The credit crisis that began in August of 2007 and intensified with Lehman Brothers' September 2008 bankruptcy continues largely unabated in U.S. loan markets in early 2009. Many bank loans, particularly leveraged loans, continue to trade at a significant discount to par in illiquid secondary markets. Borrowers have begun sensing opportunity.

It is estimated that more than 25 U.S. companies have attempted buybacks of their bank loans in the last year or so. Given the challenges posed by the recession and the current premium placed on liquidity preservation, not every borrower has (or will be comfortable deploying) the resources necessary to buy back its loans. For those able to do so, however, the benefits can include the monetization of a significant trading discount to par, as well as a reduction in leverage and interest cost, which may ease ongoing compliance with ratio covenants.

What's more, The American Recovery and Reinvestment Act of 2009, the stimulus package signed into law by U.S. President Obama on February 17, 2009, may soften the negative tax consequences of certain loan buybacks by potentially allowing borrowers to elect to defer, until their 2014 – 2018 tax years, the recognition of taxable "cancellation of debt" income arising on buybacks occurring in 2009 or 2010.

A more detailed summary of U.S. loan buyback considerations and consequences is available here .

Andrew Herr is a partner in the Financial Services Group in the Osler's New York office, he represents financial institutions and borrowers in domestic and international debt financing transactions, including syndicated secured and unsecured credit facilities, acquisition and other leveraged finance transactions, private placements, and structured finance transactions. William Corcoran is a partner in the Tax Department of the firm's New York office where he represents private equity funds and investors in all aspects of fund formation, management and operation. Michele Moss is a partner in the Financial Services Practice Group in the firm's New York office and her transaction experience covers a wide spectrum of both domestic and cross-border financing transactions.

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