A US bankruptcy court has ruled that flip clauses are unenforceable – opposing a decision in the UK. This could lead to securitisations migrating from the US and ratings agencies revisiting existing structures.
In the decision, the United States Bankruptcy Court for the Southern District of New York favoured Lehman Brothers regarding flip clauses in collateralised debt obligations (CDOs). This goes against an earlier decision in the English Court of Appeal.
“This was unexpected. People will have to rethink the way they document things,” said Fredric Sosnick, partner at Shearman & Sterling in New York. “It will be difficult to get similar economics into a structure without having a flip at the parent filing. It’s...