Wed 01/12/2022 15:59 PM
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On Friday, Jan. 7, TriMark announced that it had resolved the dispute with certain lenders under its first lien term loan facility in connection with the company’s superpriority uptier exchange in September 2020.

Although the precise terms of the settlement remain confidential, the company has disclosed that the lenders have agreed to:
“[E]xchange … all outstanding First Lien Term Debt on a dollar-for-dollar basis for Tranche B Loans pursuant to the company's Super Senior Credit Agreement. Tranche A Loans outstanding under the Company's Super Senior Credit Agreement will retain their position in the Company's capital structure, senior to the Tranche B Loans.”

In 2020, TriMark, Serta Simmons and Boardriders completed similar superpriority uptier exchanges under which a majority of first lien lenders consented to amendments providing them with superpriority debt capacity, and those consenting lenders exchanged their first lien term loans through prearranged “open market purchases” for that new superpriority debt. Effectively, the transactions subordinated minority first lien lenders, who were not offered the chance to participate in the exchange.

The transactions, along with the inevitable lawsuits brought by each group of minority lenders, raised a number of questions that centered on the credit agreements’ exchange mechanics, including:

  • Does a transaction that results in lenders’ liens being subordinated amount to a release of those lenders’ liens on the collateral?

  • What is an open market purchase? Can selective open market purchases from cooperative existing holders be done at below market prices?

  • Do debt-for-debt exchanges implicate the credit agreement’s pro rata sharing provisions?

  • Are minority lenders adversely affected by the reduction in outstanding term loans absent default?

Although TriMark and its lenders have resolved their dispute, Serta Simmons’ and Boardriders’ litigation with their minority lender groups are still winding their way through the court system. In August 2021, the judge in the TriMark case ruled that the minority lenders had stated a viable claim under the first lien credit agreement, but this was a preliminary ruling on the pleadings, and the settlement ensures that no decision will be rendered on the merits.

The lack of a final court ruling as to the propriety of these transactions is likely as frustrating as it is unsurprising for loan market participants, who had hoped to have some clarity as to the potential for these transactions to be repeated.

Superpriority uptier transactions were just the latest machination from sponsored borrowers taking advantage of loose documentary terms and conditions in their credit agreements.

One does not have to look too far back in time to remember the wave of unrestricted subsidiary intellectual property transfers championed by J.Crew in late 2016 and copied by PetSmart in 2018 and Travelport in 2020.

Like the superpriority uptier exchanges, the IP transfer transactions were all challenged by those companies’ lenders, and, like the superpriority uptier exchange lawsuits, the IP transfer lawsuits were also dropped after the companies and their lenders settled their disputes.

Reorg Americas Core Credit discussed bankruptcy issues related to IP and other unsub transfer transactions in connection with the Talen Energy situation in September 2021.
Anti-Serta Simmons Protections

Although superpriority uptier exchanges have been neither accepted nor rejected by courts, a handful of recent publicly filed credit agreements, a majority of which are for sponsored borrowers, have included similar language that seeks to protect lenders from being primed as a result of a superpriority uptier exchange.

The credit agreements for Tenable Holdings (Insight Venture Partners), MeridianLink (Thoma Bravo), Cincinnati Bell (Macquarie Group), Ping Identity (no sponsor), Integer Holdings (no sponsor) and WideOpenWest (Crestview Partners) require that all lenders must consent to any amendments that result in lenders’ liens being subordinated. However, to the extent each lender has been offered the opportunity to participate in the super senior debt on a pro rata basis, such lien subordination amendments will only require the consent of a majority of lenders.

While lenders under these credit agreements will be protected from being primed by new super senior debt, they stand in stark contrast to lenders under the vast majority of credit agreements in the loan market, which lack any protection from Serta-style superpriority uptier exchange transactions. This includes agreements drafted subsequently to lender litigations mentioned above, with these agreements failing to provide any new language in response.
New Kids on the Block

Lenders were certainly apoplectic in 2016 after discovering that their collateral no longer included liens on certain of their borrower’s intellectual property and in 2020 after discovering that their first lien position in their borrower’s capital structure had, overnight, turned into a third lien position.

