Distressed Assets & Alternative Investments

Lender Fees At Risk?

A New York state court has voided a $1.3 million loan agreement to a corporate borrower because the loan agreement’s stated interest rate of 34% violated New York’s criminal usury law statute.

The loan agreement was governed by Virginia law, which doesn’t allow corporate borrowers to plead a usury defense. However, because this borrower was based and licensed in New York, the court found a sufficient nexus to New York to allow the state’s public interest against usurious contracts to void the agreement’s choice of law provision and enforce New York’s criminal usury law.

Specifically, the New York statute prohibits interest rates over 25% on loans between $250,000 and $2.5 million and permits voiding of such contracts. The court noted that under New York law, all consideration paid for a loan (including fees) count toward the 25% usury threshold.

This decision is relevant for smaller DIP loans governed by New York law or loans made to borrowers that have a connection to New York. If the interest and fees exceed this threshold, the contract would be void (i.e. if the money was already lent, the lenders would not their money back or the interest and fees).

Loan Trading 101: How to Ensure You Get It Right with Transfer Restrictions

If you know anything about syndicated loan trading, you probably know the basics of transfer restrictions.

New term lenders typically need the consents of the administrative agent and the borrower in order to be admitted to the syndicate. New revolving lenders usually need those consents, plus the consents of any banks that issue letters of credit or swingline loans. In many syndicated loan deals, that’s the entire universe of transfer restrictions.

But that isn’t always the case. Transfer restrictions vary from deal to deal. They may stay the same over the life of the loan or change over time. Debt exchanges, rights offerings, and other restructuring events can introduce new sources of transfer restrictions outside of the credit agreement.

Overlooked or misunderstood transfer restrictions can result in settlement delays, unexpected costs, and potentially litigation. That’s why it’s critical to do your diligence before you trade. In order to perform this task efficiently, you need to know where to look for transfer restrictions.

Where to Find Transfer Restrictions

The Credit Agreement

Most syndicated loan transfer restrictions can be found in the credit agreement, but there are several places within the agreement where transfer restrictions are most likely to be found. The most important of these is the successors and assigns provision. Consent requirements, minimum transfer amounts, and any notice requirements are usually set forth at or near the beginning of the section. In many credit agreements, those provisions will be the only restrictions on transfer. But there are many exceptions. For example, the successors and assigns provision often imposes limitations on assignments to the borrower, the sponsor (if there is one), and their respective affiliates. The credit agreement may prohibit assignments to such entities altogether, or it may require the parties to follow a special process or use a separate form of assignment and assumption to complete the transfer. Some credit agreements grant a right of first refusal to certain lenders. These provisions can be particularly troublesome because the LSTA standard terms do not address what happens to a trade if a third party exercises its right of first refusal. If the loans are convertible into equity, the successors and assigns section may set out additional requirements based on applicable securities laws. Pre-trade due diligence should always include a thorough review of the successors and assigns section.

The credit agreement’s definitions section may also contain transfer restrictions. Most notably, credit agreements often limit transfers to potential assignees that meet the definition of an “Eligible Assignee.” The definition may simply state that an “Eligible Assignee” is an assignee that satisfies the requirements set forth in the successors and assigns section. But in some cases, the “Eligible Assignee” definition will impose additional restrictions of its own. For example, the definition may require that the assignee be a commercial bank or a financial institution with assets in excess of a certain threshold. Eligible Assignee definitions also sometimes set forth the consent requirements for new lenders or describe the level of discretion the borrower or the administrative administrative agent may have in deciding whether to admit new lenders. Similarly, the definition of “Disqualified Lender” may exclude certain named entities or types of entities from becoming lenders. As Eligible Assignee and Disqualified Lender definitions often set forth restrictions that apply to certain entities and their “Affiliates”, the definition of “Affiliate” (or the lack of such a definition) may complicate things further. To the extent the definitions section contains transfer restrictions, it’s important to harmonize those restrictions with the ones set forth in the successors and assigns section and to resolve any ambiguities before trading.

Transfer restrictions may also appear elsewhere within the credit agreement. For instance, some credit agreements require borrowers to comply with a Dutch auction process when repurchasing loans. These requirements may be set forth in the definitions or in the successors and assigns sections, but they may also appear in other parts of the credit agreement or in the exhibits. In rare cases, ancillary credit documents like security agreements or intercreditor agreements may impose additional transfer restrictions beyond what is set out in the credit agreement.

