The following post comes to us from Professor Rasmussen at USC:
Nortel Bankruptcy Sets a Dangerous Precedent For the Future of Lending
Lenders are no fools. They care deeply about the promises they receive in return for the money they hand over to the borrower. And if a 2015 ruling in the long-running Nortel Networks bankruptcy case is allowed to stand, it could lead to more restrictive lending to borrowers in the future.
For decades, our commercial law has allowed enterprises to divvy up promises as they see fit. Companies often conduct business through multiple, related entities. This allows lenders to extend credit knowing they’ll receive repayment for their loans from particularly asset-rich subsidiaries, that are not on the hook for all of the debts of the business. This adroit use of the corporate structure allows borrowers to get funds at a lower cost and, in the extreme, can mean securing a loan or not — which can be the difference in a business being able to operate.
Until recently, a lender taking a promise from a subsidiary of a business could rest assured that its only other competition to the subsidiary’s assets would be the other creditors. A recent case, however, threatens to overturn this accepted wisdom and bring uncertainty to financing of large enterprises.