Although certain distressed debt investors in the European markets would like to believe that senior secured bonds can provide easier and more liquid access to the rights and influence of senior secured lenders, this is not the current reality. Though both bonds and bank debt may have “senior secured” preceding their title, the rights and influence afforded to investors can vary significantly among instruments. While many on the buy side are fighting to bring the senior secured bond structure more in line with bank debt on the premise that a Euro worth of senior secured bonds should be a Euro worth of senior secured bank debt, it remains to be seen when and if this will happen. In most instances, the ability to quickly access the senior secured facility agreement and ancillary documents as well as steer a borrower’s proposed restructuring will continue to be driven initially by the senior bank debt lenders. A misstep in trading bank debt while building a portfolio position could therefore shut an investor out from discussions. This makes for a bitter pill to swallow if the investment strategy behind the debt purchase from the outset is to be active in restructuring talks. Access by an investor to the traditionally “club” world of European bank debt, especially in middle market private situations, can come with challenges. This is especially true for investment funds looking to trade across a borrower’s capital structure and seeking liquidity and a quick settlement if things don’t go according to plan. In Part 1 of this two-part article series, David J. Karp, a Special Counsel at Schulte Roth & Zabel LLP (SRZ), and leader of the firm’s Distressed Debt and Claims Trading Group, Roxanne Yanofsky, an Associate at SRZ, and Erik Schneider, also an Associate at SRZ, examined regulatory and tax issues that may impact on an investor’s recovery; identified certain restrictions in the underlying credit documentation that could prohibit an investor from assuming a direct lender of record position; and discussed perfection issues that may affect a lender’s recovery in a borrower insolvency scenario. See “Regulatory, Tax and Credit Documentation Factors Impacting Hedge Funds’ Trade Risk in European Secondary Loans (Part One of Two)
,” Hedge Fund Law Report, Vol. 4, No. 37 (Oct. 21, 2011). In this article, Part 2 of the series, the authors, joined by their colleague Neil Robson (a Senior Associate in SRZ’s London office) touch upon issues relating to confidential information in the European secondary loan market and trading where a disparity of information exists between syndicate members and restructuring committee members under a credit agreement. Additionally, the authors discuss the different forms of documentation available for trading bank debt, the various options for purchase of bank debt and the risks associated with each method of settlement.