However, the Tribunal reached a different conclusion and found that the debt swap was concluded pursuant to Section 9.05 (g) of the 2016 credit contract, which states that “any lender may at any time surrender all or part of its rights and obligations arising from this agreement with respect to its term loans to [Serta] on a non-proportional basis… through open purchases on the market… without the consent of the administrative manager. It is often an open commission to buy on the market and is often found in medium and large wholesale credit facilities. The pro-rata allocation provision expressly excludes payments that lenders receive from the borrower in connection with purchases made on the open market. As the recapitalisation was carried out by this open purchasing mechanism, the Tribunal did not find that the transaction was contrary to the obligation to share pro-rata. Among other things, the NYDJ in proportion to the sharing provisions did less than bulletproof, the common pro-rata language itself could be largely modified by a class vote of the class negatively concerned. This sounds protective, but given that there was only one class of lenders at the time and there was no requirement that loans in this category all receive the same treatment, it does not provide more protection than if a simple majority decision was required. At NYDJ, after the majority and the borrower had done this, some of the minority lenders filed a complaint and the matter was resolved. In addition, the credit allocation provisions provide that, to the extent that, as a result of its loans, a lender has a larger voluntary down payment than other lenders, that surplus must be distributed among all lenders.
This provision appears to prohibit the exchange of debt securities, since such a transaction was not a proportionate exchange of loans. Serta`s situation shows that borrowers seeking cash are combing through their balance sheets and credit contracts to find ways to identify and neutralize the additional availability. In this context, insured lenders are well served to scrutinize their credit contracts, examine the interaction of restrictions, alliances and sacred rights, and ensure that their pledge rights cannot be altered, justified or eroded through strategic negotiations with a subgroup of lenders or with a new group of lenders. In the litigation, the applicants argued that the recapitalization transaction violated the “sacred rights” of non-exchangeable lenders, i.e. rights that cannot be cancelled or changed without the 100% agreement of the group of lenders. The sacred rights in question can be categorized into two categories: the proportional sharing provisions and the prohibition on the release of all lenders` guarantees. Alyson Gal: That`s right. And another loophole in the proportional allocation provisions is that sometimes orders to the borrower and their subsidiaries are not covered by proportional distribution rules – this can also be a way of circumventing what lenders consider to be protection, for example if the borrower buys loans by a majority in an approval transaction and the minority never has the opportunity to participate.