Oid and bankruptcy

oid and bankruptcy

Despite the OID being paid only when the debt matures, it is, in essence, interest and, from an accounting and tax perspective, OID is typically amortized over the life of the debt and treated as interest in addition to any periodic or regular interest under the debt instrument. How is OID usually treated from a bankruptcy perspective?  · upon a bankruptcy filing. This act moves the maturity date to the bankruptcy petition date and courts generally regard payment at or after that time as a repayment after maturity rather than prepayment before maturity. Enforceability of Make-Wholes in Bankruptcy (cont.) The recent Southern District Bankruptcy Court decision in In re AMR Corp., B.R. (Bankr.S.D.N.Y. ) ("American Airlines") raises again the challenges facing underwriters, initial purchasers, lenders and investors in the debt capital markets in assessing and minimizing the risks associated with the ability to recover make-whole compensation and original issue discount ("OID") in the //make-whole-premiums-and-oid-in-bankruptcy. oid and bankruptcy

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Original Issue Discount (OID) on Debt Issuances

The Bankruptcy Court concluded that the reasoning of Chateaugay dictates that unamortized OID generated by a fair value exchange should not be disallowed. The Court reasoned that no "meaningful basis" exists for distinguishing between face value and fair value exchanges and, thus, the same rule on disallowance of OID should apply in both instances.

The Court concluded that "no commercial or business reason, or valid theory of corporate finance, [exists] to justify treating claims generated by face value and fair value exchanges differently in bankruptcy. The Court rejected the assertion that disallowing the OID in this particular case was consistent with the "plain language" of section b 2. The plaintiffs argued that applying the plain meaning would not lead to an absurd result because the noteholders that participated in the exchange would receive a greater recovery than those that did not.

The Court was not persuaded, noting that its rules should provide "predictability" and avoid "confusion in the market. ResCap should give lenders comfort that, at least in the Southern District of New York, unamortized OID generated by debt-for-debt exchanges whether face value or fair value in connection with prepetition consensual workouts is not subject to disallowance as unmatured interest.

This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its content. Questions concerning issues addressed in this memorandum should be directed to:. Associates Erica Weinberger and Adam M. Denhoff contributed to this client alert.

UMB Bank, N. A face value exchange is an exchange of existing debt for new debt of equal face value but with modified terms and conditions. Such an exchange does not reduce the borrower's overall debt obligations. A fair market value exchange is an exchange of existing debt for new debt with a reduced principal amount, determined by the market value of the old debt.

Unlike a face value exchange, a fair value exchange offers the issuer the advantage of reducing its debt obligations. The Court also noted that "[a]t the time that Congress passed section b 2 , debt-for-debt exchanges did not create OID for tax purposes. The Tax Code was amended in to provide that distressed face and fair value exchanges generated taxable OID.

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