Mirant Corp.'s efforts to restrict the trading of its creditor claims to preserve certain tax benefits is causing confusion in the loan market as to which firms are affected by the measure. Traders said the bank debt has virtually stopped trading but some shops believe they can trade the name freely. "We're not going to let that slow us down," said one dealer. But others are more cautious. Investors do not want to trade paper and then find out that the trade will be broken because they are at the end of a chain, which started with a restricted party, another dealer explained.
The restriction efforts come as Mirant works to preserve an estimated $200-400 million in tax benefits that it could possibly receive due to mounting net operating losses. But under section 382 of the Internal Revenue Service tax code, as it applies to bankrupt companies, if a certain amount of creditor claims change hands, a change of control clause is triggered and the company's ability to claim the net operating losses is limited. To prevent this from happening, the bankruptcy court judge has approved a temporary order restricting the holders of more than $250 million of Mirant's debt from trading those claims and the company wants to establish a procedure for handling the trades. Jeffrey Samuels, a partner in Paul, Weiss, Rifkind, Wharton & Garrison's tax department, explained that in one particular bankruptcy case, the court ruled that the net operating losses qualified as one of the assets of the company. "If too many of the claims trade, then the asset goes up in smoke," he said.
Counsel representing the unsecured creditors is trying to squash this order. Oral objections were presented to the court last Wednesday and written objections were slated to be submitted by last Friday. The creditors believe that the judge overreached with the ruling, said one banker. And traders are reacting a bit more defensively. "It's unethical," said one trader. "It hampers liquidity," said another.
The restriction applies to holders of debt claims, whose total exposure to bank debt and/or bond debt claims exceeds $250 million. J.P. Morgan Chase Bank, Citibank, HypoVereinsbank and Credit Suisse First Boston are firms with more than $250 million in creditor claims that also include bank debt claims, according to a bankruptcy court filing. Exposure of bank and bond debt for these institutions ranges from $486.094 million to $307.86 million. "The problem is with the big dealers, you have a lot of exposure on the trading desk and also in the workout or portfolio groups," said one dealer. A J.P. Morgan spokeswoman noted that a large portion of the bank's exposure came from its custodian and trust business on the bond side. She added that J.P. Morgan is one of the smallest creditors to Mirant. Calls to spokespeople at Citibank and CSFB were not returned. Officials at HypoVereinsbank also did not return calls.
The market for Mirant's bank debt lingers at similar levels to where it was trading two weeks ago. The company's '03 revolver and '04 revolvers were quoted in the low-to-mid-40s. The market for the '05 revolver was said to be in the 67-69 range. A Mirant spokesman could not comment beyond a written statement issued by the company early last week.