Recent rulings from the U.S. Court of Appeals for the Fifth Circuit and the New York Supreme Court’s appellate division have highlighted the use of liability management exercises (LMEs) for distressed borrowers. Glenn Agre partner Shai Schmidt recently shared his perspective on the Fifth Circuit’s Serta decision, the appellate division of the New York Supreme Court’s Mitel decision, and their impact on LMEs with Turnarounds & Workouts.
According to Shai: “The headline for me is that companies and majority groups may face greater risk in LME-related litigation. This is especially significant given that numerous LMEs in recent years — including the Serta LME itself — have failed to stave off bankruptcy. The Fifth Circuit’s excision of the plan indemnity and its refusal to insulate the plan from scrutiny under the doctrine of equitable mootness could mean that in certain future situations participating lenders will be on the hook for damages for breaching the credit agreement.”
Discussing the Mitel decision, Shai noted that: “The Mitel decision could embolden sponsors and companies given the court’s focus on whether the uptier exchange involved an actual amendment to the pro rata sharing provision, regardless of whether the transaction effectively altered the waterfall. This arguably formalistic approach could potentially be applied to other situations where the LME does not directly violate the explicit requirements of the relevant credit agreement.”
Shai also shared his perspective on how these decisions will impact borrowers, lenders and restructuring professionals, stating: “I expect to see a continued push from company- and lender-side advisors to structure LMEs in a way that encourages full participation. Even where the minority group is offered significantly worse terms than the majority, full participation typically removes the litigation threat that could result in a Serta-like outcome.”