No Honor Among Creditors: Delaware Judge Issues Important Ruling On “Uptier” Transaction

Intercreditor disputes in bankruptcy are common.  Usually, even so, they heart around predictable disagreements involving senior or junior classes of lenders these kinds of as valuation battles or lien perfection troubles.  A recent selection in the Delaware chapter 11 scenario of TPC Group has highlighted a new trend of “intra-creditor course warfare,” involving, in the understated words and phrases of Choose Craig Goldblatt, “transactions that look to choose advantage of complex constructions of loan documents in methods that some watch as breaking with business norms.”

In TPC Team, Judge Goldblatt upheld a so-named “uptier” transaction, in which a the vast majority of the holders of a certain series of secured notes agreed to order a new collection of debt from the borrower, with the first notes getting to be subordinated to the new notes.  Pre-bankruptcy in 2019, TPC Group issued $930 million of secured 10.5% notes pursuant to a believe in indenture.  The collateral agent for the 10.5% notes entered into an intercreditor settlement with the agent financial institution for the financial institution syndicate supplying TPC Group with a revolving credit rating facility, supplying the banking institutions with a senior lien on stock and receivables, and the 10.5% noteholders with a senior lien on substantially all other belongings.

In 2021 and previously this yr, less than a independent indenture, TPC Team issued roughly $205 million of new secured 10.875% notes to holders who constituted about a two-thirds greater part of the 10.5% noteholders, secured by the identical collateral as the 10.5% notes.  That vast majority of 10.5% noteholders voted to amend the 2019 indenture and the intercreditor settlement so that the liens securing the new 10.875% notes would be senior to the liens securing the 10.5% notes.

TPC Group filed a petition for reduction underneath chapter 11 of the Individual bankruptcy Code at the starting of June.  In link with the filing, the holders of the 10.875% notes supplied to deliver debtor in possession (DIP) funding with $85 million of new income, but demanded a roll-up of $238 million in principal and accrued fascination thanks under the 10.875% notes.  When TPC Group agreed and sought court docket approval for the DIP financing, two holders of the 10.5% notes which did not keep the 10.875% notes challenged the new financial loan, contending that the modification of the 2019 indenture was invalid.

This necessitated an immediate overview by Judge Goldblatt of the uptier transaction.  If the amendments of the 2019 indenture were being good and the 10.875% notes have been validly senior to the 10.5% notes, then the roll-up of the prepetition credit card debt into a new postpetition DIP loan facility with priority about just about all other claims would have very little practical effect.  But if the improvements to 2019 indenture experienced been carried out in violation of the indenture conditions, then, as Judge Goldblatt mentioned, the roll-up would elevate junior (and almost certainly unsecured) personal debt and make the DIP financial loan “very expensive dollars in truth.”

The events agreed that the thoughts elevated were being entirely lawful challenges.  The objection and connected motions had been briefed and argued on an expedited basis, so that Judge Goldblatt could make a final ruling on the DIP financial loan.

The crucial substantive concerns were being regardless of whether the amendments and subordination violated the 2019 indenture’s ratable cure clause, which involves payment to all noteholders “without choice or priority of any kind,” or effectuated a alter to “the application of proceeds of Collateral [in a manner] that would adversely have an impact on the Holders.”  Any these kinds of modification would have expected the unanimous consent of all 10.5% noteholders.

Choose Goldblatt determined that the amendments did not affect the ratable remedy of the 10.5% notes and dominated in favor of TPC Group and the 10.875% noteholders.

The 2019 indenture was silent on the concern of subordination of the 10.5% notes.  Though acknowledging that it was a shut call and that other courts experienced arrived at distinctive conclusions pertaining to subordination and ratable treatment method clauses, Decide Goldblatt mentioned that the 2019 indenture permitted the launch of collateral upon approval of a two-thirds greater part.  He concluded that if a launch of the collateral, which he described as a extra “drastic” action, could be accomplished with significantly less than 100% approval, then subordination similarly must not involve unanimous consent.

Decide Goldblatt reasoned that the indenture trustee was nonetheless obligated to disburse proceeds of collateral ratably, and concluded that the ratable therapy clause was not violated basically simply because there would most likely be much less proceeds of collateral to disburse.  The ratable remedy clause, he stated, “should not be read through as an anti-subordination provision in disguise.”  He thus ruled that the amendments did not have to have unanimous acceptance, and that the alterations to the 10.5% indenture and the intercreditor arrangement had been validly effectuated.

Whilst evincing some sympathy for the arguments place forward by the objecting 10.5% noteholders, and noting that the uptier transaction “may have violated . . . the ‘all for one particular, just one for all’ spirit of a syndicated loan,” Decide Goldblatt identified that underneath the apparent phrases of the 2019 indenture the amendments have been valid.  “There is very little in the regulation that needs holders of syndicated financial debt to behave as Musketeers.”

Choose Goldblatt’s determination is an vital addition to the establishing jurisprudence on uptier transactions and related intra-creditor disputes.  With fascination rates increasing and a wave of defaults looming, related battles are likely to be fought out in bankruptcy courts in the coming months.