We know you missed us, so we are back to examine some more pitfalls that may be unidentified or ignored until they are those monsters keeping everyone up the night before a targeted closing - or worse, delaying closing (see Part 1 for an introduction to the blog post series and Parts 2, 3 and 4 for our other traps to watch out for). This post reflects on some execution risks that have become more commonplace as liability management exercises (LMEs) have evolved.

Exchanges Using Buyback Mechanics

We talked about exchanges in Part 2, but those exchanges generally contemplate the use of pre-wired mechanisms like incremental facilities and amend and extend provisions (which are making a comeback in LMEs - hello Better Health and Oregon Tool). However, many LME-related exchanges still rely on Serta-type maneuvers, which require that companies use the non-pro rata payment exceptions relating to open market purchase buybacks for term loans, despite the determination by the United States Court of Appeals for the Fifth Circuit in Serta, 125 F.4th 555 (5th Circ. 2024), amended 2025, that for a transaction to be an “open market purchase,” it must involve purchases in a market with competing buyers. Many credit agreements have addressed the ruling in Serta by stating that “privately negotiated” purchases of loans shall constitute open market purchases or expressly are permitted.

Parties may attempt to rely on an exchange agreement to effectuate a Serta transaction, but customary exchange agreements do not cover the borrower buyback step. Relying solely on an exchange agreement is only an option if there is 100% requisite lender participation, allowing the exchange agreement to effectively override any prohibitions on non-pro rata prepayments. It is best to address the buyback documentation early on, ensuring that the documentation is in a form that the administrative agent can process and strictly adheres to the mechanics of the credit agreement. This might include ascertaining whether there is a special assignment form exhibit for affiliated lender buybacks and whether any representations regarding MNPI are required. The company will also need to determine and timely communicate to the agent what entity is purchasing the loans, which may affect how the agent plans to process the buyback.

Some credit agreements have addressed the “open market purchase” issue by permitting the Borrower to prepay outstanding term loans on a non-pro rata basis at or below par with the consent of only the lender being prepaid. While this mechanic helps the parties cut to the chase without conducting any borrowing buybacks, the company and agent still need to determine the specific form of lender consent that allows the administrative agent to process a below par and/or non-cash prepayment.

In each case, a master assignment or consent agreement will likely be the most suitable document to handle a multi-lender buyback or prepayment. The agent and its legal advisors may need some time to review that documentation, particularly the schedule of loans subject to extinguishment: for good reason, agents are typically deliberate in following the credit agreement when taking loans off a register for anything other than cash at par, and, as discussed in Part 1, shifting from automated to manual processes may take time.

Double Dips

Adding two new credit agreements to a transaction in order to effectuate a “double dip” - which typically results in participating lenders having direct recourse to a Newco (or other non-loan party entity designated to be the double dip borrower), a guaranty and security from RemainCo loan parties, and an indirect pledge of Newco’s receivable payable by RemainCo (i.e., the double dip) - requires planning to execute. Thinking about the following questions ahead of time will be helpful:

  • Who will be the collateral agent or secured party on the intercompany loan? The lenders may want the Newco collateral agent to serve in that capacity, and the agent institution will need time to put into place new agency arrangements (including fee arrangements).
  • Moreover, are the participating lenders comfortable with the same collateral agent serving in such capacity on both the RemainCo and Newco credit agreements? Will a third-party agent need to be brought into the deal?
  • Will the amount of the intercompany receivable be based on anything other than new money lent to Newco? If there is a revolver at Newco, will the proceeds of the revolver be on-lent to RemainCo, and how will those proceeds be captured in the double dip receivable?
  • Will it be more efficient to include the double dip intercompany receivable as an incremental facility under the RemainCo credit agreement? How might the RemainCo lender votes be affected?
  • Is there a global intercompany note that needs to be amended? For instance, does the existing global note state that it represents all receivables between the borrower and the loan parties (which is no longer accurate once the double dip receivable is established)?

Letter of Credit Issuer Consent Rights

It’s hard to end a blog post without reminding everyone about the intricacies letters of credit bring to a restructuring (and not holding back here). Post-restructuring, it is not uncommon that the agent and the letter or credit issuer are no longer the same institution. When negotiating any future amendments, keep in mind whether any modifications affect the letter of credit issuer, in which case its consent will be required in addition to the requisite lenders, the company, and the agent.

