This month's issue of Debt Dialogue addresses non-conventional credit events that trigger obligations under credit default swaps, the Supreme Court's recent decision in Czyzewski v. Jevic on structured dismissals in bankruptcy cases, liquidity and bankruptcy plan feasibility, and other issues.
Topics covered in this issue include:
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Nonconventional CDS Credit Events Part 1: The iHeart
Case
Last December, the ISDA Americas Determinations Committee announced that the election by iHeartCommunications Inc. not to repay at maturity the principal balance of certain Senior Notes held by one of its subsidiaries constituted a "failure to pay" credit event under ISDA's 2014 Credit Derivatives Definitions. This may represent a paradigm shift in the world of credit default swaps (CDS), where credit events can be created that are not indicative of the fundamental credit unworthiness of a reference entity. -
Nonconventional CDS Credit Events Part 2: Other Cases of
Interest and Suggestions for Amendments
Nonconventional "credit events," of which iHeartCommunications is one example, could be viewed by some market participants as inconsistent with the spirit of the protections for which CDS contracts were designed. Amendments to the standard CDS contracts may be considered to address these non-conventional credit events. -
Jevic — The Supreme Court Puts the
"Dis" in Structured Dismissals
On March 22, 2017, the United States Supreme Court held in Czyzewski v. Jevic Holding Corp. that a "structured dismissal" of a bankruptcy case cannot include a distribution scheme to creditors that does not comply with the priorities provided for under the Bankruptcy Code. The decision throws into question the future use of negotiated settlements in bankruptcy cases where some, but not all, creditors receive a benefit. -
Feasibility Under Section 1129(a)(11) and the Importance of
Liquidity
Last November, Judge Sontchi of the bankruptcy court for the District of Delaware denied confirmation of the plan of Paragon Offshore plc, holding that the plan was not feasible, and that Paragon would probably not be able to refinance its debt at maturity. "At the end of the day," the court said, "these cases are all about liquidity." -
The Indenture Trustee as a Basis for Federal
Jurisdiction
In iHeartCommunications, Inc. v. Benefit Street Partners LLC, the defendant noteholders attempted to remove their case to federal court on the grounds that the trustees for the notes were federally chartered banking corporations. While rejected by the court, the tactic may nonetheless be something to keep in mind in future, more appropriate situations. -
Cumulus Media: Term Loan Lenders Block Amendments to the
Revolver
In Cumulus Media Holdings Inc. v. JP Morgan Chase Bank, N.A., the court held that a proposed refinancing consented to by the company's revolving credit lenders nevertheless violated the negative covenants in the company's Credit Agreement. Creditors may rely on the decision to challenge exchange offers, particularly where issuers seek to refinance unsecured debt with secured debt.
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