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Talking Point: Credit Bidding Challenges in Bankruptcy

FW: Could you outline some of the key trends and developments in credit bidding over the last 12 - 18 months? How prevalent has this practice been in a recent banruptcy cases?

Peterman: Credit bidding has been a prevalent practice in bankruptcy cases over the past several years. Typically, a distressed investor determines the fulcrum security in a company's capital security and then implements a 'loan to own' strategy that results in a Section 363 sale with the distressed investor credit bidding its debt and acquiring the assets of the company. Over the past 12 to 18 months, a few courts have restricted a lender's right to credit bid for cause under Section 363(k). The lenders, whose credit bid rights have been restricted, generally have purchased the debt for purposes of executing a loan to own strategy. Courts have restricted their credit bid rights not because of the loan to own strategy, but due to aggressive sale timelines, other aggressive actions taken by those lenders and other unique circumstances in the cases.

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