Publications

A:  A recent federal court decision, UMB Bank v. Brystol Meyers Squibb (“BMS”), serves as a cautionary tale for securityholders who replace their trustee without going through DTC.

A: The holders of BMS’ Contingent Value Rights (“CVRs”) were entitled to over $6 billion in payments if the FDA approved marketing applications for three of BMS’ products by specified milestone dates. The CVR Agreement required BMS to use “diligent efforts” achieve the milestone dates. BMS failed to meet the milestone dates. Only the Trustee could bring suit against BMS and certain holders thought that a trustee appointed by them would be better suited to take actions against BMS under the CVR agreement.

A: Under the CVR Agreement, the Trustee could be removed by at least a majority of the “Holders” of the CVRs, meaning the registered holders (i.e., The Depository Trust Company (“DTC”), through Cede & Co.). However, an instrument of removal executed by a majority of the beneficial owners, but not DTC, was delivered to then-acting Trustee, Equiniti, purporting to replace it with a new Trustee, UMB Bank. Equiniti issued a notice, executed by BMS, confirming that UMB Bank was the new Trustee.

A: The CVR beneficial holders instructed UMB Bank to sue BMS for breach of the CVR contract for failing to use “diligent efforts” to meet the milestone dates, which it did. Two years after the case was filed—and after BMS’s initial motion to dismiss was denied—BMS filed a motion to dismiss for lack of standing because Equiniti was never properly removed as Trustee. UMB argued that Equiniti had authority to determine whether its removal was properly effectuated. The court granted the motion to dismiss: because DTC’s nominee, Cede & Co. was the true “Holder” of the CVRs and had not appointed UMB Bank as the new trustee, UMB Bank did not have standing to sue BMS. So, the “new” trustee was not the trustee at all.

A: Holders seeking to remove and replace a Trustee or seeking to direct Trustees for amendments or other actions under indentures or other instruments with Trustees should be aware that instructions given by beneficial holders are subject to challenge and invalidation. Holders should instead seek the consent or proxy of DTC acting through Cede & Co.—this “Demand and Dissent” process can take time and holders are cautioned to ensure timetables take this into account. Failing to do so can be incurable.

• LMEs in the US started as a trickle with J. Crew and Serta but have now become commonplace and have surged to unprecedented levels in 2024. Borrowers and issuers have been engaging in LMEs with increasing frequency since 2020. This includes both more established types of transactions (i.e. “Uptiers” and “Drop-Downs”), as well as more novel structures such as the “double-dip” and structures that combine several different LME elements.
• Covenant Review tracked over 30 transactions that involved LME elements in 2024. In contrast, less than 20 comparable LMEs were tracked in 2023. The number of these transactions is even greater taking into account LMEs completed in a more traditional refinancing context.

• There are no signs that these will slow down. As long as there are viable options to extend maturities and/or delever out-of-court, companies will (and should) continue to utilize LMEs. They are an effective technique to garner a high level of creditor support, address near/intermediate term business concerns and avoid a bankruptcy.
• However, post-LME documentation typically includes tighter covenants that may limit future refinancing or LME options.Certain of these restrictions are making their way in various forms into broadly syndicated loans and indentures (as well as private credit).

A: Building on the early-stage LME protections (such as Serta, Chewy and J. Crew blockers), the next generation LME blockers are broader and have developed in response to more novel LME structures. Below are some examples of next generation LME protections.  Most of these protections tend to be subject to heavy negotiation.

