Archive for the ‘Bankruptcy & Financial Distress’ Category

Court Holds That US Bankruptcy Code Does Not Permit Recovery of Extraterritorial Transfers

Editor’s Note: George T. Conway III is partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton firm memorandum authored by Mr. Conway, Douglas K. Mayer, and Emil A. Kleinhaus.

In a decision that could significantly limit the power of U.S. bankruptcy trustees to challenge cross-border transactions, the United States District Court for the Southern District of New York has held that the trustee overseeing the Madoff liquidation may not recover transfers made by Madoff’s foreign customers to other foreign entities. SIPC v. Bernard L. Madoff Investment Securities LLC, No. 12-mc-115 (S.D.N.Y. July 7, 2014). The court held that recovery of such “purely foreign” transfers would run afoul of the presumption against extraterritoriality reaffirmed by the Supreme Court in Morrison v. National Australia Bank.

…continue reading: Court Holds That US Bankruptcy Code Does Not Permit Recovery of Extraterritorial Transfers

Two New Cases Cast a Shadow Over Credit Bidding

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday July 13, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Marshall S. Huebner, partner and co-head of the Insolvency and Restructuring Group at Davis Polk & Wardwell LLP, and is based on an article by Damian S. Schaible and Darren S. Klein that first appeared the New York Law Journal; the full article, including footnotes, is available here.

Two recent bankruptcy court decisions have increased uncertainty over the right of secured creditors to credit bid in sales of debtors’ assets. Relying on and expanding a rarely used “for cause” limitation on a secured creditor’s right to credit bid under §363(k) of the Bankruptcy Code, these decisions may ultimately affect credit bidding rights in a broad swath of cases.

…continue reading: Two New Cases Cast a Shadow Over Credit Bidding

The Prevalence and Utility of “Roadmap” Decisions in Bankruptcy Mega-Cases

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday July 6, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Marshall S. Huebner, partner and co-head of the Insolvency and Restructuring Group at Davis Polk & Wardwell LLP, and is based on an article by Mr. Huebner and Elliot Moskowitz that first appeared in Financier Worldwide.

As the pace of Chapter 11 filings jumped in the aftermath of the 2008 financial crisis, bankruptcy courts found their resources increasingly stretched. The number of Chapter 11 “mega-cases”—that is, cases that involve $100m or more in assets, over 1000 entities and/or a high degree of public interest—placed significant strain on the nation’s bankruptcy courts. Many of these cases involve numerous creditors and, given the stakes, litigation that has the potential to drag on for years. Against this backdrop, bankruptcy judges have developed a variety of strategies to foster the efficient resolution of such cases. Mediation is becoming a regular feature of contentious mega-cases, and judges are frequently urging parties to resolve their disputes. Where a compromise is not possible and litigation is unavoidable, judges have increasingly issued “roadmap” decisions that deny relief but provide a specific list of steps that need to be taken or changes to be made that will yield judicial approval. These decisions encourage parties to recalibrate their positions based on the court’s views on the matter, engage in productive negotiations, and quickly come to an agreement on a proposal that the court has already indicated it will approve.

…continue reading: The Prevalence and Utility of “Roadmap” Decisions in Bankruptcy Mega-Cases

An Economist’s View of Market Evidence in Valuation and Bankruptcy Litigation

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday June 28, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Faten Sabry, Senior Vice President at NERA Economic Consulting, and is based on a NERA publication by Ms. Sabry and William P. Hrycay.

Courts often face many challenges when assessing the solvency of a company whether public or privately held. Examples of difficult valuation questions include: would a company with a market capitalization of several hundred million dollars possibly be insolvent? Or, would publicly-traded debt at or near par be conclusive evidence that the issuer is solvent at the time? Or, would a company’s inability to raise funds or maintain its investment grade rating at a given time be sufficient to rule on solvency?

It is common in valuation and solvency disputes to have qualified experts with very different opinions on the fair market value of a company, often using the same standard approaches of discounted cash flows and comparables. How would the courts or the arbitrators decide and what is the role of contemporaneous market evidence in such disputes? In this article, we discuss the role of market evidence and possible misinterpretations of such evidence and highlight recent court decisions in the United States.

…continue reading: An Economist’s View of Market Evidence in Valuation and Bankruptcy Litigation

Clearinghouses as Liquidity Partitioning

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday June 20, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Richard Squire, Professor of Law at Fordham University School of Law.

The Dodd-Frank Act established that certain swap contracts which previously were traded bilaterally (directly between buyers and sellers) must be traded through clearinghouses instead. Critics of this clearing mandate have mounted two main objections: a clearinghouse shifts risk instead of reducing it; and a clearinghouse could fail, requiring a bailout. In my article Clearinghouses as Liquidity Partitioning, recently published in the Cornell Law Review, I counter both objections by showing that clearinghouses engage in a socially valuable function that I term liquidity partitioning. Liquidity partitioning means that when one of its member firms becomes bankrupt, a clearinghouse keeps a portion of the firm’s most liquid assets, and a matching portion of its short‑term debt, out of the bankruptcy estate. The clearinghouse then applies the first toward immediate repayment of the second. Economic value is created because the surviving clearinghouse members are paid much more quickly than they would be in a bankruptcy proceeding. Meanwhile, the bankrupt member’s outside creditors are not paid any less quickly: they still are paid at the end of the bankruptcy proceeding, which the clearinghouse does nothing to prolong. These rapid cash payouts for clearinghouse members reduce illiquidity and uncertainty in the financial sector, the main causes of contagion in a crisis. And because the clearinghouse holds only liquid assets, it avoids the maturity mismatch between short‑term liabilities and long‑term assets that characterizes the balance sheets of many financial institutions. A clearinghouse therefore is much less likely than its members to fail during a crisis.

