Bankruptcy court rules OID generated in fair market value debt exchange should be allowed
On 15 November 2013, judge Martin Glenn of the Bankruptcy Court for the Southern District of New York held that original issue discount (OID) created in a prepetition ‘fair market value’ debt exchange is not disallowable in bankruptcy. This ruling provides important and long-awaited guidance for the investing community on the question left open by the Second Circuit’s 1992 ruling in LTV Corp v Valley Fidelity Bank & Trust Co (In re Chateaugay Corp).
OID is a form of ‘deferred interest’ that is generated when a bond is issued for less than its face value. The discount is the difference between the face value of a bond and the price paid to the issuer. For instance, if a company issues a zero coupon bond with a face value of $100 (£62) at an issue price of $80, the OID for the bond is $20.
Although OID is only payable at maturity, for tax and accounting purposes, OID is amortised over the life of the bond. In a debt exchange, the issue price of the new debt is generally determined by reference to its market value at the time of issuance…
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