• Envision Protection: Investment Limitations:
  • Ensuring there is a cap on investments by credit parties in non-credit parties and/or, in certain transactions, requiring that investments in unrestricted subsidiaries be made solely pursuant to a dedicated (and capped) investments basket.
• Other Limitations on Unrestricted Subsidiaries:
  • Varying tests designed to limit unrestricted subsidiaries or their use (e.g., pro forma leverage tests, capping the total size unrestricted subsidiaries or the assets they can hold either at designation or for life of the debt instrument, the ability of unrestricted subsidiaries to provide credit support to or from the credit group or “purpose” based clauses designed to prescribe what an unrestricted subsidiary can be used for) or, in some cases, eliminating the concept of “unrestricted subsidiaries” altogether.
• Enhanced Sacred Rights
  • Barring amendments to all or certain LME protections without the consent of each debt holder or voting thresholds greater than simple majority.
• Double-Dip and Pari-Plus Protections
  • Requiring that any intercompany debt be unsecured and subject to a customary subordination agreement.
  • Prohibiting unrestricted subsidiaries from holding debt that is recourse to the restricted group both at the time of their designation and at any point thereafter.
  • Eliminating “pari plus” debt capacity whereby pari debt that is permitted under the debt document can also benefit from additional collateral and guarantees not provided to existing debt holders.
• Wesco / Incora Protection: Anti-Dilution
  • Restricting the borrower from incurring or permitting additional debt for the primary purpose of influencing voting thresholds.
• Instructing Order of Paydown
  • Directing the order in which the Company can repay its debt, such as specifying that later-dated debt cannot be paid down before debt with an earlier maturity date.
• General LME Protection
  • Restricting the borrower from entering into certain transactions in connection with a “liability management” transaction, which may be a defined or undefined term.

• Not really, because strict LME protections remain relatively uncommon.
• These types of fulsome protections appear in certain post-LME and chapter 11 debt documents. While loose versions of early generation LME protections have in some fashion made their way into the broader debt and loan markets, whether and, in what form, the next generation LME protections make their way into the broader debt and loan market remains to be seen.
• The competitive landscape to provide financing for relatively healthy companies continues to lead to looser documentation terms and few, if any, LME protections.
• As the ever-evolving spectrum of LMEs prove, innovative structures will likely continue to provide for LME opportunities.

A:  Similar to the breadth of protections creditors are seeking in post-LME transactions, the suite of terms to incentive participation is expanding as well.  Ultimately, increased willingness by debt holders to participate in LME transactions may be driven more by the desire to avoid an outcome even worse than the LME (such as prolonged litigation, a less favorable debt instrument, reputational damage or bankruptcy) than by the terms or the fairness of the LME proposal. Tools include:

• Lien subordination:Non-participating creditors’ liens on all collateral are stripped or subordinated by an amendment to existing debt documents, usually with the consent of a simple majority or a two-thirds supermajority.
• Turnover Provisions and Payment Subordination:Non-participating debt holders must turnover collateral proceeds, guarantee or other unsecured recoveries to participating holders until they are paid in full.
• Economics:Ad hoc group members may participate on better terms than non-ad hoc group members through, for example, better exchange terms, cash or backstop fees.
• Covenant Strip: Participating debt holders generally seek to execute exit consents and strip existing debt of its covenants, collateral and/or guarantees where possible, limiting or even removing many of the contractual and credit protections of the non-participants’ debt documents.
• Elimination of Rights:Participating debt holders may neuter non-participating holders’ rights, such as potentially deferring interest payment defaults until maturity, which effectively PIKs the non-participant debt.
• New Debt Lien/Payment Position: Debt holders may get a mix of new second-out and third-out debt rather than being relegated to a third-, fourth-, or fifth-out position if they do not participate.
• New Money Debt:Participation may provide non-ad hoc group debt holders with an opportunity (but not necessarily an obligation) to contribute to new super-priority debt tranches on a proportional basis with their ownership of the original debt.
  • These new money debt instruments generally have favorable pricing and robust prospects for recovery in a subsequent default.

A:  Ad hoc or key structuring participants are also leveraging their negotiation position to seek post-LME transaction benefits. These are a relatively new and expanding feature of LMEs that we expect to continue to evolve.

• Ad Hoc Group-Specific Baskets: Participating debt documents may provide for an additional pari debt basket that is only available to be funded by the ad hoc group and with their consent.
• Pricing MFN:  Requires that the all-in yield of the closing date debt is increased to match (less a differential, e.g., 50 basis points) the all-in yield of any new incremental or other debt that is pari passu in payment and lien priority.
• Hunter-Gatherer Rights:  Provides participating debt holders with the ability to exchange debt purchased in the open market for new debt at a premium to the purchase price, allowing such participating debt holders to capture the discount (the amount, if any, of the economic split with the issue is strongly negotiated).

A: Possibly, but it’s complex. The headlines from 2024 – like Hunkemoller, Altice France and Ardagh – suggest that Europe is seeing more creative priming maneuvers similar to those seen in the US. However, it’s still up for debate whether this is a true trend or just a few notable exceptions.

