WILMINGTON, Del. (Reuters) – A U.S. appeals court in New York on Friday ruled in favor of senior creditors who had contested interest rates imposed on them during the bankruptcy of silicone maker Momentive Performance Materials, reversing a decision that had sparked alarm among lenders.

The ruling by the 2nd U.S. Circuit Court of Appeals found the U.S. Bankruptcy Court in White Plains, New York, erred by not using market rates to determine the interest paid on new notes Momentive forced on holders of about $1.25 billion of secured notes.

The replacement notes carried much lower rates, which were set by the court using a formula developed in a consumer bankruptcy case involving a subprime loan for a used truck.

Secured creditors opposed getting notes with below-market interest and argued they were not getting the full value of their claim. Their appeal led to Friday’s ruling.

Lenders and bankruptcy lawyers had warned that the lower court ruling ramped up the risk in financing distressed companies. They also argued it gave struggling companies more leverage when negotiating with lenders because they could essentially threaten to impose new loans on them with below-market rates.

Momentive, owned by Apollo Global Management, filed for bankruptcy in 2014. Apollo continues to own 40 percent of the company, according to securities filings, and the case bolstered Apollo’s reputation as a savvy investor that is willing to test legal boundaries.

The case now goes back to U.S. Bankruptcy Judge Robert Drain, who was directed to determine if a market interest rate exists for the replacement notes, and if it does, to apply that rate.

The Loan Syndications and Trading Association, which urged the Appeals Court to overturn the Momentive ruling, welcomed the decision.

A Momentive spokesman did not immediately respond to a request for comment.

Momentive filed for an initial public offering in September and said in a securities filing that a loss on the interest rate issue in the 2nd Circuit could reduce its liquidity and could increase interest costs.

Holders of the secured notes had said a market rate would have led to an additional payment from Momentive of at least $150 million, according to the Appeals Court opinion.

Following the ruling, Momentive’s notes due 2021 traded to a record high of 104.75 cents on the dollar on Friday, up over 2 points from their latest trade on Wednesday, according to MarketAxess data.