Navigating Turbulent LME Waters in the Wake of Serta and Mitel

By Agustina G. Berro, Naznen Rahman and Maggie Lovric

Many believed that the Fifth Circuit’s December 2024 decision in In re Serta Simmons Bedding LLC would be the final nail in the coffin for non-pro rata liability-management exercises (LMEs).1 Serta, as discussed in depth in past issues,2 involved a non-pro rata uptier exchange that utilized the “open market purchase” exception to pro rata treatment.

The Fifth Circuit vacated the bankruptcy court’s decision condoning the transaction, holding that the bankruptcy court had erred in disregarding whether the company’s purchase of the participating lenders’ claims occurred on a specific “market” (i.e., the “secondary market for syndicated loans”), rather than merely in “a general context where private parties engage in noncoercive transactions with each other.”3 The court had hoped to limit non-pro rata treatment going forward, warning that while “every contract should be taken on its own, today’s decision suggests that such exceptions” to non-pro rata treatment “will often not justify an uptier.”4

This hope was short-lived. In Serta’s wake, borrowers have developed new LME structures to effectuate non-pro rata exchanges. Less than one month after the Fifth Circuit decided Serta, Better Health used amend-and-extend provisions to effectuate a non-pro rata exchange.5 Shortly after the Better Health transaction, Oregon Tool did its own non-pro rata exchange, also effectuated through amend-and-exchange provisions.6 Serta did not — as the Fifth Circuit had hoped — end non-pro rata treatment. In response to Serta, distressed borrowers have pioneered new ways to effectuate non-pro rata transactions. The question remains as to whether these new structures will hold up in court.

Adding to the uncertainty in the market, the reported decisions addressing LMEs have not been entirely consistent. As summarized in the exhibit, the Wesco/Incora,7 TriMark8 and Boardriders9 courts (similar to the Fifth Circuit in Serta) rejected the borrowers’ attempts to exploit technicalities in the loan documents to deprive the excluded lenders of the benefit of their bargain. By contrast, the Mitel10 and TPC11 courts took a more literal approach and upheld the LME structures at issue in those cases.

Takeaways

Serta did not end non-pro rata LMEs, as some had hoped. The market interpreted the holding narrowly and adapted, coming up with new ways to achieve the same result. The growing number of reported decisions addressing LMEs do not offer much guidance for determining whether these new LME structures will hold up in court. Boardriders, TriMark, Wesco/Incora and Serta illustrate situations where the company had facially complied with the operative loan documents, but the court nonetheless rejected the narrow, literal readings advanced by the borrowers. By contrast, the Mitel and TPC courts gave borrowers more leeway. As the TPC court stated, “[t]here is nothing in the law that requires holders of syndicated debt to behave as Musketeers. To the extent such holders want to be protected against self-interested actions by borrowers and other holders, they must include such protections in the terms of their agreements.”12

If the first six months since the Serta case was decided have taught us anything, it is that holders of syndicated debt are no Musketeers. Restructuring professionals should brace for a bumpy road ahead.

Agustina Berro is a partner, and Naznen Rahman and Maggie Lovric are associates, with Glenn Agre Bergman & Fuentes LLP in New York.