The Second Circuit recently issued its decision on an appeal to the Momentive Performance Materials Inc. (“MPM”) bankruptcy case. Amongst other issues, the Court found that when determining the appropriate interest rate in a Chapter 11 cramdown, courts should consider market factors rather than strictly apply the Till formula. The Court’s decision will benefit secured creditors when a market rate is ascertainable, as they will no longer have to accept below-market take-back debt.
Recently, the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) rejected the so–called Till formula when calculating the interest rate paid to secured creditors in a Chapter 11 cramdown, and instead found that the existence of a market for similar loans should be considered when determining such rates. See Matter of MPM Silicones, LLC, No. 15-1682, 2017 WL 4772248 (2d Cir. 2017). The loans considered here were in the form of replacement notes, which allows debtors to pay out their claims over time in the form of “deferred payments”. In this case, the Senior–Lien Note holders questioned whether the interest rate of such deferred payments was fair and equitable in comparison to rates applied to similar debt obligations.
By way of background, the bankruptcy court in 2014 confirmed Momentive Performance Materials Inc.’s (“MPM”) Chapter 11 plan. See In re MPM Silicones, LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. 2014) aff’d, 531 B.R. 321 (S.D.N.Y. 2015). The bankruptcy court held that, amongst other things, the secured lenders were entitled to the Till rate of interest on replacement notes they received under the plan. The Till formula “instructs the bankruptcy court to begin with a largely risk-free interest rate, specifically, the ‘national prime rate … which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default.” The district court agreed with the bankruptcy court’s holding.
On appeal, the Second Circuit considered whether the interest rates applied by the bankruptcy court on the replacement notes were sufficient under 1129(b) of the Bankruptcy Code. The Second circuit reevaluated the Till formula or “prime plus” method endorsed by the Supreme Court to see if Chapter 11 cases typically require the application of such a method. The bankruptcy court should then hold a hearing to determine a proper plan-specific risk adjustment to that prime rate “at which the debtor and any creditors may present evidence.” See In re MPM Silicones, LLC 2014 WL 4436335 at 8 (citing Till v. SCS Credit Corp., 541 U.S. 465, 478–79, 124 S. Ct. 1951, 1961, 158 L. Ed. 2d 787 (2004).
In applying the Till formula, the Second Circuit found that the bankruptcy court failed to take into account whether or not an efficient market existed when determining the interest rates of the replacement notes. See In re MPM Silicones, LLC 2014 WL 4436335 at 14. The Second Circuit, after finding that market factors should not be ignored when determining such rates, adopted the Sixth Circuit’s two-part test: this calls for the inclusion of market factors when an efficient market exists, but where no such market exists, courts should apply the Till formula. See In re MPM Silicones, LLC 2014 WL 4436335 at 8, 9 (citing In re Am. HomePatient, Inc., 420 F.3d 559, 568 (6th Cir. 2005)). The Second Circuit remanded the case to bankruptcy court to determine the interest rate by using this dual-tiered approach.