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'Credit bidding' hearing to set bankruptcy landmark
An obscure bankruptcy case currently before the US Supreme Court could have major implications for investors linked with distressed debt, reports the Financial Times newspaper.
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The case concerns the RadLAX Gateway Hotel, a bankrupt Los Angeles airport hotel which is, under chapter 11 protection, trying to block lender Amalgamated Bank from ‘credit bidding’ – swapping its debt for the hotel in a bankruptcy-court-overseen auction rather than paying cash.
Conflicting rulings
The case has received conflicting rulings in the lower courts, and will today be heard by the Supreme Court.
The Wall Street Journal suggests that this is a crucial issue for the corporate bankruptcy world, ‘because many companies are turning to chapter 11 as a means to sell their assets to their highest bidder rather than as a reorganization opportunity’.
Lenders argue that ‘credit bidding’ is within their rights and any blocking would force them to make less credit available or on more expensive terms. The opposing argument is that rival bidders will be deterred.
Critical tool
‘Credit bidding is a critical tool for protecting a secured creditor from having its collateral undervalued,’ said the Loan Syndications and Trading Association in a brief filed with the high court, reports the FT. ‘If the creditor is not satisfied with the competing bid, it can obtain the property by bidding more, using the amount of its unpaid debt as currency in the auction.'
Conflicting rulings
The case has received conflicting rulings in the lower courts, and will today be heard by the Supreme Court.
The Wall Street Journal suggests that this is a crucial issue for the corporate bankruptcy world, ‘because many companies are turning to chapter 11 as a means to sell their assets to their highest bidder rather than as a reorganization opportunity’.
Lenders argue that ‘credit bidding’ is within their rights and any blocking would force them to make less credit available or on more expensive terms. The opposing argument is that rival bidders will be deterred.
Critical tool
‘Credit bidding is a critical tool for protecting a secured creditor from having its collateral undervalued,’ said the Loan Syndications and Trading Association in a brief filed with the high court, reports the FT. ‘If the creditor is not satisfied with the competing bid, it can obtain the property by bidding more, using the amount of its unpaid debt as currency in the auction.'
