Intercreditor disputes in bankruptcy are common. Typically, however, they center around predictable disagreements between senior or junior classes of creditors such as valuation battles or lien perfection challenges. A recent decision in the Delaware chapter 11 case of TPC Group has highlighted a new trend of “intra-creditor class warfare,” involving, in the understated words of Judge Craig Goldblatt, “transactions that seem to take advantage of technical constructions of loan documents in ways that some view as breaking with commercial norms.”
In TPC Group, Judge Goldblatt upheld a so-called “uptier” transaction, in which a majority of the holders of a particular series of secured notes agreed to purchase a new series of debt from the borrower, with the initial notes becoming subordinated to the new notes. Pre-bankruptcy in 2019, TPC Group issued $930 million of secured 10.5% notes pursuant to a trust indenture. The collateral agent for the 10.5% notes entered into an intercreditor agreement with the agent bank for the bank syndicate providing TPC Group with a revolving credit facility, providing the banks with a senior lien on inventory and receivables, and the 10.5% noteholders with a senior lien on substantially all other assets.
In 2021 and earlier this year, under a separate indenture, TPC Group issued approximately $205 million of new secured 10.875% notes to holders who constituted over a two-thirds majority of the 10.5% noteholders, secured by the same collateral as the 10.5% notes. That majority of 10.5% noteholders voted to amend the 2019 indenture and the intercreditor agreement so that the liens securing the new 10.875% notes would be senior to the liens securing the 10.5% notes.
TPC Group filed a petition for relief under chapter 11 of the Bankruptcy Code at the beginning of June. In connection with the filing, the holders of the 10.875% notes offered to provide debtor in possession (DIP) financing with $85 million of new money, but demanded a roll-up of $238 million in principal and accrued interest due under the 10.875% notes. When TPC Group agreed and sought court approval for the DIP financing, two holders of the 10.5% notes which did not hold the 10.875% notes challenged the new loan, contending that the amendment of the 2019 indenture was invalid.
This necessitated an immediate review by Judge Goldblatt of the uptier transaction. If the amendments of the 2019 indenture were proper and the 10.875% notes were validly senior to the 10.5% notes, then the roll-up of the prepetition debt into a new postpetition DIP loan facility with priority over nearly all other claims would have little practical impact. But if the changes to 2019 indenture had been done in violation of the indenture terms, then, as Judge Goldblatt noted, the roll-up would elevate junior (and probably unsecured) debt and make the DIP loan “very expensive money indeed.”
The parties agreed that the questions raised were solely legal issues. The objection and related motions were briefed and argued on an expedited basis, so that Judge Goldblatt could make a final ruling on the DIP loan.
The key substantive questions were whether the amendments and subordination violated the 2019 indenture’s ratable treatment clause, which requires payment to all noteholders “without preference or priority of any kind,” or effectuated a change to “the application of proceeds of Collateral [in a manner] that would adversely affect the Holders.” Any such amendment would have required the unanimous consent of all 10.5% noteholders.
Judge Goldblatt decided that the amendments did not affect the ratable treatment of the 10.5% notes and ruled in favor of TPC Group and the 10.875% noteholders.
The 2019 indenture was silent on the question of subordination of the 10.5% notes. Although acknowledging that it was a close call and that other courts had reached different conclusions regarding subordination and ratable treatment clauses, Judge Goldblatt noted that the 2019 indenture permitted the release of collateral upon approval of a two-thirds majority. He concluded that if a release of the collateral, which he described as a more “drastic” action, could be done with less than 100% approval, then subordination similarly should not require unanimous consent.
Judge Goldblatt reasoned that the indenture trustee was still obligated to disburse proceeds of collateral ratably, and concluded that the ratable treatment clause was not violated simply because there would likely be fewer proceeds of collateral to disburse. The ratable treatment clause, he stated, “should not be read as an anti-subordination provision in disguise.” He therefore ruled that the amendments did not require unanimous approval, and that the changes to the 10.5% indenture and the intercreditor agreement had been validly effectuated.
While evincing some sympathy for the arguments put forward by the objecting 10.5% noteholders, and noting that the uptier transaction “may have violated . . . the ‘all for one, one for all’ spirit of a syndicated loan,” Judge Goldblatt determined that under the clear terms of the 2019 indenture the amendments were valid. “There is nothing in the law that requires holders of syndicated debt to behave as Musketeers.”
Judge Goldblatt’s decision is an important addition to the developing jurisprudence on uptier transactions and similar intra-creditor disputes. With interest rates rising and a wave of defaults looming, similar battles are going to be fought out in bankruptcy courts in the coming months.