Monday, March 16, 2009

Cramdowns - fact or fiction?

Here's a thought-provoking article on real estate bankruptcies in commercial real estate put out by Proskauer Rose LLP.

The gist? In the 1990s borrowers filed a lot of bankruptcies as a negotiation tactic and to shield assets from foreclosure. Bankruptcy laws have changed since than, and many deals (especially in CMBS packages) will contain springing guarantees against the principals. (That said, I have seen a deals outside this market that are much less onerous against the borrowers, with guarantees only for so-called "bad boy" acts such as fraud and environmental problems.) There are other considerations to this, but I'm not going into them here.

The article also gets into the issues of SPEs, independent directors and managers, bankruptcy remoteness and the like. It does not get into the more complex issues of substantive non-consolidation, Delaware single member LLC opinions, etc. Thank goodness for that. And query whether, if BK filings so start happening, whether there will be a rash of (a) challenges to consolidation in BK and (b) lawsuits on opinion letters against law firms. Again, these issues arise most frequently in the CMBS deals we saw so much of this decade. Give it a read if you this piques your interest.