The Delaware Chancery Court today granted summary judgment to the holders of Realogy Corporation's senior toggle notes, who had filed a lawsuit against Realogy claiming, among other things, that a proposed exchange offer by Realogy would violate the terms of the indenture governing the senior toggle notes.

On November 13, 2008, Realogy launched an exchange offer that would have given holders of Realogy's subordinated notes new second lien term loans incurred under the accordion feature of Realogy's credit agreement in exchange for the subordinated notes. The exchange offer also was open to holders of Realogy's senior toggle notes and senior notes. However, priority was given to the subordinated notes. This would have permitted the subordinated notes to leapfrog senior debt in Realogy's capital structure.

There are no provisions in the indenture governing the senior toggle notes that directly prohibit the exchange offer as structured. The debt, lien and restricted payment covenants in the indenture all have sufficient carve-outs to permit the exchange offer, assuming that the transaction is permitted under Realogy's credit agreement. In particular, the lien covenant in the indenture permits liens securing obligations under the credit agreement. The senior toggle noteholders therefore relied on arguments that the exchange offer would violate provisions of Realogy's credit agreement, and as a result, the loan cannot be considered incurred "under the credit agreement" for purposes of the indenture.

The senior toggle noteholder's first argument was that the proposed new loans would not be "loans" under the credit agreement because they would not be funded in cash. The court found this argument uncompelling, stating the "fact that loans are typically funded in cash does not mean that the word 'loan' cannot even in that context encompass borrowings funded otherwise.

The senior toggle noteholder's second argument was that the exchange offer violated the negative covenant in the credit agreement restricting Realogy's ability to make payments on the subordinated notes, senior notes and senior toggle notes. Realogy was relying on the exception in such covenant that permitted such payments in connection with "Permitted Refinancing Indebtedness." Therefore, the final determination rested on whether or not the new second lien term loans to be incurred under the credit agreement met the definition of Permitted Refinancing Indebtedness. As is typical, the definition of Permitted Refinancing Indebtedness has a provision that states that the new debt cannot have "different obligors, or greater guarantees or security." However, there is a proviso in this particular definition that says "security may be added to the extent then permitted under Article VI [negative covenants]."

Realogy argued that this means that if a lien is permitted by Article VI, it may be added to the refinancing indebtedness. Since Article VI permits liens securing loans under the credit agreement, Realogy argued the new debt is allowed to be secured. The senior toggle noteholders argued that Realogy's interpretation was too broad and would render the general restriction meaningless. In their view, the proviso means that if the indebtedness being refinanced could itself be secured, then the refinancing indebtedness can also be secured. The latter argument was more compelling to the court.

The court ruled that because the proposed new second lien term loan would not constitute Permitted Refinancing Indebtedness it is not permitted under the credit agreement. This in turn means that the second lien term loans cannot constitute indebtedness incurred "under the Credit Agreement" for purposes of the indenture and therefore the exchange if consummated would violate the indenture.

Click here for the full Realogy Decision (PDF)