Credit Market Turmoil And Stimulus Package Bolster U.S. Loan Buybacks

The credit crisis that began in August of 2007 and intensified

with Lehman Brothers' September 2008 bankruptcy continues

largely unabated in U.S. loan markets in early 2009. Many bank

loans, particularly leveraged loans, continue to trade at a

significant discount to par in illiquid secondary markets.

Borrowers have begun sensing opportunity.

It is estimated that more than 25 U.S. companies have attempted

buybacks of their bank loans in the last year or so. Given the

challenges posed by the recession and the current premium placed on

liquidity preservation, not every borrower has (or will be

comfortable deploying) the resources necessary to buy back its

loans. For those able to do so, however, the benefits can include

the monetization of a significant trading discount to par, as well

as a reduction in leverage and interest cost, which may ease

ongoing compliance with ratio covenants.

What's more, The American Recovery and Reinvestment Act of

2009, the stimulus package signed into law by U.S. President Obama

on February 17, 2009, may soften the negative tax consequences of

certain loan buybacks by potentially allowing borrowers to elect to

defer, until their 2014 – 2018 tax years, the recognition

of taxable "cancellation of debt" income arising on

buybacks occurring in 2009 or 2010.

A more detailed summary of U.S. loan buyback considerations and

consequences is available

here .

Andrew Herr is a partner in the Financial

Services Group in the Osler's New York office, he represents

financial institutions and borrowers in domestic and international

debt financing transactions, including syndicated secured and

unsecured credit facilities, acquisition and other leveraged

finance transactions, private placements, and structured finance

transactions. William Corcoran is a partner in the

Tax Department of the firm's New York...

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