Third Circuit Finds DCF Analysis is "Commercially Reasonable Determinant of Value"
On the Edge
ABI Journal Vol. XXX, No. 4, May 2011
Counterparties to repurchase agreements and other contracts protected under the safe-harbor provisions the Bankruptcy Code have something new to worry about: the possible undervaluation of their damage claims based on a discounted-cash-flow (DCF) analysis of termination value in a dysfunctional market. The Third Circuit recently affirmed the U.S. Bankruptcy Court for the District of Delaware’s denial of Calyon New York Branch’s $478.5 million claim in In re American Home Mortgage Holdings Inc. and held that a DCF analysis may constitute a “commercially reasonable determinant of value” for measuring a damage claim under an accelerated repurchase agreement under § 562 of the Code. As a result, the decision that such counterparties face upon a default (whether to sell the underlying assets into a depressed market or retain them until market conditions normalize) has become significantly more complicated, which ultimately may result in increased financing costs and a counterproductive incentive to liquidate assets prematurely into a dysfunctional market