Investors in the $225 billion distressed-debt market are watching a Manhattan appeals court to see whether judges can impose what the U.S. Chamber of Commerce has called “revolutionary” new limits on out-of-court restructurings, Bloomberg News reported today. Three federal judges will hear arguments today in a $14 million dispute over how much corporate borrowers can alter debt terms before they run afoul of a Depression-era law designed to protect bondholders. Last year, a lower-court judge set a new, more stringent standard that critics say would force more companies into bankruptcy by limiting their restructuring options. Caesars Entertainment Corp. is embroiled in similar bondholder disputes and has said that it risks bankruptcy if the appeals court lets the new interpretation stand. The gambling giant, which put its main operating unit into chapter 11 last year, faces five lawsuits by bondholders, or their trustees, who are owed $11 billion and say the company violated the 1939 Trust Indenture Act, or TIA. In June, U.S. District Judge Katherine Polk Failla held that Education Management Corp., a for-profit college operator, violated the TIA by forcing unsecured creditors including Marblegate Asset Management to choose between accepting stock in a reorganized company or standing aside as assets that could have covered their debts were transferred out of reach. Read more.
In December, there were legislative efforts to include a proposed omnibus appropriations rider that would amend the Trust Indenture Act of 1939. Those efforts were postponed. Listen to an ABI podcast between ABI Resident Scholar Melissa Jacoby and Prof. Mark Roe from December on the issues surrounding TIA.