Other Agreements

Restructuring support agreements (“RSAs”) are an increasingly common source of transfer restrictions outside of the credit agreement. RSAs are agreements under which a subset of lenders agrees to support a proposed plan of restructuring, often in conjunction with the borrower, sponsor, and other groups of creditors. To prevent dilution of the debt controlled by RSA parties, lenders who sign on to RSAs are usually prohibited from transferring loans unless the assignee is or becomes a party to the RSA. One common exception is that a “qualified marketmaker” (i.e., a broker-dealer or similar entity that is acting as a marketmaker) that is not a party to the RSA may buy and sell loans that are subject to the RSA, provided that the qualified marketmaker transfers the loans to an assignee that is or becomes an RSA party. In either case, one or both of the parties to a trade of RSA paper is usually required to notify the borrower, the sponsor, the other RSA parties, or some combination thereof within a fixed period of time before or after the transfer. Although the LSTA published model RSA transfer provisions several years ago, the market has not adopted them, and transfer restrictions and notice requirements vary from one RSA to another.

Occasionally, loans are required to be traded in tandem with equity or other types of interests. These types of arrangements are most common in the post-restructuring context. If the loans are stapled to common stock, the parties to a trade will need to comply with any restrictions on transfer imposed by the issuer’s articles of incorporation, bylaws, and shareholders’ agreement (if any). If warrants are stapled, the parties will also need to consider restrictions imposed by the warrant agreement. Bonds or litigation trust interests may also be stapled to loans and their governing documents may impose further restrictions.

Why Transfer Restrictions Are So Important

Failing to identify the applicable transfer restrictions before entering into a trade can have serious consequences. Settlement delays are the most likely result. And while settlement delays are common in the loan market, the risks they create should not be overlooked. The longer a trade remains unsettled, the longer each party to a trade is exposed to the other party’s credit risk. For the seller, settlement delays also mean additional exposure to the credit risk imposed by the borrower. Price fluctuations can change the parties’ economic incentives, making disputes and litigation more likely. When a trade is entered, the parties’ economic incentives are aligned in that they have chosen to enter into the transaction at the agreed upon price. If the market price changes significantly before the trade settles, the party that stands to realize a loss will have a greater incentive to find a way out of the transaction.

In some circumstances, missing a transfer restriction can give third parties the right to unwind a transfer. Most credit agreements do not include provisions that make a transfer done in violation of the credit agreement void or voidable. While a lender or credit party that is damaged by such a transfer may have a claim for breach of contract, the transfer itself would stand.

However, RSAs and certain other agreements among lenders routinely include language that makes a transfer void if it does not comply with all applicable transfer restrictions. The right to unwind such a transfer is often bestowed upon every party to the agreement, thereby creating a large pool of potential challengers to the effectiveness of a transfer. A transfer that is retroactively voided could create significant liability for the original seller and buyer because the unraveling could negate the buyer’s and/or its downstream purchasers’ rights to participate in a rights offering, vote on a plan of reorganization, or receive distributions. As the transfer restrictions contained in RSAs vary from agreement to agreement and often contain multiple notice requirements, the parties to a trade should take special care to understand and observe the applicable restrictions and procedures.


  • Perform your due diligence before you trade. The secondary loan market functions on the principle that a “trade is a trade.” In other words, if two parties agree to the material terms of a loan trade, then they have made a legally binding commitment to one another to settle the trade on the agreed terms, regardless of whether there is a signed agreement and regardless of what happens after the trade is entered. Discovering after the fact that the loans cannot easily be transferred is unlikely to excuse either party’s obligation to settle the trade under an LSTA trade confirmation. Traders need to know upfront which restrictions apply so they can make informed decisions about whether to enter into a trade and which terms should apply if they do trade.
  • Consider the drafting implications. If your pre-trade diligence identifies transfer restrictions that are not adequately addressed by the LSTA standard terms, those restrictions should be taken into account upfront when the parties agree to trade terms. Knowing which terms to include requires a mastery of the LSTA standard terms, as well as the credit documents and other applicable sources of transfer restrictions. Getting those terms into the agreement often requires close coordination among traders, closers, and legal counsel.
  • Periodically refresh your diligence. Credit agreement amendments, events of default, bankruptcy filings, updates to internal policies, and even the simple passage of time can affect which restrictions apply. Lenders and prospective loan purchasers should stay on top of developments that may affect a particular loan’s transferability. If you haven’t traded a credit recently, consider performing a fresh round of diligence before trading again.