A: Size of capital stacks – and risk/reward – matters. In Europe, large cap debtors generally carry less debt than their US counterparts, potentially reducing the perceived upside reward for investors that participate in more creative (or riskier) priming transactions. Supporting this thesis are the exceptions of Ardagh and Altice France, both of which have seen more creative transactions within their sizeable capital stacks of c.$12 billion and €24 billion respectively.

Outside of these exceptions, the question remains whether there is enough upside reward in smaller capital structures to incentivize the pursuit of more creative transactions. Interestingly, we have seen bold moves in sub-$1bn cases like Hunkemoller (uptier), Oriflame (designating certain subs as unrestricted), and (looking further back) Intralot (dropdown), suggesting that investor appetite may be growing.

A: Relationships have a role to play. Markets are a people business. In Europe, the investor pool is smaller when compared to the US. Maintaining relationships may discourage overly aggressive maneuvers against other institutions and individuals that you see across any number of investments.

By contrast, family- or closely-owned companies (like Altice France, Ardagh and Intralot) may be more willing to consider creative priming transactions if they feel less restricted by the weight of cross-investment relationships.

A: Directors' duties across Europe are a patchwork of different regimes. Often, those regimes place stricter fiduciary responsibilities upon directors than those seen in the US – making it harder to justify moves that could put certain creditors at a disadvantage. Particularly the closer the debtor gets to being at risk of insolvency.

European financing agreements may also carry higher consent requirements than their US counterparts, particularly in the loan and intercreditor space.

The risk and cost downside of litigation is also significant. Hunkemoller, a Dutch debtor, now finds itself in the New York state courts defending a challenge to its uptier transaction.

A: The jury’s still out. While some commentators suggest that US-style priming could take root in Europe, whether these transactions are capable of implementation is situation specific and will depend on the legal and relational dynamics at play. Each situation is nuanced, turning on the jurisdictions involved, documentary constraints, the nature and wider context of the liquidity need, and the attitudes of the particular debtor, its shareholder(s) and its investors.

Focus in on “what can we do” vs. “what can be done to us.” European creditors and debtors are now more attuned to their rights and vulnerabilities. This knowledge might be best used as a stick to influence behaviors and encourage inclusive soft amendments and extensions (A&Es) or pro-rata transactions.

As a final word: remember that liability management means different things to different people. The term can include the more vanilla and opportunistic transactions (such as debt buybacks at a discount). It does not always mean priming transactions where one investor group benefits at the direct expense of another.

A: A trend from the US, co-ops are perceived to be a shield against priming – by forming a club of existing investors that agree to a set of rules or parameters in respect of a debtor and a potential transaction. That perception can hold true, provided the co-op group holds a sufficient majority of the debt to be able to block transactions that require lender consent.

A: Co-ops may not be a perfect defense. They are most effective against actions that explicitly require investor consent under the finance documents. However, they can be less effective (or worse, ineffective) in scenarios where debtors have sufficient flexibility under their finance documents to execute a transaction without lender consent or if the co-op group does not hold a blocking stake where majority consent is required. Co-ops also frequently restrict debt trading while the co-op is on-foot, limiting market liquidity.

We have also seen the beginnings of debtor pushback against co-ops. Debtors may "weaponise" NDAs to create information imbalances and restrict communication between their investors, undermining the effectiveness of co-operative agreements. There is also growing market chatter questioning whether co-op agreements might be anticompetitive in some contexts, and whether debtors in new issuances can include terms to prohibit investors from talking to each other during the term of the debt.

A: Number one: don’t let fear of missing out dictate your decision. When presented with a co-op, investors should critically assess whether the co-op is appropriate for the specific situation. Signing-on just because others are (rumoured to be) doing so could lead to unintended consequences. Test the thesis behind the co-op. Speak to fellow investors and your trusted advisers.

Number two: be wary of two-tier co-ops. The recent trend sees creditors split into different groups within the co-op agreement, baking-in different economic returns between “day one” co-op signatories and subsequent co-op signatories. Instead of protecting creditors, these agreements could create tension and conflict within the co-op group – morphing the co-op from a shield into its own form of priming transaction.