RK&O Outlook: Finding Common Ground in Trading & Restructuring

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March 24, 2020

Secondary market credit trading and out-of-court restructurings have co-existed for many years. The relationship is close, but far from collaborative. Both sides are responsible for this mismatch –

On the one hand, record owners may not be economic owners of the loans and claims due to secondary trading.  Record owners may have sold the loans and claims but it takes a longs time to settle that trade and have the buyer become the new record owner.  Sometimes the buyer cannot become the record owner and must be content with having beneficial or economic interest, but not title, of the loan or claim.

On the other hand, the success of a restructuring requires achieving and maintaining the broadest support from creditors in a compressed timeframe at the lowest cost to the restructuring company. Prompt and targeted negotiations with true economic owners are a key premise on which successful restructurings are built.

Here are some simple suggestions to restructuring companies that should help harmonize their goals with those of stakeholders participating in an increasingly liquid secondary credit market:

  • Minimize mismatches between economic stakeholders and eligible stakeholders when developing support for a restructuring. This approach may include incentivizing administrative agents and other parties to facilitate and, indeed, expedite assignments of loans for as long as possible.
  • Structure the payment mechanics of any fees that incentivize consent in a way that factors in the impact of continued trading.
  • Consider publicly disclosing the restructuring terms and support agreement early to enable “public only” stakeholders to evaluate the proposal and, hopefully, consent.
  • If a release from stakeholders is desirable, balance the borrower’s need for a broad release against the stakeholders’ inability to release claims held by affiliates and related parties. Many financial institutions are unable to give affiliate releases for legal or reputational reasons.

Similarly, here are some suggestions for secondary market traders when trading loans or claims being restructured:

  • Each trading party should understand the current status of the voting rights of its counterparties and their participants. It is important to review both the standard terms and the bespoke provisions of any participation agreement and the relevant provisions in the credit agreement.
  • Record owners that are inclined to agree to support a restructuring plan should try to minimize the impact of such RSA on the bonds, loans and claims that the record owners have previously contracted to sell.
  • A buyer that does not wish to be bound by the RSA should confirm, before the trade date or the effective date of the RSA, that the loans and claims it intends to purchase are not subject to the RSA.
  • A market-maker should consider implementing additional procedures and transaction provisions designed to minimize the risk of becoming an inadvertent restructuring support party, being exposed to trade disputes or breaching its contractual obligations.

Secondary credit trading and debt restructuring of troubled borrowers are two overlapping and interacting aspects of the life of a loan or claim. When they occur in tandem, secondary trading parties need to adjust their trading activities in the context of restructurings more proactively to deal with the associated risks and challenges. Restructuring professionals need to be mindful of secondary trading markets and practices in their approaches to restructurings in order to achieve maximum success at the lowest cost. Careful examination of contractual provisions and limitations and creative structuring of transactions and processes will help both trading and restructuring co-exist in an orderly fashion.