By Adam C. Harris and Karen S. Park of Schulte Roth & Zabel LLP
A recent decision from the Bankruptcy Court for the Southern District of New York provides guidance on the “fair and equitable” requirement as it relates to secured creditors in a so-called “cramdown plan.” Section 1129(b) of the Bankruptcy Code provides the means by which a Chapter 11 debtor may obtain confirmation of a plan of reorganization over the objection of a dissenting class of creditors, including secured creditors. To cram down a plan on a class of secured creditors, the plan must be “fair and equitable” to that class. One way to meet the “fair and equitable” requirement is to provide that the secured creditors retain their liens and receive deferred cash payments having a present value equal to the allowed amount of their secured claims.
In In re MPM Silcones LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), the Bankruptcy Court held that the interest rates on secured claims in a “fair and equitable plan” should be derived using a formula that starts with a “risk free” Treasury rate for similar duration instruments, and adds a risk premium generally in the range of 1%-3%. Importantly, the Bankruptcy Court rejected the objecting secured credtiors’ arguments that the interest rates should be based on the market, i.e., the rates that would be charged to the same debtor entity for a loan having the same terms and duration by a third party lender.
The Bankruptcy Court’s ruling has been appealed. If upheld, the decision could have far-reaching implications for distressed debt investors as well as on the availability and pricing of capital for borrowers.
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