Second Circuit Affirms Enforceability of Flip Provisions in Swap Agreements Under Bankruptcy Code Safe Harbor


For over a decade, Lehman Brothers Special Financing (“LBSF”) has been litigating the enforceability of so-called “flip clauses” in connection with the post-bankruptcy liquidation of swap agreements. These clauses, which are common in structured financing transactions, specify the priority of payments when a swap provider (like LBSF) is in default. In particular, these clauses purport to subordinate the swap provider’s payment priority below that of noteholders when termination payments are owed due to the provider’s default.

When LBSF’s holding company (Lehman Brothers Holdings Inc.) filed a chapter 11 petition in September 2008, that filing placed LBSF in default under various swap agreements to which LBSF was a party. In a 2010 complaint involving 44 synthetic collateralized debt obligations (“CDOs”) that LBSF created, LBSF sought to claw back over $1 billion that had been distributed to noteholders in connection with the early termination of swap transactions, arguing that the flip clauses in those transactions were ipso facto provisions and therefore unenforceable. (Ipso facto clauses are contractual provisions that modify a debtor’s contractual rights solely because it petitioned for bankruptcy; the Bankruptcy Code generally treats such provisions as unenforceable.) The noteholders defended the distributions on various grounds, including by invoking the safe harbor codified in section 560 of the Bankruptcy Code, which exempts “swap agreements” from the Bankruptcy Code’s prohibition of ipso facto clauses.[1] Read our key takeaways here.

Loan Market Breathes a Sigh of Relief As SDNY District Court Finds Loan Are NOT Securities


On May 22, 2020, the loan market let out a collective sigh of relief as Judge Gardephe dismissed the Millennium Lender Claim Trust’s complaint alleging securities law violations related to the sale of loans. The central question considered was whether loan trading should be subject to securities laws. The loan market operates on the assumption that loans are not securities, and the LSTA and Bank Policy Institute sought authority for leave to file briefs as amicus curiae to support that position. The motion for leave to file was denied, thus heightening concern over the outcome. But the concerns turned out to be unwarranted. Rather than redefining the leveraged loan market, Judge Gardephe stuck with the status quo finding that the loans were not securities after applying the four prong Reves test, which considers: (i) the motivations of Seller and Buyer; (ii) the distribution plan for the loans; (iii) the reasonable expectations of the investing public and (iv) the existence of another regulatory scheme. The Court pointed to the fact that the documents used the terms “loan documents,” “loan,” and “lender” consistently throughout, instead of “investor” which “would lead a reasonable investor to believe that the Notes constitute loans, and not securities.” The Court also noted in light of the Banco Español case, where the Second Circuit affirmed the district court’s finding that because “the Office of the Comptroller of the Currency has issued specific policy guidelines addressing the sale of loan participations,” application of securities laws is unnecessary as another regulatory scheme exists. (Order at 21, citing Banco Español de Credito v. Sec. Pac. Nat. Bank, 973 F.2d 51 (2d Cir. 1992)). The Plaintiff has until June 5, 2020 to amend the complaint.

Supreme Court Rules the Federal Government Must Pay Health Insurers’ Multi-Billion Dollar Risk Corridor Claims


Insurance markets have been watching the Supreme Court’s docket for its ruling on whether the Federal Government must compensate some of health insurers’ losses. Today the Supreme Court ruled that the Federal Government must satisfy these obligations. Insurers and holders of their claims are expected to seek billions of dollars of compensation.

Section 1342 of the Patient Protection and Affordable Care Act attempted to mitigate risk for insurers who sold health insurance on federal insurance exchanges through a “risk corridor payment system” – during the first three years of the insurance exchanges’ operation, 2014 through 2016, insurers who profited from selling insurance on the exchanges transferred a share of their profits to the Federal Government, which was required to compensate other insurers whose costs exceeded the premiums they collected on the exchanges. However, in 2014 the Congress passed an appropriations bill that purported to limit these compensation payments, and a federal appeals court ruled that this and subsequent appropriation bills repealed or suspended the Federal Government’s obligation to make transfer payments to loss-making insurers. Some insurers’ losses reached billions of dollars.

Today the Supreme Court held that § 1342 imposed a direct legal obligation on the Federal Government to make risk corridor payments to loss-making insurers who had participated in the insurance exchanges, notwithstanding the Federal Government’s argument that § 1342 provided insufficient details for how the Federal Government should satisfy these obligations. The Court held that § 1342 does not require risk corridor payments to be budget-neutral, nor to permit partial satisfaction of the Federal Government’s obligations to insurers, and rejected arguments that an appropriations bill could implicitly repeal another statute’s express statutory language.

