Presenting a live 90-minute webinar with interactive Q&A Recovery of Make-Whole Premiums in Bankruptcy After Momentive Performance and Energy Future Holdings Navigating Varying Court Interpretations of Prepayment Premium Provisions; Guidance for Drafting Loan Documents and Indentures TUESDAY, MAY 3, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Melinda Franek, Vice President & Deputy General Counsel, CNH Partners , Greenwich, Conn. Jennifer Harris, Special Counsel, Milbank Tweed Hadley & McCloy , Los Angeles Melainie K. Mansfield, Partner, Milbank Tweed Hadley & McCloy , Los Angeles The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Recovery of Make-Whole Premiums in Bankruptcy After Momentive Performance and Energy Future Holdings
Disclosures The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of AQR Capital Management, CNH Partners, Milbank, Tweed, Hadley & McCoy LLP, or their respective affiliates and employees. 6
General Considerations 7
Topics To Be Covered • Differing approaches taken by bankruptcy courts in analyzing enforceability of make-whole provisions • Momentive Performance and Energy Future Holdings guidance on enforceability of make-whole provisions • Best practices for lenders and bondholders to protect their entitlement to make- whole premiums 8
Premise of Make-Whole / Yield-Maintenance Provisions • Make-whole provisions require a borrower to include a premium when prepaying debt, in addition to principal and accrued interest. The premium is intended to compensate lenders for the lost income stream from future interest that would have accrued but for early repayment (i.e., to make lender whole). • Also referred to as “prepayment penalties,” “prepayment premiums,” “prepayment fees,” or “optional redemption” clauses. • Lender Protection: Rather than prohibiting repayment, make-whole provisions are designed to discourage borrowers from repaying debt as soon as credit markets move in their favor. • Historically, more prevalent in bond markets and on other long term debt where investors seek long term deployment of capital at fixed rates. Now, becoming more common in loan market. 9
Premise of Make-Whole / Yield-Maintenance Provisions • Examples of types of make-whole provisions: – Fixed Percentage: premium is expressed as a fixed, certain dollar amount or, more typically, a fixed percentage of the principal amount to be repaid (e.g. 103%). – Net Present Value: formula-based make-whole premium that measures the difference between the lender’s expected return through a specified date (which could be maturity) and a hypothetical, alternative investment stream (formula could include a minimum rate of return to ensure make-whole premium is not zero or a negative value). 10
Other Protections Designed to Protect Lender Against Early Repayment of Debt • No call – an express provision prohibiting prepayment of bonds until maturity. (Note, “perfect tender” rule (NY) common law.) No -call provisions are generally unenforceable in bankruptcy (conflicts with Chapter 11 inhibiting restructuring), although damages claims are sometimes permitted for breach of contract. • “Hard” call – sets a specific date after which the borrower can repay the bonds with premium in all circumstances. • “Soft” call – does not prevent the bonds from being repaid but pays the investor a premium for repricing or refinancing events. • Change of control or fundamental change premiums. • OID (original interest discount): difference between the face amount of the debt issued and the cash actually received by the debt issuer. – This amount amortizes over the term of the debt and thus resembles interest accrual. Often treated as interest in bankruptcy. Not a make-whole per se, but raises related issues. 11
Considerations for Drafting • Time period over which make-whole premium applies? Is it a make-whole to maturity or only through a shorter period of time (e.g., to the end of the first year)? • What is the amount and how is it calculated? Beware of computation issues if a floating rate loan; NPV discount. • Triggers for make-whole payment, e.g., does a repayment or refinancing in bankruptcy qualify as a voluntary prepayment or redemption under the terms of the debt documents? What effect does mandatory vs. voluntary pre-payment have? • Market practice. 12
Bankruptcy Considerations for Make-Whole Premiums 1 3
Bankruptcy Considerations for Make-Wholes Acceleration Analysis • In bankruptcy, debt is automatically accelerated to the date the company filed for bankruptcy. In addition, contracts typically provide for automatic acceleration of debt following a bankruptcy filing. • If the debt is accelerated, is there still a valid claim for payment of a make-whole premium under the agreement (which protected a lender’s expectation of future income streams)? – Example: “Acceleration. If an Event of Default . . . occurs and is continuing, the Trustee by notice to the Company . . . may . . . declare the principal of, premium, if any, and accrued and unpaid interest, if any, on all the Securities be due and payable. Upon such a declaration, such principal, premium and accrued and unpaid interest shall . . . be immediately due and payable ” 14
Bankruptcy Considerations for Make-Wholes Interest Analysis : • Is the make-whole premium merely a proxy for a claim for unmatured interest? Or is it simply liquidated damages? • RULE : A claim for “unmatured interest” is disallowed under the Bankruptcy Code. See 11 U.S.C. § 502(b)(2). – “Unmatured interest” is defined as interest that has not yet accrued as of the date a debtor filed for bankruptcy. – However, most courts view make-whole premiums as liquidated damages, subject to Section 506(b) of the Bankruptcy Code. • OID : Section 502(b)(2)’s legislative history makes clear that prepaid interest that represents an original discounting of the claim may be included within the meaning of unmatured interest. 15
Bankruptcy Considerations for Make-Wholes • Notwithstanding the general rule disallowing claims for unmatured interest, a claim for a make-whole premium may still be enforced depending on whether the creditor is “over - secured,” “under - secured,” or “unsecured.” • A lender is “over - secured” if the debt owed to such lender is less than the value of the collateral securing that debt. Likewise, a lender is under-secured if the debt owed to such lender exceeds the value of the collateral securing that debt. A lender is unsecured if the debt owed to such lender is not secured by any collateral. • Make-Whole premiums may be permitted if: – The claim is not considered unmatured interest, but a reasonable fee or charge on the underlying principal (e.g., represents liquidated damages) and the lender is over- secured; or – Whether or not the lender is over-secured, if the debtor borrower is solvent upon emergence . 16
Leading Cases: Southern District of New York 17
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