The Loan Syndications and Trading Association and The Bond Market Association are encouraging secondary market investors to adopt a new standard for trading the debt and equity of bankrupt issuers. The standard, known as the model Net Operating Loss [NOL] order, derives its name from the tax credits that a bankrupt company would preserve under the plan. "We're hoping it is used on a case-by-case basis in the context of actual bankruptcy cases as a standard model," said Jane Summers, general counsel of the LSTA, adding debtors and creditors have agreed on the new standard. James Bromley, at law firm Cleary Gottlieb, acted as outside counsel on the model order.
Under the new order, distressed investors can trade the debt or equity of a company with the written permission of the borrower providing there is no substantial change in the ownership of a company. The need for such an order arose because bankruptcy courts in recent proceedings have frequently halted trading in some firms' debt and equity in order to maintain a corporate's ownership structure. This has occurred for UAL, US Airways and Mirant Corp. The two trade associations sought feedback on the draft model NOL order this summer from debtors counsel and fixed-income market participants (LMW, 8/16).
Summers said the debtors counsel asked to soften the standard a bankrupt company would have to meet at the end of its bankruptcy to show trading restrictions had been necessary in order for tax credits to be preserved. "The standard was changed from showing an absolute requirement, to showing in the final order only a reasonable probability that [the trading restrictions] were necessary," she said.