April 12, 2023 - The topic of liability management transactions (LMTs) is once again at the forefront of discussions amongst loan market participants, given the oral ruling of Southern District of Texas Bankruptcy Judge David R. Jones on March 28th in the Serta case.  On motions for summary judgment on the propriety of the LMT, Judge Jones ruled that the uptiering transaction in question was indeed an “open market purchase” and thus complied with the terms of the credit agreement and there was no ambiguity regarding the meaning of “open market purchase”.  However, Judge Jones went no further – he did not define “open market purchase” nor offer guidance on the types of transactions that would satisfy this term and thus be open market purchases.  The LSTA is hosting a webinar with experts from Alston & Bird on May 9th who will discuss these types of LMTs and examine the meaning of “open market purchase”.  We encourage you to listen to the webinar registration for which will open later this month.  

We would like to take this opportunity to remind our members that in 2021 the LSTA published a Market Advisory which outlined certain “drafting fixes” for those lenders looking to protect themselves from such LMTs.  In that Advisory, we summarised the key features of the two main types of LMTs that have been prevalent in our market — the drop-down financing and the uptiering transaction (the Serta case was an example of this type of LMT).  We then matched those transactions to the relevant credit agreement provisions, set out “documentation fixes” (ie, broadly drafted “riders” which can be included in credit agreements to ensure that a particular LMT cannot be effected), and provided lenders with a useful credit agreement “Documentation Checklist”. We are recirculating that Advisory now and urge our members to take a look and discuss it with their counsel as they consider acquiring new loans to ensure that the credit agreements include the protective language or at the very least they are aware of the risks involved when they acquire the loan. 

We also recently posted on our website on the LSTA University page the Practical Law What’s Market: 2022 Year End Trends in Large Cap and Middle Market Loan Terms which discusses the Serta case.

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