The Fisker Case and Its Impact on Distressed M&A

April 15, 2014

As is well known, the right to credit bid is the entitlement of a secured lender to bid the amount of its outstanding claims at the sale of its collateral. If the secured lender places the winning bid, no money is exchanged and the purchase price is offset against the existing claims. Credit bidding provides an important right to secured lenders in ensuring that their collateral is not sold for a depressed value. If a secured lender thinks its collateral is being sold too cheaply, it has the option of taking the collateral in exchange for some or all its claims. Credit bidding can also be used as part of an acquisition strategy. Potential acquirers can purchase distressed secured claims in the secondary market, often at a substantial discount, and bid those claims at up to face value in a bankruptcy auction. Although credit bidding can be a useful in a distressed acquisition strategy, one of the risks is that a bankruptcy court will deny or limit credit bidding “for cause” under section 363(k) of the Bankruptcy Code.

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