In December 2016, Cumulus Media Holdings Incorporated (Cumulus) proposed an exchange of $610 million of its unsecured senior notes for $305 million of new first-lien debt under a fully drawn revolving credit facility and Class A common stock. The proposed transaction contemplated assigning existing revolving credit commitments to the senior note holders and adding an incremental revolving facility of $105 million (utilizing the “free and clear” basket). A fully drawn revolving credit facility rather than a term loan was utilized to avoid repricing the outstanding term loans under the “most favored nations” pricing protections under the incremental provisions of the credit agreement. At the time of the proposed exchange, the collateral securing the credit agreement had an estimated value of approximately $1.45 billion, and Cumulus had a $1.81 billion principal amount of outstanding term loans secured by that collateral. As the exchange offer was structured, no consent of the term loan lenders was required under the credit agreement. 

Cumulus brought an action in the U.S. District Court for the Southern District of New York seeking a declaratory judgment that the credit agreement permitted the proposed transaction. A group of term loan lenders intervened in the case, seeking their own declaratory judgment that the proposed transaction violated certain negative covenants under the credit agreement. Among other claims, the term loan lenders asserted that the proposed incremental amendment would violate the “Amendment of Material Documents” covenant of the credit agreement, which read in pertinent part that no material amendment can be made to “any … credit agreement … except for any such amendment … that … would not, in any material respects, adversely affect the interests of the Lenders,” because the additional $105 million of first-lien revolving loans would further dilute their interests in the collateral.

The court held in favor of the term loan lenders, stating that the proposed transactions violated the Amendment of Material Documents covenant because the exchange of senior notes for revolving loans would be materially adverse to the interests of the term loan lenders. The court stated, “I agree with [the term loan lenders’] argument on this front that there is a baseline level of protection and that while they were agreeing to permit the revolving credit facilities and the incremental revolving credit facilities, they were doing so with the knowledge that the negative covenants … including that of [the “Amendment of Material Documents” covenant], existed to protect them.” The court further noted that “[it] is only because the value of Cumulus’ collateral is less than the sum of its debts that the creation of the additional secured interests would affect adversely the interest of the term lenders in a material respect.” 

While the inclusion of amendments to the subject credit agreement in the Amendment of Material Documents covenant as in Cumulus is unusual, it is common for credit agreements to have a “material adverse effect” representation and warranty with a prong that includes any event constituting a material adverse effect on the ability of the borrower to fulfill its payment obligations under the credit agreement, which representation and warranty must be true and correct as a condition of future revolver borrowings, letter of credit issuances and other extensions of credit. The rationale of the Cumulus decision could impact the ability to bring down that representation and warranty in circumstances where an incremental borrowing has already diluted “underwater” collateral values.