In connection with a contentious restructuring, Judge Drain of the Bankruptcy Court for the Southern District of New York, ruled recently that certain lenders to Momentive Performance Materials Inc. (Case No. 14-22503) had no enforceable claim to a so-called “make-whole” premium.
A “make-whole” premium is an obligation payable to a lender in excess of principal and accrued interest by a borrower in the event the borrower repays the loan prior to its maturity date. This type of premium is meant to compensate the lender for the interest it would have earned had the loan remained outstanding until its original maturity date. Because filing for bankruptcy typically automatically accelerates loan obligations, this type of prepayment premium is often at issue in chapter 11 cases.
In the Momentive case, senior noteholders were seeking over $200 million in make-whole premiums pursuant to the indenture governing the notes. According to the lenders, the indenture provided for payment of such a premium in the event of any redemption of the notes before October 2015. The lenders argued that the automatic acceleration of the notes that occurred upon the filing of Momentive’s chapter 11 case constituted the redemption under the indenture and triggered the make-whole obligation. Momentive’s bankruptcy plan provided for payment in full of the notes, but did not provide for payment of the make-whole premium to the noteholders. Because the plan did not provide for payment of the make-whole premium, the noteholders opposed the plan.
Last week, Judge Drain approved Momentive’s plan, subject to certain modifications, and found for Momentive on the make-whole premium issue. Momentive argued that no prepayment premium was due under these circumstances because: (i) the language of the indenture did not expressly require a payment under these circumstances (i.e. following automatic acceleration of the maturity date), (ii) the automatic acceleration of the maturity date of the notes precluded any “redemption,” which, by definition, could only occur if the noteholders were paid prior to maturity; and (iii) payment of the notes as a result of Momentive’s bankruptcy was per se involuntary and therefore could not trigger an “optional” redemption as provided for in the indenture. At the confirmation hearing on Momentive’s plan, held on August 26th, Judge Drain ruled against the noteholders chiefly because the language of the indenture relating to the make-whole premium lacked specificity. In order for the make-whole premium to apply, the indenture needed to specifically provide that such a payment was due in the event of automatic acceleration of the maturity date as a result of bankruptcy.
This ruling may have wide implications in the debt markets as investors in corporate bonds consider the enforceability of make-whole provisions in bankruptcy. Indeed, it may force lenders to reconsider the language used in credit agreements and indentures governing make-whole payments. Moreover, for the debt instruments already in circulation, the specter of unenforceable prepayment premiums may affect the pricing of notes issued by companies at risk for bankruptcy. Judge Drain’s ruling leaves open the possibility that prepayment premiums could be enforceable if expressly set forth in the loan contract, but it is not entirely clear what exactly an indenture would need to say to pass muster with Judge Drain or any other bankruptcy judge. Practitioners and investors alike will be watching this issue closely as the case law develops.
Momentive’s senior lenders have appealed Judge Drain’s ruling on issues related to plan confirmation and the parties continue to litigate.