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Airlines throughout the world were unable to fully trade during the pandemic-related lockdowns and their subsequent travel restrictions, creating significant liquidity constraints during       2020–22.  As a result, a number of major international airlines—including Aeroméxico, Avianca, LATAM, Norwegian Air Shuttle, SAS and Virgin Australia—were forced to file for bankruptcy protection or insolvency administration, and many airline lessors were forced to agree to defer lease rental payments from their airline customers.
For some lessors, their airline customers entered bankruptcy protection regimes, resulting in the return of aircraft that were deemed “excess” to the airlines’ needs, and leaving those lessors with unsecured claims for financial losses that are most likely to be settled by the insolvent estate of the relevant airline at a significant discount to par value.
Rather than wait for a distribution, following the bankrupt debtor’s claims administration process, creditors with unsecured claims against an insolvency estate have the option to trade their claims, which can avoid the uncertainty and delay of being an expectant creditor.
So how does a claim trade work, and what are the key issues for a “selling” creditor?
<h3>A (Very) Brief Guide to Claims Trading  </h3>
A creditor with claims against a debtor in an insolvency estate is able to trade such claims by way of an assignment of its rights to a third party “buyer.”  In the airline context, the rights to be assigned under the trade include all of the creditor’s rights arising under the lease or other deal-related documents, including, its rights to receive the distribution from the insolvency estate afforded to the creditor’s claim.
Creditors can sell both proven “allowed” claims and those claims that have yet to be allowed or fixed against the insolvent debtor.  In either case, the creditor, as seller, would enter into an agreement with the buyer to sell the principal amount of the filed or proven claim for an agreed price.  Claims are traded below par, so the sale price will represent an agreed discount to the principal amount of the claim.
Upon completion of the trade, the buyer would become the creditor of record and be entitled to all applicable claim distributions from the insolvent estate.
There is a well-established market in claims trading.
<h3>Key Issues</h3>
<ol><li>Documentation.  There are two main documents that form part of a claims trade:  the trade confirmation and the assignment of claim.  The trade confirmation is a relatively short document setting out the key commercial terms, such as the principal amount of the filed claim, the purchase price and any conditions to completion of the assignment.  Although it is similar to a term sheet or letter of intent, the trade confirmation is a legally binding document and constitutes an agreement to trade the relevant claims subject to completion of any agreed conditions and the signing of the assignment of claim.  The seller and the buyer would typically be unable to avoid completing the intended sale and purchase once the trade confirmation is signed and dated.</li><li>Prior Transfers/Assignability.  To establish title to the claim, the buyer will take an assignment of rights under any prior assignment of the traded claim and will seek disclosure of any other assignment document.  Accordingly, if the seller has assigned the claim within its group, for example, that intra-group assignment will need to be assignable or a consent to assignment (and to disclosure of its terms) will need to be obtained.</li><li>Representations.  In the assignment of claim, the seller is expected to make representations consistent with establishing the existence and validity of the claim without any third-party right of set-off or disallowance, consistent with the risk allocation between the seller and the buyer.  The seller assumes the risk of the existence and validity of the claim and the buyer assumes the risk of the timing and rate of recovery on the claim.</li><li>Recourse.  Claim assignments typically include recourse by the buyer against the seller if the expected distribution is impaired, including situations where the claim amount is reduced or subordinated or where the dividends or distributions on account of the claim end up being proportionately less in amount or different in nature or timing than dividends or distributions payable to other holders of similar admitted claims against the estate.  In such cases, the buyer would be entitled to a purchase price adjustment agreed under the claim assignment.</li><li>Timing of Payment.  If the creditor’s claim against the insolvency estate has been proven, fixed and allowed prior to execution of the trade confirmation, payment of the purchase price will typically be made at closing.  In contrast, if the claim to be sold has not been allowed and is thus still potentially subject to objection, payment is routinely delayed until such time as the claim becomes an allowed claim.  As a result, having an allowed claim is preferable, although not necessary, to complete a claims trade.</li><li>Post Completion.  Post-signing of the assignment of claim, the buyer would need to be registered as the creditor of record in respect of the relevant insolvency estate.</li>
</ol>
If you have any questions about claims trading, do not hesitate to contact our Global Transportation Finance attorneys.



March 9, 2023

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Insolvency Claims Trading

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