Boardriders: Minority Lenders Win First Round | Proskauer Rose LLP
A common but controversial liability management strategy is an “uptier” transaction, where lenders holding the majority of the loans or notes under a financing agreement seek to elevate or “roll up” the priority of their debt to the above the previous one. past bet debt held by non-participating minority lenders. In a recent decision by the Boardriders case, the minority lenders denied a motion to dismiss various claims challenging a superior transaction.
The Boardriders case: Boardriders, a surf and skateboard apparel company, borrowed $450 million in senior term loans under an April 2018 syndicated credit agreement (the “credit agreement”). Relevant facts, as pleaded by the plaintiffsa group of non-participating minority lenders, include:
- Boardriders’ credit agreement provided that loan payments and prepayments were to be made pro rata to the lenders, subject to certain exceptions. The relevant exception permitted the repurchase of loans on a disproportionate basis through “open market purchases”. The credit agreement did not define “open market purchases”, but in particular specified the terms of a Dutch auction, which was to be offered on a pro rata basis.
- Amendments to the credit agreement could be made by the lenders holding the majority of the loans, e. required lenders, subject to “sacred rights” exceptions, which exceptions required the consent of the lenders directly and adversely affected by the amendment. Provisions for pro rata sharing have been included in the list of sacred rights.
- A group of lenders (the “Participating lenders”) and the sponsor (who was itself a participating lender) negotiated a transaction where up to $110 million of new funds secured by liens senior to the liens securing the existing term loans would seed the loans held by the excluded lenders (the “Nonparticipating lenders”), who did not have the opportunity to participate in the uptier transaction.
- The Borrower and the Participating Lenders have agreed to various amendments to the Credit Agreement to effect the Higher Tier Transaction, including creating the basket capacity allowing the Borrower to incur new debt on a super-priority basis and by authorizing the agent to enter into a new intercreditor agreement that grants new loans super-priority status over existing obligations under the credit agreement.
- The borrower and participating lenders then entered into a new super senior term loan agreement to evidence the new loans.
- The super senior term credit agreement also left room for a second tranche of seniority below the $110 million of new term loans, but above the debt under the existing credit agreement. In the top-tier transaction, the participating lenders effectively exchanged their loans under the existing credit agreement for an equal amount of loans in this second tranche. The swap was made at par, even though the loans were trading at a substantial discount to par (50-60% of face value).
- The mechanism used to effect the swap-up was the Borrower’s disproportionate redemption of Participating Lenders’ Loans under the Existing Credit Agreement in accordance with its “open market purchase” provisions.
- The non-participating lenders have sued the participating lenders, the borrower and the developer under a host of theories that culminate in an allegation that the transactions violate the express and implied terms of the credit agreement.
The borrower and participating lenders filed a motion to dismiss the claims, arguing that the credit agreement permitted all changes. Specifically, they asserted that (1) the credit agreement allowed required lenders to approve the inception of new super senior debt and to subordinate existing liens to liens securing that debt, and (2) that redemption of existing loans from Participating Lenders pursuant to the “open market purchase” provisions of the Credit Agreement.
Crux of the Matter – Intent Matters: Here are the two essential aspects of the decision of Judge Masley of the Supreme Court of New York:
First, despite the absence of an explicit sacred right “without subordination”, such a right could potentially be implied in the pro rata sharing and related provisions of the credit agreement, read in conjunction with the relevant context. The court found that although there is nothing in the sacred rights provision that expressly prohibits the subordination of liens securing existing obligations under the credit agreement, such a “narrow interpretation” of the sacred rights provision would “essentially vitiate the equal repayment provisions” of the credit agreement and be “contrary to the court’s obligation to take into account the context of the whole contract and not in isolation [sic] particular words – or in this case, the absence of particular words”. Accordingly, the court held that the higher level transaction, in the context of the entire credit agreement, was likely to violate the intention parties.
Second, the term “open market purchase”, not defined in the credit agreement, was likely to have more than one meaning and therefore ambiguous. Therefore, the court would not accept at face value the borrower’s characterization of the transaction and the factual considerations, such as the fact that the debt was exchanged (as opposed to repaid), the purchases were not allegedly not at market value, not all lenders were given an opportunity to bid, and the exchange was made in various related transactions, were all relevant considerations.
Accordingly, the court dismissed the motion to dismiss the majority, and strongest, of the plaintiffs’ claims.
Compare TPC: In the TPC Group Inc. Case, District Judge Andrews endorsed a bankruptcy court decision that took a markedly different approach to a similar issue regarding the interpretation of a loan agreement. In TPC, the participating majority noteholders under an indenture and TPC entered into a new super-priority indenture for the new notes and entered into a new intercreditor agreement which gave the liens securing the new notes priority over the existing tickets. The transaction did not include an uptier. The nonparticipating bondholders challenged the transaction on the grounds that under the existing indenture, any amendment to the existing indenture and existing intercreditors’ agreement “dealing with the application of the proceeds of the security required the consent of all bondholders.
Bankruptcy Judge Craig Goldblatt held, and District Judge Andrews agreed, that the prima facie term only referred to the pro rata distribution of collateral proceeds to collateral noteholders and “should not be construed as a disguised anti-subordination provision”. The bankruptcy court found its reading to be “readily apparent” because the trust deed was unambiguous. The court relied on the express provisions of the trust deed and did not have to consider the intention of the parties. Therefore, the court was able to resolve the issue based on the four corners of the trust deed.
The Boardriders the court left open the possibility that the credit agreement was breached based on a reading of sacred rights in the context of the agreement as a whole, whereas the TPC The court limited its analysis to the specific terms of the trust deed. How to reconcile these decisions?
The TPC case concerned a seed operation and was not accompanied by a higher level operation. With respect to a seed transaction, Justice Goldblatt found that the terms of the trust deed provision at issue were clear on their face. Judge Masley was apparently swayed by the totality of the circumstances, and one has to wonder if the result would have been any different if the case was only about seeding the existing loans with the new loans. not coupled with a roll-up of existing loans (as was the case in TPC). Regardless, Judge Masley found that the pleadings barely warranted further scrutiny of the transaction.
Key points to remember: (1) A court may determine whether a financing agreement has been breached based on the “context of the whole contract” and the intention of the parties rather than strict adherence to the individual provisions, each taken in isolation, and (2) in the absence of a clear definition, a court may review the facts and circumstances of an alleged “open market purchase” using all relevant information.
Proskauer Private Credit Restructuring Group. We will continue to monitor these cases as we do not expect this to be the final word on these types of issues.
 A court must consider a complaint in the light most favorable to the plaintiff when considering a motion to dismiss. Thus, the facts presented are as pleaded by the plaintiffs and considered in the light that is most favorable to them.
 Judge Masley is no stranger to these transactions; she has also presided over litigation concerning Is used to superior transaction.
 Justice Masley turned to Black’s Law Dictionary for the ordinary meaning of the term “open market”, which describes it as “a market in which any buyer or seller may exchange [sic] and whose prices and product availability are determined by free competition.
 A claim for tortious interference was dismissed. In derogation of the decision on the motion to dismiss in the TriMark case, the court dismissed the motion to dismiss a claim for breach of covenant of good faith implied in all contracts, finding that sufficient grounds of bad faith had been asserted; namely that the “allegations were sufficient to show that the defendants worked together and in secret to deprive the plaintiffs of the benefit of their bargain…”.
 Bayside Capital Inc. v. TPC Group Inc. (In re TPC Group Inc.), 2022 BL 233160, 2022 Bankr. Lexis 1853 (Bankr. D. Del. July 6, 2022).