The legal scuffle between Wachovia Bank and a group of investors over bankrupt Le-Nature's debt could significantly affect the secondary loan trading market.
"If Wachovia is successful in persuading a court that fraud or similar claims are unassignable, it would affect the market liquidity and the value of these loans," said Neil Binder, a partner at law firm Richards Kibbe & Orbe. If North Carolina law applies and claims can not be re-assigned, downstream holders of the loans wouldn't have anyone to sue to make a recovery, he further explained. A Wachovia spokeswoman declined comment. Calls to Eric Lloyd, co-head of leveraged finance, did not return calls.
Some speculated that if Wachovia's restraining order stays in place and the creditors are not allowed to sue, this could affect future trading with banks located in the U.S. but outside of New York. For example, one market player said that if some of Wachovia's credits continue to be governed by North Carolina law, dealers may be less willing to trade those names.
One portfolio manager said lenders will have to look more closely at Wachovia-led deals. "You'll make sure your credit agreement isn't based in North Carolina," he said. He commented it's normal for a bank to try and block investors from suing it on fraudulent conveyance, but if the court rules in favor of Wachovia it could be a different story for buysiders. It is unclear how many of Wachovia's credits are governed by North Carolina law and how many are governed by New York law.
Le-Nature's debt was hovering near the low 60s Friday morning while its bonds were trading around the low to mid-30s, according to a dealer.
