INVITAE BANKRUPTCY COURT DISALLOWANCE OF MAKE-WHOLE CLAIM CAUTIONS AGAINST LME DEBT PRICING PIG OUT
While restructuring advisers will remember the summer of 2024 for when the US Supreme Court killed nonconsensual third-party releases in Purdue, they should also remember it for when the US Bankruptcy Court for the District of New Jersey issued an important decision disallowing a make-whole claim arising out of the Invitae Corporation Chapter 11 cases. In addition to adding to the case law on make-whole allowance more generally, the Invitae case is notable because the court found the make-whole was not reasonable, in large part because the borrower was in distress and had limited bargaining leverage at the time the make-whole was negotiated and became effective. Thus, the Invitae decision cautions against investors maximising economics when negotiating liability management exercise (LME) debt terms without considering disallowance risk, and underscores the importance of establishing a record of robust negotiation in connection therewith.
Overview of make-whole premiums and treatment in bankruptcy
Make-whole premiums are contractual provisions in credit documents that operate as a form of ‘call protection’; that is, make-whole premiums protect creditors against the economic loss created by prepayment of the debt prior to its stated maturity. A make-whole premium is generally a present-value calculation that discounts the payments that would have been received if the debt had not been prepaid, calculated based on comparable treasury yields. Many, if not most, debt instruments that include make-whole provisions provide that the indebtedness can be accelerated upon certain events of default and that the debt is automatically accelerated if the borrower files for bankruptcy. Acceleration of the debt also triggers a make-whole premium.
Jan-Mar 2025 issue
King & Spalding LLP