Credit bidding has become a really hot issue recently. For those of us who don’t normally work on bankruptcy matters, the right to credit bid is an important right that secured lenders usually have in a bankruptcy proceeding. If you’re the senior secured lender and you want to buy the company’s assets in a bankruptcy sale, you can show up at the auction and, instead of bidding cash, you can place credit bids. A credit bid is basically an offer to give up part (or all) of the secured claim you have against the company — i.e., amounts the company borrowed from you and didn’t pay back — in exchange for the assets.
The senior secured lender’s right to credit bid in an asset sale has come under question recently. In the well-publicized Philadelphia Newspapers (pdf) case, the secured lenders were actually prohibited from credit bidding in the asset sale. Last week, the lenders bought the company’s assets anyway, by paying cash.
The Philadelphia Newspapers case is significant because it seems to be the first time an appellate court has decided that secured lenders don’t have a right to credit bid the amount of their loans in a sale under a Chapter 11 plan of reorganization. It’s important to note that this case was from the Third Circuit, which includes Delaware — where a lot of companies choose to file for bankruptcy. That said, it’s also important to note that this case applies only to sales under plans of reorganization, and not to “363 sales” (under Section 363 of the bankruptcy code) or UCC Article 9 asset sales outside of bankruptcy. Still, this changes the game for secured lenders, at least in that part of the country. A right you would have expected to have in bankruptcy appears to be gone, at least for now.
Several suggestions have been offered for what to do about this. For example, if you have a borrower in bankruptcy (and if it’s not too late), you can try to include provisions in a DIP financing order (or in a cash collateral order) requiring that the secured lenders be given the right to credit bid. You can also try to require that an asset sale be conducted as a 363 sale and not under a plan of reorganization. For more details about the Philadelphia Newspapers case (and a longer list of suggestions for what to do), take a look at this summary.
Since credit bidding has been the subject of so many recent bankruptcy cases, we’ll continue this thread next time, talking about issues that come up when you have a syndicated loan and want to credit bid for the assets, but not all the lenders agree.