Key takeaways

• The Second Circuit Court of Appeals reversed a lower court decision that interpreted minority bondholder protections in Section 316(b) of the Trust Indenture Act (“TIA”) to restrict out-of-court bond restructurings.
• The court held that Section 316(b) of the TIA only prevents changes to an indenture’s core payment terms and does not prevent other transactions that may impair a bondholder’s practical ability to receive payment.
• This ruling removes uncertainty over whether certain out-of-court bond restructurings are permissible under Section 316(b) of the TIA.
• The court also cautioned that out-of-court bond restructurings remain subject to other potential creditor claims, serving as a useful reminder that distressed companies and equity sponsors should follow best practices when pursuing these transactions.