This month's issue of Debt Dialogue address developments in areas of debt, taxation, settlement cycles for securities and bank debt and securities law enforcement for muni debt. We also share some thoughts on various indenture-related issues.
Topics covered in this issue include:
U.S. Treasury Finalizes Regulations Recharacterizing
Certain Debt Between Related Parties as Equity
On October 13, 2016, the Treasury Department finalized highly controversial regulations under Section 385 of the Internal Revenue Code that recharacterize certain debt between related parties as equity for federal income tax purposes. The final regulations retain the same basic architecture as when they were proposed in April, but add several exceptions that significantly scale back their scope, at the cost of increased complexity.
SEC Proposes Shortening of Standard Settlement Cycle to
T+2, while the LSTA Has Made Recent Changes to Encourage Shorter
Settlement Times for Bank Loan Trades
The Securities and Exchange Commission has proposed shortening the settlement cycle for securities trades in which broker-dealers are participants from the current T+3 to T+2. Settlement times for bank loan trades are considerably longer, but the Loan Syndications and Trading Association (LSTA) has also recently taken action to financially incentivize parties toward shorter settlement times.
Overview of the Municipal Bond Securities Law Framework and
Recent SEC Enforcement Activity
Recently, the Securities and Exchange Commission brought actions against 71 municipal bond issuers for failure to comply with their disclosure obligations. It also obtained a jury verdict in a case against the City of Miami for violations of the antifraud provisions of the federal securities laws. The SEC's continued focus on enforcement actions against municipal bond issuers and underwriters, and the absence of investor activity in this area, underscores the limited role for investors in policing compliance with securities law in the municipal bond markets.
Equities Notwithstanding, a Collateral Manager Lacks
Discretion to Refuse to Dispose of Collateral
U.S. Bank National Association v. Triaxx Prime CDO 2006-1, Ltd. (S.D.N.Y. June 23, 2016) provides a useful lesson on the limits of the ability of indenture fiduciaries to exercise discretion regarding facially mandatory provisions of an indenture requiring remedial action. While not of direct applicability outside the complex mortgage securities structures of the past decade, the principles of the case speak to broader issues of indenture interpretation.
Rights of Majority Holders to Direct a Trustee: Scope and
Trust Indenture Act Section 316(a)(1) prescribes the default rule that a majority of bondholders have the power to direct the remedial actions of the trustee. Even indentures that are not governed by the TIA routinely include such a provision. Surprisingly, there is little case law on TIA Section 316(a)(1) exploring the scope and limitations of majority rights. Beyond that there is the broader question of when a trustee may decline to follow the direction of even a majority of bondholders or even disregard their economic interests.
iHeart: The Alchemy of Transfers to Unrestricted
In May 2016, a Texas state court granted the petition of iHeartCommunications for declaratory judgment and a permanent injunction in the dispute over whether the company's capital contribution to its subsidiary Broader Media constituted a "Permitted Investment" under certain indentures. Recent appellate activity provides a convenient opportunity to consider the court's order, which has important implications for covenant compliance in connection with transfers to unrestricted subsidiaries.
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