Distressed Assets & Alternative Investments

EMIR: “Too Big To Fail”, Again?

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“…just to give you an idea of the actual impact of Lehman Brothers, we can consider the figures published by one of the Lehman’s counterparties: Merrill Lynch, which in the third quarter of 2008 disclosed a US$2 billion pre-tax trading loss, which was mainly due to the unwinding of trades for which Lehman Brothers was a counterparty. Merrill Lynch was only one of the hundreds of counterparties of Lehman, so the aggregate impact on counterparties’ losses of Lehman’s default was much bigger than the one generally used.[1]”

This telling quote is from a speech given by Steven Maijoor on March 27, 2013, the then chair of the European Securities and Markets Authority (“ESMA”), in which he is describing the violent aftermath of the Lehman collapse whose financial tremors nearly brought down the West’s financial system.

This alert focuses on the European Market Infrastructure Regulation (or “EMIR” as it is better known[2]) which was introduced as the equivalent of the Dodd-Frank Act of 2010, to address a wide range of issues, many of which were said to be linked to the problems identified in the over the counter (“OTC”) derivatives market[3] following the collapse of Lehman. However, as we set out below, there are serious questions which arise as to the effectiveness of EMIR and the implications of the seismic changes in the OTC market.

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Overview and Analysis of Select Provisions of the ABI Chapter 11 Reform Commission Final Report and Recommendations

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Part Two of Three

Last month, Orrick’s Restructuring team began a three-part look at the American Bankruptcy Institute’s Chapter 11 Reform Report. In part one we looked at issues related to confirmation, valuation, financing and asset sales. This second part focuses on modifications to the Bankruptcy Code’s “safe harbors” for derivatives and other complex financial transactions. The final part will focus on professional compensation, treatment of executory contracts and other interesting topics.

To view the full article, please click here.

Rep. Pierluisi Introduces Bankruptcy Code Amendment to Permit P.R. Municipalities to File Under Chapter 9

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Just days after the United States District Court for the District of Puerto Rico struck down the Commonwealth’s efforts to pass its own insolvency regime, Resident Commissioner Pedro Pierluisi introduced the “Puerto Rico Chapter 9 Uniformity Act of 2015” into the U.S. House of Representatives last week.  The bill, which is substantively similar to one introduced in 2014, would allow the Commonwealth of Puerto Rico to authorize its insolvent public corporations to file a chapter 9 petition; they currently are not able to do so.  The bill, H.R. 870, has been assigned to the House Judiciary Committee and is scheduled for a hearing before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law on February 26th.  H.R. 870, 114th Cong. (1st Sess. 2015)

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Decoding the Code: Preferences Under Section 547 of the Bankruptcy Code

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This is the first post in our “Decoding the Code” Series.  The Series will cover various sections of the Bankruptcy Code in a clear and easy to understand manner.  Our first stop:  preferences.

Why do I care about preferences? 

Scenario 1:  Your company sells products and services to a large retail electronics chain.  You have been doing business with the electronics chain for years and they have been paying your invoices as they come due.  Recently, however, their payments have become sporadic and you are worried they have fallen on financial hard times.  You soon learn that they have filed for bankruptcy.  You know you have received payments from the now-bankrupt electronics chain within the last three months and you have heard something about preference claims but what does it all mean?

Scenario 2:  You are a claims trader interested in buying claims filed against bankrupt companies.  You know that some claims you are thinking about buying could be subject to preference litigation but are there ways to defend against it?

Let’s decode the basics: READ MORE →

Debtwire European Distressed Debt Market Outlook 2015

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Distressed investments will be on the rise in 2015, particularly in Europe, according to Debtwire Europe’s 11th European Distressed Debt Outlook, produced in association with Orrick and Rothschild. High yield bonds, in-court workouts and direct lending are also expected to gain traction in 2015, with economic growth in the EU anticipated to be low or stagnant.

Orrick Partner and Co-head of Europe Restructuring, Stephen Phillips, recently spoke on the Debtwire panel addressing these issues. For additional information, please contact Stephen.

The full report is attached here.

Restructuring and insolvency in France: New regime and other hot topics

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France has been the most active market in Europe for financial restructurings over the past two years due to the high level of economic challenges currently facing the country. As part of a plan to simplify and shore up the laws governing restructuring and insolvency, dating back to the introduction of the ‘sauvegarde’ procedure in 2005, the French government has put in place a number of new orders that have the potential to significantly affect debtors and creditors facing insolvency proceedings.

The last significant changes to the current regime result from the orders dated 12 March 2014 and 26 September 2014 and are applicable to proceedings opened as of 1 July 2014.  

In the attached presentation we outline how these new orders alter the current law and the affect they may have on French insolvency proceedings. Specifically, we cover:

  • The key points you need to know about the new orders, including the impact on creditors versus debtors;
  • An overview of the current regime, including mandat ad hoc, conciliation, safeguard proceedings, reorganisation and liquidation;
  • Specifics rules applicable to listed companies; and
  • French banking monopoly rules and debt trading.

