Associations File Brief on ''Discounted Future Payments'' in Bankruptcy Plan

SIFMA, the Loan Syndications and Trading Association ("LSTA") and the Managed Funds Association ("MFA") (collectively "the associations") filed an amici curiae brief in a case that considered how to discount future payments under a plan of reorganization in order to provide secured creditors with payments "of at least the value" of their claim pursuant to Section 1129(b) of the Bankruptcy Code. The brief was filed with the U.S. Court of Appeals for the Second Circuit in Momentive Performance Materials Incorporated, et al. v. BOKF, NA et al. Section 1129(b) allows the court to confirm a plan of reorganization over the objection of one or more dissenting classes of impaired creditors (i.e., a "cram down"), but only if the plan is "fair and equitable" with respect to each dissenting impaired class.

In the Momentive case, the debtors proposed to provide two classes of secured noteholders with replacement notes secured by the same collateral as the original notes but bearing a lower interest rate. The Bankruptcy Code's "fair and equitable" standard includes a requirement for secured creditors to receive payments with a net present value equal to the amount of their claims (but limited to the value of the collateral securing the claims). In order to determine whether the replacement notes had a net present value equal to the noteholders' claims, the court selected a discount rate at which to "discount back" the future payments to be made under the replacement notes. To do so, the court used a "formula" approach, adding a riskless base rate (the rate on U.S. Treasury notes of comparable maturity) to a risk premium reflecting the court's assessment of the debtors' circumstances.

The associations argued that the "formula approach" resulted in a discount rate that was too low. Instead of this approach, the court should use market interest rates whenever they are observable. In this case, the debtors obtained exit financing at a substantially higher rate than the discount rate determined by the court. As a result, the associations argued, the replacement notes will trade at a market price significantly below the amount of the noteholders' claims. This result falls short of the Bankruptcy Code's "fair and equitable" requirement. The associations concluded that the court should not confirm the plan of reorganization over the noteholders' objections.