A May 2006 decision in the Adelphia Communications bankruptcy case has struck a nerve with senior lenders. The US Bankruptcy Court for the Southern District of New York ruled that the senior lenders to various Adelphia entities were not entitled to receive more than $187 million in retroactive interest on their loans.
The court reached this conclusion despite acknowledging that the lenders would have been entitled to that interest if the borrower had not deceived the lenders as to its financial condition. The decision is of concern to senior lenders because the court's analysis of the company's loan agreements turned on a conservative interpretation of a series of provisions that appear in many loan agreements governing syndicated loan transactions.
Under the company's loan agreements, the borrower at its option could make borrowings based on: (i) the prime rate of interest; or (ii) the London inter-bank offered rate for US dollar...