Once again, we reflect on the prior year for restructuring trends impacting private credit lenders. Last year it was all about “liability management”—the latest trend in which the limits of sponsor-favorable loan documents are being tested, in some cases past the breaking point.
A common yet contentious liability management strategy is an “uptier” transaction, where lenders holding a majority of loans or notes under a financing agreement seek to elevate or “roll-up” the priority of their debt above the previously pari passu debt held by the non-participating minority lenders. In a recent decision in the Boardriders case, the minority lenders defeated a motion to dismiss various claims challenging an uptier transaction.
In an important decision to private credit lenders, the Fifth Circuit Court of Appeals held that a make-whole premium for an unsecured creditor tied to future interest payments is the “functional equivalent of unmatured interest” and not recoverable under Section 502(b)(2) of the Bankruptcy Code. Ultra Petroleum Corp. v. Ad Hoc Committee of OpCo Unsecured Creditors (In re Ultra Petroleum Corp.), No. 21-20008 (5th Cir. Oct. 14, 2022) (“Ultra”). Ordinarily, the story ends here.
Creditors of distressed businesses are often frustrated by shareholder-controlled boards when directors pursue strategies that appear to be designed to benefit shareholders at the creditors’ expense. In these circumstances, creditors might consider sending a letter to the board to convince the directors to pivot and adopt alternative strategies or face risk of liability for breaching fiduciary duties. The efficacy of this approach depends on many factors, including the company’s financial condition, the board’s composition and the underlying transactions at issue.
In a previous alert, we covered the Delaware Chancery Court’s decision in Stream TV Networks last year.
This past year was marked by extraordinary deal activity. Record breaking M&A activity drove record breaking private credit activity. Private equity M&A activity was at a substantial high, with over 8,500 deals worth $2.1 trillion, a 60% increase over 2020. Not surprisingly, in this environment, defaults were at all-time lows. The Proskauer Private Credit Default tracker showed an active default rate of approximately 1% at the end of 2021, compared to 3.6% in 2020.
In brief
The courts were busy in the second half of 2021 with developments in the space where insolvency law and environmental law overlap.
In Victoria, the Court of Appeal has affirmed the potential for a liquidator to be personally liable, and for there to be a prospective ground to block the disclaimer of contaminated land, where the liquidator has the benefit of a third-party indemnity for environmental exposures.1
In brief
Australia's borders may be closed, but from the start of the pandemic, Australian courts have continued to grapple with insolvency issues from beyond our shores. Recent cases have expanded the recognition of international insolvency processes in Australia, whilst also highlighting that Australia's own insolvency regimes have application internationally.
Key takeaways
In brief
With the courts about to consider a significant and long standing controversy in the law of unfair preferences, suppliers to financially distressed companies, and liquidators, should be aware that there have been recent significant shifts in the law about getting paid in hard times.