Joshua Feltman Speaks on Open Market Purchases

Joshua Feltman

From a policy perspective, it’s interesting to position these issues in the context of the trend toward more direct — for our purposes here, non-syndicated — lending. If non-ratable transactions of various sorts constitute a risk that requires pricing in the syndicated market, then that’s a competitive advantage for non-syndicated credit (or at least a reduction in the general pricing advantage that the syndicated market enjoys at present, due in part to risk-sharing). In this light, pushback on non-pro rata exchanges in the primary market can be seen not only as a credit enhancement on the particular deal being sold, but also as a defense of syndicated term loans writ large! The most extreme fears about uptiering transactions include the decimation of the existing bank debt market due to a breakdown in essential trust among lenders. I don’t have that on my list of likely outcomes, but there’s no doubt these players could use a win in court and/or a real evolution in documentation standards relative to the last few years – and they have been on their heels in court of late.

Moreover, the two solutions are not equivalent. A positive judicial development would protect hundreds of billions of existing debt, whereas a market correction at the point of syndication alone would leave us with several years yet of non-ratable deal making and associated coalition-jockeying. Leading to the further question of whether the market can correct midstream, in particular through cooperation agreements. We’ll see. The answer is likely yes but, should courts addressing open-market/non-ratable transactions vindicate those transactions, then I don’t see why we’re more likely to get cooperation agreements among super majorities supporting ratable treatment than we are to get cooperation agreements among bare-majority coalitions who want to position themselves to offer the most value possible to sponsors by extracting the most value possible from 49.9% of similarly situated creditors.

The road to nowhere concern is also real, though the most troubling example in my experience, Toys-R-Us, didn’t involve a non-ratable deal. Any technology that allows sponsors to extend runway is susceptible to the critique, including the basic ability to financially engineer ratable transactions with broad lender consensus, as occurred with Toys a few short years before its liquidation. And we really should bear in mind that the recent wave of challenged transactions is a COVID product, which cautions toward some humility. Serta has failed, but it’s not obvious stakeholders as a whole would have been better off with a 2020 filing. Revlon looked very much to be on track post its 2020 financial restructuring until supply chain problems kicked in two years later. The TriMark transaction was challenged and then settled, and there’s good reason to think that company will make it without a restructuring. I’m not naïve: obviously enabling already stressed companies to take on more leverage has its risks, but I’m not sure it’s all bad or, more to the point, that it’s specific to the uptier/open-market-purchase question.

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