The Uptier Transactions, 2020 onwardHard

What happened

• 2020 — a US mattress manufacturer under pressure agrees a financing with a group holding a majority of its term loan. The group provides new money and exchanges its existing loans into new debt ranking ahead of the rest.
• The mechanism is an amendment passed by the required majority under the existing credit agreement, permitting the new super-senior tranche.
• The non-participating lenders keep their original loans, now behind the new tranche, and litigate.
• Similar transactions follow across a number of borrowers, in both uptier and drop-down forms, and the category acquires a name: liability management.
• The litigation produced conflicting outcomes in different courts over the following years, turning on the specific wording of each agreement.

The mechanism

• The permission was already in the document. Sacred rights lists, amendment thresholds, and the definition of what a majority may agree were drafted long before anybody used them this way.
• A drop-down moves the collateral instead of the ranking. Assets are transferred to a subsidiary outside the security package and financed there — both structures side by side.
• Being a minority lender is a position, not a protection. Without a blocking stake, a lender's rights are whatever the majority may not amend, and that list is shorter than most assume.
• The borrower consents but does not drive it. This is a contest between creditors in which the company is the venue.
• Cooperation agreements are the market's answer. Lenders now group early, because the protection is a blocking position rather than a covenant.

What it teaches

• Read the amendment provisions before the covenants. What a majority may change decides what every other term is worth.
• An unrestricted subsidiary is a hole in the security package the size of whatever may be transferred into it.
• Documentation risk is a real risk category. It is not about the borrower's business at all, and no amount of credit analysis detects it.
• The market repairs itself in drafting. Anti-uptier and anti-drop-down provisions became standard asks afterwards, which is how each of these episodes ends.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• Uptier and drop-down — the two structures, compared.
• Liability management — the category these belong to.
• How to read a credit agreement — where the permissions live.
• Term loan B — the instrument being amended.