A recent decision in New York State Appellate Court, GSO Coastline Credit Partners L.P. v. Global A&T Electronics Ltd. (NY App. Div. 1st Dept. May 3, 2016), demonstrates what can go wrong when an issuer attempts to correct what it asserts to be an ambiguity or defect in an indenture without a noteholder vote.

In GSO Coastline , Global A&T Electronics Ltd. (GATE) had two first lien credit facilities and two second lien credit facilities, aggregating approximately $775 million and $475 million, respectively. In February 2013, GATE issued approximately $625 million of notes (the Original Notes) pursuant to an indenture (the Indenture) and used the proceeds to prepay the first lien facilities. The Original Notes were secured by a first lien on GATE’s assets.

Facing financial difficulties in September 2013, GATE issued approximately $502 million of additional notes (the Additional Notes) under the Indenture. The Additional Notes were issued to holders of the second lien facilities who agreed to exchange those obligations for the Additional Notes. Holders of the Original Notes issued under the Indenture (the Original Noteholders), who now found themselves pari passu with the former holders of second lien indebtedness, sued GATE in an attempt to invalidate the exchange.

Among the various claims raised by the Original Noteholders was that GATE should have sought their approval for an amendment to its intercreditor agreement (the ICA) that was made in connection with the exchange. GATE viewed notes issued under the Indenture, including the Additional Notes, as meeting the definition of first lien debt under the Indenture; however, the ICA stated that debt used to retire the second lien credit facilities would be deemed second lien obligations. GATE viewed this as an ambiguity, where the Additional Notes could simultaneously be both first and second lien obligations. In an attempt to cure this perceived ambiguity, GATE amended the ICA to specify that the Indenture and any notes issued thereunder (including the Additional Notes) would be first lien obligations under the ICA. The Indenture allowed for unilateral amendments to the ICA in cases where an ambiguity was being corrected. A lower court agreed with GATE’s argument that it was merely correcting an ambiguity and dismissed the Original Noteholders’ claims.

The Appellate Division, while not providing a great deal of the analysis behind its decision, overturned the lower court’s ruling, viewing GATE’s amendment of the ICA as not simply corrective in nature, but as an attempt to circumvent the terms of the ICA’s priority scheme. The court saw no inconsistency or ambiguity in the ICA, noting that the ICA stated that conflicts between the Indenture and ICA are to be resolved in favor of the ICA. While analyzing a separate claim relating to affiliate transactions, the court noted that one of GATE’s two controlling shareholders was among the second lien credit facility lenders who benefited from the exchange, though the court did not affirmatively state that this fact impacted its analysis in disallowing the unilateral amendment to the ICA. 

Does an Ambiguity Exist? 

Under New York law, a contract is not ambiguous merely because the parties ask that it be construed differently.1 “All corners” of the document should be viewed to determine whether an ambiguity exists, as opposed to viewing sentences or clauses in isolation.2 Additionally, in interpreting the meaning of potentially ambiguous language, the document in question does not stand alone. Courts have found that under New York law, “[A]ll writings forming part of a single transaction are to be read together.”3 Therefore, language in an indenture might not be ambiguous when, for example, the prospectus clearly sheds light on the language’s true meaning. The standard of ambiguity within a contract is that of a “reasonably intelligent person.” If such a person is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business, has examined the context of the entire integrated agreement, and could see the language as capable of more than one meaning, then the language in question is ambiguous.4

Are There Conflicts of Interest? 

Furthermore, where transaction participants conclude that an ambiguity or defect exists in a credit agreement or indenture and are evaluating whether an amendment without lender or security holder consent is permissible or advisable, they should also consider who may benefit from the cure and who may be adversely affected, as motives other than merely curing an ambiguity could possibly be perceived in certain cases, particularly where management or a significant shareholder holds a large interest in a class of debt that is impacted by the cure.