The credit crisis that began in August of 2007 and intensified
with Lehman Brothers' September 2008 bankruptcy continues
largely unabated in U.S. loan markets in early 2009. Many bank
loans, particularly leveraged loans, continue to trade at a
significant discount to par in illiquid secondary markets.
Borrowers have begun sensing opportunity.
It is estimated that more than 25 U.S. companies have attempted
buybacks of their bank loans in the last year or so. Given the
challenges posed by the recession and the current premium placed on
liquidity preservation, not every borrower has (or will be
comfortable deploying) the resources necessary to buy back its
loans. For those able to do so, however, the benefits can include
the monetization of a significant trading discount to par, as well
as a reduction in leverage and interest cost, which may ease
ongoing compliance with ratio covenants.
What's more, The American Recovery and Reinvestment Act of
2009, the stimulus package signed into law by U.S. President Obama
on February 17, 2009, may soften the negative tax consequences of
certain loan buybacks by potentially allowing borrowers to elect to
defer, until their 2014 – 2018 tax years, the recognition
of taxable "cancellation of debt" income arising on
buybacks occurring in 2009 or 2010.
A more detailed summary of U.S. loan buyback considerations and
consequences is available
Andrew Herr is a partner in the Financial
Services Group in the Osler's New York office, he represents
financial institutions and borrowers in domestic and international
debt financing transactions, including syndicated secured and
unsecured credit facilities, acquisition and other leveraged
finance transactions, private placements, and structured finance
transactions. William Corcoran is a partner in the
Tax Department of the firm's New York office where he
represents private equity funds and investors in all aspects of
fund formation, management and operation. Michele
Moss is a partner in the Financial Services Practice Group
in the firm's New York office and her transaction experience
covers a wide spectrum of both domestic and cross-border financing
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