January 12, 2022 - Late last week Trimark USA announced the resolution of its litigation with minority lenders who hold term loans (the “First Lien Term Debt”) under its First Lien Credit Agreement over a dispute in which those lenders’ First Lien Term Loans were subordinated to Tranche A and B loans issued under the terms of its September 2020 $120MM “uptiering” transaction.  While the terms of the settlement are subject to closing conditions and documentation, it includes “an exchange of all outstanding First Lien Term Debt on a dollar-for-dollar basis for Tranche B Loans pursuant to the company’s Super Senior Credit Agreement. Tranche A Loans outstanding under the Company’s Super Senior Credit Agreement will retain their position in the Company’s capital structure, senior to the Tranche B Loans.”

In August 2021 we wrote extensively about the New York State court decision that denied Trimark’s motions to dismiss the lawsuit permitting the lenders to pursue claims there was a violation of so-called sacred rights under the credit agreement, and specific breaches of contract.  As LevFin Insights notes, the settlement “prevents what could have been a precedent setting litigation based on the merits involving a priming transaction brought about by the combination of distress and the aggressive interpretation of loose covenants.”

Nonetheless, this settlement is important for two reasons. First, it leaves on the books a lower court decision that validates contractual limits to aggressive “liability management” transactions that seek to subordinate first-lien lenders. Second, it potentially raises the costs for borrowers who should now anticipate even more litigation in response to aggressive tactics. While this case represents an isolated victory for aggrieved senior secured lenders, it is too soon to say whether it also represents a welcome trend. The most optimistic take is that this settlement will serve as a call to return to more traditional market norms and less contentious times in the market. On the other hand, recent documentation trends, as highlighted in this thoughtful piece by Reorg, point in the opposite direction. They suggest that new and worse trends are emerging and, “as with the lifecycle of a plant, aggressive debt document terms and provisions start as seedlings, and as they get more and more exposure (that is, as they are included in more and more credit agreements), they steadily grow and plant their roots. Before anyone has had time to take notice, those seedlings have become market terms that can hold steady against fierce market pushback.” Only time will tell where the market goes from here.