Happy executing and hope all your deals go seamlessly.

Tags

finance, financial institutions, restructuring and insolvency, corporate

Welcome back to our blog post series on those distressed financing pitfalls that may seem like little bumps in the road but can cause meaningful delays and issues in the midst of restructuring transactions (see Part 1 for our introductory discussion and coverage of agency resignations). Below we discuss a couple of operational topics that may cause serious interference.

Letters of Credit

While companies relying heavily on use of letters of credit and bank guarantees (whether structured as a sub-facility of a revolving facility or a standalone letter of credit facility) tend to give attention to treatment of letters of credit from the outset of restructuring negotiations, companies less reliant on letters of credit may neglect such considerations. However, failure to address even a single outstanding letter of credit under a secured credit facility can lead to delays.

Frequently, first lien obligations are negotiated based on the assumption that all creditors of the same class will receive similar consideration (with some differences based on whether or not such creditors are participating in a transaction, are sponsors of the transaction or elect to receive a different type of consideration). While related calculations are easy with respect to outstanding principal obligations, a company’s reimbursement obligations with respect to undrawn letters of credit are contingent and, therefore, not suited for direct comparison to outstanding principal obligations despite both sets of obligations having equal lien and payment priority. Even though there are mechanisms in bankruptcy proceedings to reduce contingent claims to a dollar value, such estimates are subject to objections and litigation, and such processes are not a realistic option if the company is looking to emerge from bankruptcy with efficiency.

Below we note a number of letter of credit related issues that need to be addressed prior to a restructuring in order to avoid delays and last minute renegotiations.

  • Does the company have ongoing letter of credit needs that will require outstanding letters of credit to “ride through” a restructuring process unaffected? Will other creditors consent to such treatment? Alternatively, can the company work with the beneficiaries to obtain the return of such letters of credit undrawn and potentially replace them with other letters of credit?
  • Do the letters of credit provide backstops for other letters of credit, bank guarantees or bonding obligations, including at foreign subsidiaries that are not intended to be affected by a predominantly domestic-focused restructuring?
  • If the company has filed for bankruptcy, does the plan specifically address treatment for letters of credit within the applicable class?
  • If the agreed upon treatment for letters of credit in a restructuring is to provide cash (whether for full face value or a percentage thereof) to letter of credit issuers/letter of credit participating lenders when they are drawn in the future, what type of arrangements will be made? What entity will hold the cash? How will the cash be returned to other creditors that might be entitled to such cash if the letters of credit are returned undrawn?

Rebalancing of Facilities; Facility Exchanges

Since non-participating lenders in an out-of-court restructuring transaction will not be consenting to modifications requiring all lender (or all adversely affected lender) votes, such transactions frequently require the creation of additional facilities and instruments with characteristics different than those in the capital structure prior to a company’s restructuring.

Prepayments of the participating lenders’ overall exposure and/or aggregate commitment reductions for participating lenders are frequent benefits exchanged for a participating lender’s consent to a transaction. When only term loans or notes are implicated, the mechanics for paydowns and reductions are typically more manageable; however, when dealing with revolving facilities, such paydowns and reductions can be more complicated and more involved rebalancing maneuvers may be necessary. Below are some items that would be helpful to think about when rebalancing facilities and/or exchanging facilities:

  • In the existing loan documentation, are there fully flushed out mechanics for amend and extend or similar transactions, or are there more general provisions allowing the agent to effect modifications as necessary?
  • Will letter of credit exposure be reallocated between the existing and new facilities? Will the borrower be permitted to make any of the following as between the existing and new facilities:
    • Non-pro rata prepayments;
    • Non-pro rata borrowings; or
    • Non-pro rata commitment reductions?
      • Note that failing to treat all aspects as pro rata may require additional mechanics for when availability as a percentage under each facility is out of sync.
  • Will interest and fees on the obligations being exchanged into another facility be paid on the effective date of the restructuring or in the ordinary course?

See Part 3 where we discuss when compliance with internal institutional policies can delay an otherwise well implemented distressed transaction.