A clearinghouse achieves liquidity partitioning by engaging in netting. Thus, when a member fails, the clearinghouse uses short‑term debts owed to the member to immediately repay short‑term debts owed by the member. In this way, cash is intercepted on its way toward the bankruptcy estate and redirected toward other financial firms, who may be suffering their own liquidity shortages. The clearinghouse thereby shifts cash from lower-value to higher-value uses, decreasing liquidity pressure on the financial sector and thus the need during a crisis for a taxpayer-funded bailout.

…continue reading: Clearinghouses as Liquidity Partitioning

Corporate Distress and Lobbying: Evidence from the Stimulus Act

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday June 13, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Manuel Adelino of the Finance Area at Duke University, and Serdar Dinc of the Department of Finance and Economics at Rutgers University.

In our paper, Corporate Distress and Lobbying: Evidence from the Stimulus Act, forthcoming in the Journal of Financial Economics, we contribute to the long literature on corporate behavior in distress, as well as to studies of the consequences of financial distress. Using the financial crisis in 2008 as a negative shock to nonfinancial firms’ financial conditions, we document a novel fact on the relation between firms’ financial health and their lobbying activities. We compare the lobbying activities of firms before and after the onset of the crisis and find that firms with weak financial health—as measured by their CDS spread—lobby more. This result is robust to controlling for such firm-specific variables as size, profitability, and market-to-book ratio, all the firm characteristics that remain unchanged during the short window before and during the passage of the stimulus act, sector-wide time trends, and the adoption of different time windows for comparison in the difference-in-differences framework.

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What It Takes for the FDIC SPOE Resolution Proposal to Work

Editor’s Note: The following post comes to us from Karen Petrou, co-founder and managing partner of Federal Financial Analytics, Inc., and is based on a letter and a FedFin white paper submitted to the FDIC by Ms. Petrou; the full texts are available here.

In a comment letter and supporting paper to the FDIC on its single-point-of-entry (SPOE) resolution concept release, Karen Shaw Petrou, managing partner of Federal Financial Analytics, argues that SPOE is conceptually sound and statutorily robust. However, progress to date on orderly liquidation has been so cautious as to cloud the credibility of assertions that the largest U.S. financial institutions, especially the biggest banks, are no longer too big to fail (“TBTF”). Crafting a new resolution regime is of course a complex undertaking that benefits from as much consensus as possible. However, if definitive action is not quickly taken on a policy construct for single-point-of-entry resolutions resolving high-level questions about its practicality and functionality under stress, markets will revert to TBTF expectations that renew market distortions, place undue competitive pressure on small firms, and stoke systemic risk. Even more dangerous, the FDIC may not be ready when systemic risk strikes again.

Questions addressed in detail in the paper and Ms. Petrou’s answers to them are summarized below:

…continue reading: What It Takes for the FDIC SPOE Resolution Proposal to Work

“SPOE” Resolution Strategy for SIFIs under Dodd-Frank

Editor’s Note: H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell publication by Mr. Cohen, Rebecca J. Simmons, Mark J. Welshimer, and Stephen T. Milligan.

On December 10, 2013, the Federal Deposit Insurance Corporation (the “FDIC”) proposed for public comment a notice (the “Notice”) describing its “Single Point of Entry” (“SPOE”) strategy for resolving systemically important financial institutions (“SIFIs”) in default or in danger of default under the orderly liquidation authority granted by Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). [1] The Notice follows the FDIC’s endorsement of the SPOE model in its joint paper issued with the Bank of England last year.

…continue reading: “SPOE” Resolution Strategy for SIFIs under Dodd-Frank

A Theory of Debt Maturity

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday January 14, 2014 at 9:23 am
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Editor’s Note: The following post comes to us from Douglas Diamond, Professor of Finance at the
 University of Chicago Booth School of Business, and Zhiguo He of the
 Department of Finance at the University of Chicago Booth School of Business.

In our paper, A Theory of Debt Maturity: The Long and Short of Debt Overhang, forthcoming in the Journal of Finance, we study the effects of the debt maturity on current and future real investment decisions of an owner of equity (or a manager who is compensated by equity). Our analysis is based on debt overhang first analyzed by Myers (1977), who points out that outstanding debt may distort the firm’s investment incentives downward. A reduced incentive to undertake profitable investments when decision makers seek to maximize equity value is referred to as a problem of “debt overhang,” because part of the return from a current new investment goes to make existing debt more valuable.

Myers (1977) suggests a possible solution of short-term debt to the debt overhang problem. In part, this extends the idea that if all debt matures before the investment opportunity, then the firm without debt in place can make the investment decision as if an all-equity firm. Hence, following this logic, debt that matures soon—although after relevant investment decisions, as opposed to before—should have reduced overhang.

…continue reading: A Theory of Debt Maturity

European Bank Recovery and Resolution Directive

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 18, 2013 at 8:58 am
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Editor’s Note: The following post comes to us from Valia SG Babis at University of Cambridge.

The present article, Bank Recovery and Resolution Directive: Recovery Proceedings for Cross-Border Banking Groups, examines recovery proceedings for cross-border banking groups under European Union law. Recovery (or “early intervention”) includes measures intended to stabilize a bank (or banking group) and enable its recovery from financial stress. Recovery is targeted at a stage before resolution, when the bank (or group) in question has not breached the triggers for resolution, and therefore its economic recovery is still possible. The focus of this paper is primarily on three group recovery mechanisms under EU law: group recovery plans, intra-group financial assistance and coordination of early intervention measures regarding groups.

…continue reading: European Bank Recovery and Resolution Directive

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