We asked three of our expert panelists from our Symposium on Intra-Creditor Class Warfare to weigh in on these controversial tactics. Professor Ayotte hit the dilemma head on: “These transactions buy runway for distressed borrowers, but they also upset the expectations of parties who contracted for security.” Ayotte reflects the bait and switch well: “The [J.Crew] trap door carve-out was intended to enable overseas investment in a tax-efficient way, but it enabled a transfer of term lenders’ trademark collateral to refinance lower-priority debt.” It may all just come down to who is footing the bill with Ayotte concluding that the expertise to manage this complex environment doesn’t come for free.
But what’s wrong with getting hosed? Why fix something if it’s not broken? Professor Bucolla provides a sound argument that something is amiss. Kicking the can down the road can “destroy economic value.” Sometimes rationalizing a capital structure and operations through a formal proceeding produces a net surplus. But who is best situated to take on this dilemma? Joel Moss questions whether courts or the market will be up to the task. “It remains to be seen whether courts will be effective gatekeepers to limit any perceived mischief, particularly given that the letter of the debt documents likely permits many of the liability management transactions at issue and given many of the litigations on these issues settle.” We will see.