This new language appearing in credit agreements specifically allowing for privately negotiated exchange transactions will provide a much stronger basis for borrowers and participating lenders going forward to argue that Serta-like exchange transactions are permissible.īreach of the Implied Covenant of Good Faith and Fair Dealing. While many credit agreements in the wake of Serta have added clear anti-layering protections for minority lenders requiring the consent of all lenders or all affected lenders to effectuate a priming transaction unless each lender is afforded the opportunity to participate ratably, it should be noted that some recent credit agreements have taken a completely opposite approach, instead clearly defining open market purchase to include privately negotiated transactions at or below par for cash, securities or any other consideration with one or more lenders that are not made available for participation to all lenders. The court’s determination that it is unclear whether the definite and precise meaning of the term “open market purchase” would permit an uptier exchange undertaken privately by a borrower and a select group of lenders is undeniably a win for asset managers and lenders that are being left out of uptier exchange transactions. In making such findings, the court rejected Serta’s definition that an “open market purchase” should be equated with fair market value and the price that a willing buyer and a willing seller can obtain in an arm’s-length negotiation. 5 To the contrary, the court reasoned that the Transaction did not take place in what is conventionally understood as an “open market” because it was closed to certain potential participants and, rather than utilizing a price set by the market, used a price that ultimately would induce lenders to enter into the amendments allowing the Transaction. In deciding that the Plaintiffs’ claims were properly asserted against Serta, the court found that the term “open market purchase” 4 was ambiguous and did not expressly allow the Transaction. Open Market Purchase Provision Does Not Expressly Allow Transaction. 3 The Court Permits Claims for Breach of Contract and Lack of Good Faith and Fair DealingĪfter the Transaction closed, Plaintiffs-holders of approximately $7.4 million of existing first lien loans-brought an action alleging, among other things, that Serta (i) breached the Agreement by structuring a debt exchange that did not qualify as an “open market purchase” and, accordingly, violated the lenders’ rights to receive pro rata payments under the Agreement, and (ii) breached the implied duty of good faith and fair dealing by depriving the Plaintiffs of their senior secured position in Serta’s debt stack. 2įunds managed by LCM Asset Management (Plaintiffs) were not included in the negotiations resulting in the Transaction and their consent to the amendments was not sought by Serta or the agent. Serta and the Participating Lenders negotiated and executed a series of amendments to the loan documents including the First Lien Term Loan Agreement (Agreement), which allowed the Transaction to be consummated. In June 2020, Serta entered into a transaction (Transaction) with a majority of its existing first lien and second lien lenders (Participating Lenders) that created two new tranches of debt (Priming Loans), both ranking ahead of Serta’s existing first lien loans: (i) a $200 million new-money tranche and (ii) an exchange tranche comprising $875 million of loans created through an exchange of the Participating Lenders’ first and second lien loans. The court also found that the minority lenders had standing to bring such claims despite a no-action clause in favor of the administrative agent under the credit agreement. 1 The court concluded, among other things, that Serta may have breached the credit agreement’s “open market purchase” provisions in consummating the uptier exchange and violated standards of good faith and fair dealing in depriving the non-participating lenders of their seniority status in the debt structure. In a win for non-participating lenders, US District Judge Katherine Failla of the Southern District of New York issued an opinion denying Serta’s motion to dismiss the action challenging its uptier exchange and allowing the minority lenders to continue to pursue claims against Serta for breaches of the credit agreement and the implied covenant of good faith and fair dealing. A recent decision in the Serta Simmons Bedding, LLC (Serta) saga provides valuable insights into the viability of non- pro rata uptier exchange transactions and may embolden minority lenders whose loans have become subordinated to those of the majority as a result of such transactions.
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