Debt enforcement battles known as “creditor violence” are on the rise, as more creditor groups use coercive tactics and non-participating creditors increasingly find themselves in court.
There is constant change in this market segment, Chris Gartman, a partner in Hughes Hubbard’s Corporate Reorganization & Bankruptcy group, said as borrowers and their private equity sponsors continue to look for new tools to avoid bankruptcy. But Gartman says those who use liability management exercises (LME) often end up in bankruptcy.
Indeed, a study carried out at the University of Oxford this year found that more than 80 percent of the 89 LME transactions that took place in recent years did not pay their debts within 36 months, many of them entered legally.
And a recent Moody’s note found that when there was a war between creditors, the losing creditors ended up receiving 14 cents on the dollar compared to 57 cents received by major creditors in a company that went bankrupt outside of the LME transaction.
The sharpest increase is in cooperative agreements, agreements that bind lenders to act as a bloc. Doug Mintz, restructuring partner at Cadwalader, said the pendulum “is swinging towards more groups pushing hard through co-op co-ops to bring the dispossessed to heel faster and more effectively than ever before”.
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For example, co-ops accept second- or third-tier creditors but introduce a carve-out of fees and expenses that seek to reimburse the steering committee for doing the hard work. The outside member, Mintz said, “allows the steering committee to package the amount they want to get from those funds” and “when they sign they put in their lot with the majority”.
Another development, Gartman said, is suing strategically for buying only after the LME closes.
“Some of these lenders buy after the debt management work has been done, and then they file lawsuits,” he said.
A common argument against these accusations is that the funds were bought knowingly – as happened in Trinseo, it is reported. Several lenders are challenging the company’s LME listing in 2023, but in a motion filed in June, the defendants said the leader of the group of several lenders, CastleKnight, bought its position with full notice of “the very contractual provisions and transactions it now seeks to terminate”.
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Gartman said many cases are still pending before the bankruptcy stage, and bankruptcy courts are increasingly appointing examiners to investigate these transactions.
“You have to make sure you track everything. The documents of the agreements, the lawsuit, the courts and the judges who make those decisions,” said Gartman.
Mintz noted that of the non-listed lenders, those who push back – with strategy and good advice – “tend to get bigger benefits than those who just take whatever is offered by the steering committee”.
Elsewhere, Gartman sees an increasing shift to pro-rata transactions.
“That means most or all lenders participate in the LME,” he added. “Many of the courts that have been followed up until now have been about non-romantic agreements because we are talking about deals made several years ago that have been challenged. But I think that there is no longer a need for many lawsuits so there is a lot of change.”
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