The Bond Market Association and the Loans Syndications and Trading Association have updated their model net operating loss (NOL) order after its application in several high-profile bankruptcies highlighted some shortfalls in the document. Sarah Starkweather, regulatory counsel at the BMA, said the updated version of the NOL order was made after the association received feedback from its application in large bankruptcy cases, such as Northwest Airlines and United Airlines.
The model NOL order consists of rules for handling tax credits generated by companies in bankruptcy. It aims to preserve liquidity in the debt markets by allowing participants to trade an issuer's debt after it has entered bankruptcy. The order was introduced in 2004 after companies that filed for bankruptcy tried to restrict trading of their securities to protect their use of net operating loss tax benefits.
One change to the document is the elimination of first day restrictions on claims trading in an issuer's debt. The revised order permits counsel for the debtor to impose restrictions in trading of a bankrupt company's equity only. Any future restrictions related to claims can be put in place only after a court hearing. The revised order also lays out which information the creditor is required to provide the debtor about its holdings in the company. The debtor requires this information to determine whether a creditor should sell down its holdings to a level that would allow the company to still take advantage of NOLs. Under the new order, a form sets out exactly which information the creditor is required to provide.
The BMA and LSTA plan to post the revised draft of the NOL order on their Web sites today. The market has until June 9 to give feedback on the changes.