Liability Management Transactions (Part I): Uptier Transactions

Key Takeaways

• While there are many different types of liability management transactions, two forms of these transactions have recently become more common: (i) uptier transactions (which are discussed in Part I of this OnPoint), and (ii) drop-down transactions (which will be discussed in a to-be-published Part II).
• Uptier transactions are where a borrower teams up with a majority of its financial creditors and amends the existing financing agreements to permit the issuance of new senior priming debt. In many instances, the majority creditors will subsequently exchange their existing debt for new senior priming debt. The non-participating minority creditors are then essentially left with subordinated debt.
• Uptier transactions have been challenged by minority creditors. Recent rulings in the NYDJ, TriMark, Serta and Boardriders cases are instructive.
  • These cases have demonstrated that tailor-made “no-action” clauses are ineffective to bar non-participating creditors’ claims.
  • In all of these cases, breach-of-contract claims brought by minority non-participating creditors (impaired by these out-of-court uptier transactions), have survived motions to dismiss.
  • In three of these cases, claims asserted with respect to the implied covenant of good faith and fair dealing have also survived a motion to dismiss.
• The increase in uptier transactions in recent years explains the current market attention to these transactions; however, creditor-on-creditor violence is not a new phenomenon. Cases addressing the proper exercise of majority v. minority creditors’ rights and related disputes were as relevant in the 19th century as they are today.