Reference no: EM131675304

Question: Energy cooperative Hoosier Energy sought to move depreciation deductions that it could not use to John Hancock Life Insurance Company. Under the transaction, John Hancock would pay Hoosier Energy $300 million for a 63-year lease of an undivided two-thirds interest in Hoosier Energy's Merom generation plant. Hoosier Energy agreed to lease the plant back from John Hancock for 30 years, making periodic payments with a present value of $279 million. The difference represented some of the value of the deductions that John Hancock could take as the long-term lessee of the plant. Because of the risks to John Hancock in the case of Hoosier Energy's default, Hoosier agreed to provide John Hancock with additional security in the form of a credit-default swap and a surety loan of about $120 million. Ambac Assurance Corporation agreed to be the surety bond holder.

As stipulated by the parties, if Ambac's credit rating fell below a certain threshold, Hoosier would be required to fi nd a different surety bond holder. In 2008, Ambac's credit rating fell below the stipulated threshold. In accordance with their agreement, John Hancock gave Hoosier 60 days to fi nd a replacement. When Hoosier reported having trouble fi nding a replacement, John Hancock extended the deadline to 120 days. At the end of this second deadline, Hoosier reported that it was "in negotiations" with Berkshire Hathaway to replace Ambac. Hoosier contended that immediately replacing Ambac as a surety bondholder was impossible in light of the changes in the credit market. John Hancock argued that Hoosier was capable of finding a replacement but found the offered fees too high. Hoosier fi led a preliminary injunction to prevent John Hancock from requesting the surety from Ambac, which claims that it was ready, willing, and able to pay the surety bond. Hoosier argued that a temporary commercial impracticability existed in the market that made the situation unfair for Hoosier, which would be required to default on its loan immediately upon Ambac's payment of the surety fee. Do you agree? Why or why not?