement was formed because certain other terms (which Perry characterizes as material) were left open, including how litigation risks and fees would be allocated and whether Perry would have to indemnify Solus for any potential damages resulting from Perry's bad acts.

In its decision and order, the court concluded that the evidence submitted failed to resolve all material factual issues in favor of either party.  Specifically, the following two issues must be determined before summary judgment can be entered—1) which terms were material to the trade, and 2) whether the parties agreed to all of those material terms.

A pretrial conference is scheduled for October 7, 2015. We will keep you posted.

New York Court Rules (Sort of) on Whether Electricity is a Good or a Service
By Lawrence Peitzman

It seems only fitting that recent decisions by the United States District Court for the Southern District of New York and its bankruptcy court regarding the nature of electricity should have sent, at least initially, a jolt through the energy community. Perhaps the Southern District court would lead the charge for one side or the other in an ongoing debate over whether electricity constitutes goods or services—a controversy that has potentially far-reaching implications (in bankruptcy cases, concerning the priority of claims of electricity providers, and, in ordinary transactions, for the tort liability of electricity providers). In the end, however, the outcome of the litigation was something less than electrifying. Here's what happened.  Read More.

What You Need to Know About the Uniform Voidable Transactions Act
By Lawrence Peitzman

Last year, the National Conference of Commissioners on Uniform State Laws ("NCCUSL") rolled out one of its latest projects, the Uniform Voidable Transactions Act ("UVTA").[I]  According to NCCUSL's website,[ii] the model statute has already been enacted in eight states, including California (where it takes effect on January 1, 2016), and has been introduced in four others, including Massachusetts.

The first thing to know about the UVTA is that it is the Uniform Fraudulent Transfer Act ("UFTA")[iii] with a new name and the legal equivalent of a fresh coat of paint. In a lengthy article about the drafting of the model statute[iv], the reporter for the NCCUSL drafting committee, Professor Kenneth C. Kettering, describes the model statute as "the UFTA, renamed and lightly amended."  As light as the amendments may be, however, Kettering notes that they are "significant enough to warrant attention"[v]—significant enough, at least, to justify his publishing a 57-page law review article on the subject. The extensive "Official Comments" that were promulgated by NCCUSL along with the model statute also provide some insight into the thinking of the drafters, but Professor Kettering's article is far more forthcoming about the reasoning behind the proposed statutory changes. Anyone who wants the full story should, therefore, consult Professor Kettering's article.   We will try here instead simply to describe the most significant provisions in the new or, at least, improved model statute.  Read More.

Decoding the Code: Bankruptcy Code Section 510(a) – Subordination Agreements in Bankruptcy
By Lawrence Peitzman

Once upon a time, under the Bankruptcy Act of 1898, subordination agreements entered into outside bankruptcy were generally enforced by bankruptcy courts, but the issue was left to the discretion of the courts to be determined on a case-by-case basis. Since 1979, when the current Bankruptcy Code came into effect, however, the treatment of subordination agreements in bankruptcy has been governed by statute: "A subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law." 11 U.S.C. § 510(a).

Since a bankruptcy court is supposed to enforce a subordination agreement that is enforceable under applicable nonbankruptcy law, section 510(a) closes the door on the exercise of case-by-case discretion by bankruptcy courts, but the statute nevertheless opens up a series of other issues that the courts have been grappling with for over 35 years now.  What constitutes a "subordination agreement"? Must a bankruptcy court enforce all the provisions of a "subordination agreement"?  What about rights of the parties that are not spelled out in the agreement (including rights that are derived from equitable principles) or that are dealt with in the agreement in ambiguous terms?  How are the answers to such questions affected by section 510(a)'s mandate that "subordination agreements" should be enforced in bankruptcy cases?  Read More

Recent Events

Europe & Asia-Pacific 2015: Distressed Debt & Alternative Investments Forum

On September 29, Orrick partner Stephen Phillips spoke at the Distressed Debt and Alternative Investments Forum, as the moderator for their panel on legal restucturing and distressed acquisitions. This panel discussed the pre-sale aspects of NPL portfolios, the credit bidding process, and current challenges and opportunities for market leaders, among other topics. Please click here for more information on this conference.

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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