Investors who are interested in trading in insurers’ risk corridor claims should note that while the Supreme Court’s ruling appears to shelter risk corridor payments from any offsets or deductions by the Federal Government, there are further nuances they should understand concerning how the risk corridor payment program calculates claim amounts – and in how claim transfer agreements structure transferees’ rights.

Investors who want to capitalize on these developments should contact Raniero D’Aversa and Allison Citron of Orrick’s Restructuring group.

COVID-19-Related Defaults in European Leveraged Loans Could Create Opportunities for Distressed Investors


Since the last financial crisis, borrowers and private equity sponsors have cut distressed investors out of most European leveraged loan deals. According to Reorg Debt Explained about 66% of European leveraged loans in 2019 restricted transfers to distressed investors.[1] But the recent economic turmoil created by the COVID-19 pandemic could create opportunities for distressed investors to return to the market. Fitch Ratings recently forecast a 4% default rate for European leveraged loans in 2020 and a 7% default rate in 2020.[2] In a severe downside scenario, Fitch projected that default rates could reach as high as 14% next year. In some European leveraged loan deals, the transfer restrictions that have kept distressed investors out of lending syndicates may fall away if events of default (or certain specific events of default) occur and continue. Read our key takeaways here.

Secondary Trading As Usual?


In a very short time, the COVID-19 pandemic has spread frightening levels of uncertainty all around the world. While many schools, businesses, and houses of worship have closed, the financial markets remain open. Like other markets, the secondary market for syndicated loans has experienced stomach-churning volatility and steep declines in asset prices in recent weeks. If you aren’t thinking about how COVID-19 could affect liquidity and settlements, you should be. Fortunately, the standard trading documents published by the Loan Syndications & Trading Association (the “LSTA”) already contain important concepts and tools aimed at promoting liquidity and pushing trades toward settlement, even during times as uncertain as these.

Click here for a brief refresher on some of the provisions that could prove critical in the months ahead.

Debtwire European Distressed Debt Market Outlook 2017


The 2017 Debtwire European Distressed Debt Outlook report surveyed 100 distressed investors and 30 private equity funds to establish the outlook for 2017.  Jointly sponsored by Orrick and Greenhill, the report predicts that European restructurings will hit their next peak in 2017, with respondents citing interest rate rises (22%), geopolitical conflict (21%) and Brexit (16%) as the most important macroeconomic factors driving this trend.  READ MORE

Orrick Lawyer Co-Authors Article Addressing Unique Confirmation Issues in Nonprofit Cases


Orrick’s Evan Hollander co-authored an article for The Norton Annual Survey of Bankruptcy Law  (2016 Edition) addressing unique confirmation issues faced by nonprofit debtors in Chapter 11. The article addresses the applicability of the absolute priority rule, distinctive feasibility issues, and appropriate comparators when considering the best interests test in a nonprofit case. The authors identify emerging trends in nonprofit bankruptcy jurisprudence and suggest legislative action to help clarify certain ambiguities in the law. Read the full article here.

New LSTA Par Confirm Penalizes Buyers for Settlement Delays


In an effort to reduce settlement times, the Loan Syndications and Trading Association (the “LSTA”) recently revised its standard par loan trading documents to penalize buyers who take too long to settle. Beginning September 1, 2016, buyers who fail to fulfill their obligations to timely settle par loan trades will forfeit the right to receive interest that accrues prior to the settlement date. The changes do not apply to loans trading on distressed documents.

The LSTA’s revisions represent the trade group’s most aggressive step to combat settlement delays. The revisions are also the most consequential changes to the LSTA’s standard par trading documents in years.

Under the current version of the LSTA’s Standard Terms and Conditions for Par/Near Par Trade Confirmations (the “Standard Terms”), buyers are automatically compensated for interest that accrues on a loan during the period beginning on the seventh business day after the trade date up through the settlement date (“Delayed Compensation”). Starting on September 1, 2016, this provision will no longer be automatic. Instead, par loan buyers will only be entitled to Delayed Compensation if they satisfy several new requirements, including paying the purchase price to the Seller in accordance with specific timing requirements (the “Delayed Compensation Prerequisites”). The LSTA believes that the Delayed Compensation Prerequisites will create a new sense of urgency for buyers to close trades and discourage buyers from tying up sellers’ balance sheets. READ MORE