The Federal Deposit Insurance Corp. may start favoring providers of short-term financing over long- term bondholders when it winds down a systemically important financial institution, CreditSights Ltd. said.
The regulator is considering paying commercial paper, bank lines of credit and other short-term obligations first in resolving the credit obligations of troubled companies. Holders of senior unsecured bonds with a maturity date of more than one year “would be expected to ‘get in line’ along with other creditors,” CreditSights analysts David Hendler and Baylor Lancaster wrote in a report.
“Our sense from the document is that the FDIC is aiming to set up a kind of dividing line between unsecured creditors which function as liquidity providers from other unsecured creditors,” the CreditSights analysts said today.
The FDIC yesterday released a document outlining how it’s considering treating creditor claims when it steps in as receiver of a troubled firm. The Dodd-Frank Wall Street Reform and Consumer Protection Act granted the FDIC authority to take control of bankrupt or insolvent companies that threaten U.S. financial stability.
Hendler and Lancaster didn’t immediately return telephone messages left at their offices.
Favoring short-term creditors may encourage investors to continue to roll over obligations that allow a company to continue operating, the analysts said.
“We’re trying to provide additional market clarity to stakeholders who had expressed concern that we would differentiate in a way that would be abusive or harmful,” FDIC Chairman Sheila Bair said in a conference call with reporters yesterday.
Under the FDIC proposal, a bridge company would be created to take over the operations of the failing financial firm.
“A bridge financial company is a completely new entity that will not be saddled with the shareholders, debt, senior executives or bad assets and operations that contributed to the failure of the covered financial company or that would impede an orderly liquidation,” CreditSights said in its report.
An exception could be made for some short-term creditors if they are deemed essential to the company’s operations, according to the proposal.
The FDIC will hold comment periods of 30 days on the rule and 90 days on broader questions. Final terms are expected to be settled in the first quarter of next year.
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