View the full presentation here.

Lehman Brothers Pension Scheme – The treatment of pensions claims in a UK insolvency process

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When the Lehman Brothers group imploded in September 2008, the impact of events on the Lehman Brothers U.K. pension scheme was not seen as a key concern for anyone other than the members themselves. Yet as time progressed, the scheme featured heavily in resolving the administration of many U.K. Lehman Brothers group entities and in the process, important legal principles relating to defined benefit pension schemes were decided. Many ancillary points were decided during the litigation (some of which are discussed below), but the most important issue, that of the priority of debts on a winding up, is of great significance.

Defined benefit schemes are a type of occupational pension scheme set up by employers for the benefit of their employees. There are generally two types of occupational pension scheme:

  • defined benefit schemes (where a defined level of benefit, usually calculated by reference to a member’s final salary, is promised on retirement); and

 

  • defined contribution schemes (where benefits payable on retirement are calculated by reference to contributions paid and returns on investment).

This article focuses on the operation of anti-avoidance pension legislation in relation to U.K. defined benefit pension schemes. In particular, we discuss the litigation over the imposition of pension liabilities on certain Lehman group companies and attempts of those companies to clarify the nature and extent of their obligations.  Read More.

Overview and Analysis of Select Provisions of the ABI Chapter 11 Reform Commission Final Report and Recommendations

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In December 2014, the American Bankruptcy Institute (ABI) issued its Final Report and Recommendations of the Commission to Study the Reform of Chapter 11. The Report is almost 400 pages long and contains more than 200 recommendations. Twenty-two Commissioners, including attorneys, academics, financial advisors and a former bankruptcy judge spent more than two years taking testimony from over 90 additional restructuring experts and considering the reports provided by 13 advisory committees, each comprised of 10-12 members from the bankruptcy bench, the bankruptcy bar, the financial community and academia. The Commission developed the report with goals including: reducing barriers to entry for debtors, facilitating more efficient resolution of disputed matters, enhancing debtors’ restructuring options and creating an alternative restructuring scheme for smaller businesses.

The recommendations do not constitute proposed legislation. Rather, the Report represents the opinion of the Commissioners and will spur debate. It ultimately could help lead to comprehensive overhaul of the almost 40-year old Bankruptcy Code. Recognizing that major bankruptcy reform generally takes years to wind its way through Congress, the Report implicitly acknowledges that 2018 is an appropriate target date for reform.

That does not mean the Report should be taken lightly, as it represents the consensus view of many well-regarded bankruptcy practitioners, academics and judges. At minimum, the Report will mark the commencement of a conversation about what the Commissioners view as much-needed reforms to the Bankruptcy Code. We also expect the report to receive the attention of judges and litigants in upcoming matters. Parties may look to the Commission’s interpretations of open legal questions as support for their assertions that certain interpretations represent the “better” argument or the “intended” result.

The Report covers nearly every aspect of the chapter 11 process with a multitude of suggested modifications to the Bankruptcy Code and bankruptcy jurisprudence. Below is our analysis of a number of the Commission’s most critical recommendations and of the potential impact of the proposed recommendations on the bankruptcy process.

To view the full article, please click here.

Distressed Debt – UK Tax Changes

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Currently, if a UK company is released from a debt owed to an unconnected creditor, the default position is that this will be a taxable event for the debtor company and its accounts will recognise a (taxable) credit in respect of this release. Further, where a debt that was previously held by an unconnected party to the debtor company becomes “connected” a “deemed” release of debt may arise, which may give rise to the same issues (although there is a limited exception where debt becomes connected as part of a corporate rescue). In addition, if an “amend and extend” restructuring of debt is undertaken and this gives rise to a “substantial modification” or a reduction in the net present value of the cashflows arising under the relevant loan by at least 10 per cent, the debts may need to be re-recognised in the parties’ accounts and this may result in the UK debtor recognising unfunded taxable credits.

It is important to note, however, that there are exemptions to the tax charge for debtor companies described above, most notably for debt/equity swaps and certain formal insolvency and restructuring procedures. However, these rules generally need to be considered carefully in a restructuring scenario.

The UK tax laws also need to be considered carefully on behalf of any UK creditors; for example, whether the creditor will get bad debt relief (generally not the case where the creditor controls the debtor).  Read More.

A Special Report on the Nigerian Banking System: The Ripple Effects of Lehman – A Tale of Sin and Redemption?

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​This article focuses on the banking sector crisis which engulfed the Nigerian financial sector from 2008 to 2011, and the steps taken by the Central Bank of Nigeria (CBN) in restoring financial stability. We discuss the impact and the opportunities for international and domestic investors resulting from the crisis.  Read More.