A federal bankruptcy judge’s ruling in a Chapter 11 case is sending ripples of anxiety throughout the distressed debt market, says the NYTimes DealBook.
The ruling, made by Judge Robert D. Drain earlier this week, states that senior debt bondholders did not have to be paid a “make-whole payment.” In such an arrangement, DealBook reported, “the bond issuer retains the option to refinance, but must hand over most of the benefits of refinancing to the investors by paying them approximately what they would have received if the bond had not been called early.”
The case pertained to the bankruptcy exit plan of Silicon maker Momentive Performance Materials, a portfolio company of private equity firm Apollo Global Management. According to the Times, the judge argued that the plan’s treatment of the bondholders was legal and that a “bankruptcy default was not the same thing as an early payment.”
However, the news outlet also noted, the judge did “leave open the possibility that a future agreement might provide for a ‘make whole’ payment as part of a bankruptcy claim, but he wanted to see that expressly set forth in the contract.”
Citing the importance of spelling out payment terms in legal documents for other corporate finance cases, the NYT did allow that the judge’s request was not “unreasonable.”
Yet the piece did observe that Apollo has been employing hardball tactics to “save its investments in other over-indebted companies, and one would assume that in the future, Apollo-backed companies will pay a premium as a result.”