Nevertheless, far from demanding more protections, recent draft private credit agreements reviewed by Reorg Covenants Prime appear to be further weakening lenders’ consent rights.
Disregarding Unresponsive Lenders

Credit agreement amendments typically require the consent of a majority of lenders, of all affected lenders or of all lenders, depending on the provisions being amended.

If a credit agreement provides a $300 million term loan and a $100 million revolver, amendments to the credit agreement that require consent from a majority of lenders will require the consent of lenders holding more than $200 million of a combination of term loans, revolving borrowings and revolving commitments.

In order to obtain consent from lenders for a proposed amendment, borrowers, typically through the administrative agent under the credit agreement, will provide notice to lenders of the proposed amendments and ask for their consent on or before a specified date. Lenders that do not respond by the deadline are deemed to have not provided their consent.

One new credit agreement we recently reviewed, however, includes a novel provision providing that:
“Notwithstanding the foregoing, the Loans and Commitments of any Lender that does not respond in writing to any waiver, amendment or other consent requested under this Agreement or any other Loan Document within ten (10) Business Days (or such longer period as the Borrower and the Administrative Agent may agree) of a written request therefor shall be disregarded in determining whether any requisite percentage of consents has been obtained hereunder” (emphasis added).

Whereas, under virtually all credit agreements, lenders that do not respond to a request seeking their consent for an amendment are deemed to have not provided their consent, under this credit agreement, the loans of lenders that have not responded to a request seeking their consent are disregarded (that is, deemed to be not outstanding) in determining whether the required number of lenders have consented to a proposed amendment.

Returning to our example, if a lender that holds $10 million of the term loan and $10 million of revolving commitments does not respond to a consent request, ordinarily the borrower would still be required to receive consent from lenders holdings more than $200 million of the term loans, revolving borrowings and revolving commitments.

However, under these new provisions, if that lender does not proactively respond to the amendment request within 10 business days, where the borrower must obtain majority lender consent, it will only be required to obtain majority consent from the remaining lenders that hold more than $380 million of the term loans, revolving borrowings and revolving commitments.

It is a staggering provision that, effectively, eliminates one of the lenders’ fundamental rights under credit agreements if it does not meet an artificial deadline established by the borrower.
Acceleration by the Supermajority

Virtually every credit agreement provides that, following an event of default, a majority of credit agreement lenders have the right to accelerate the credit agreement obligations.

A recent draft credit agreement increased that threshold such that lenders holding 66-2/3% of the term loans, revolving borrowings and revolving commitments have to agree to accelerate the obligations.

Although nowhere near as harmful as the unresponsive lender mechanics, the increased lender acceleration threshold is just another example of a provision designed to weaken the influence of any one lender under a credit agreement.
Voting Caps Invade the Leveraged Loan Market

In early to mid 2021, a handful of new high-yield bond issuances included a “Voting Cap” mechanic that allows the issuer to restrict any single holder (and its affiliates) from accounting for more than 20% of the outstanding notes for voting purposes, regardless of the holder’s actual holdings. To the extent the issuer exercises the Voting Cap, all of the holder’s notes in excess of 20% will be deemed to not be outstanding for purposes of determining whether the applicable voting threshold has been met.

It wasn’t until the end of 2021 that we finally - but inevitably - saw the Voting Cap mechanic appear in a draft credit agreement.

Like the unresponsive lender mechanic, although far more overtly, the Voting Cap mechanic quite literally can result in a lender losing its ability to vote all of its loans in favor of, or opposed to, any proposed amendment.

As of this writing, the inclusion of these provisions in credit agreements remains exceedingly rare. However, as with the lifecycle of a plant, aggressive debt document terms and provisions start as seedlings, and as they get more and more exposure (that is, as they are included in more and more credit agreements), they steadily grow and plant their roots. Before anyone has had time to take notice, those seedlings have become market terms that can hold steady against fierce market pushback.
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