We know you missed us, so we are back to examine some more pitfalls that may be unidentified or ignored until they are those monsters keeping everyone up the night before a targeted closing – or worse, delaying closing (see Part 1 for an introduction to the blog post series and Parts 2, 3 and 4 for our other traps to watch out for). This post reflects on some execution risks that have become more commonplace as liability management exercises (LMEs) have evolved.
Exchanges Using Buyback Mechanics
We talked about exchanges in Part 2, but those exchanges generally contemplate the use of pre-wired mechanisms like incremental facilities and amend and extend provisions (which are making a comeback in LMEs – hello Better Health and Oregon Tool). However, many LME-related exchanges still rely on Serta-type maneuvers, which require that companies use the non-pro rata payment exceptions relating to open market purchase buybacks for term loans, despite the determination by the United States Court of Appeals for the Fifth Circuit in Serta, 125 F.4th 555 (5th Circ. 2024), amended 2025, that for a transaction to be an “open market purchase,” it must involve purchases in a market with competing buyers. Many credit agreements have addressed the ruling in Serta by stating that “privately negotiated” purchases of loans shall constitute open market purchases or expressly are permitted.
Parties may attempt to rely on an exchange agreement to effectuate a Serta transaction, but customary exchange agreements do not cover the borrower buyback step. Relying solely on an exchange agreement is only an option if there is 100% requisite lender participation, allowing the exchange agreement to effectively override any prohibitions on non-pro rata prepayments. It is best to address the buyback documentation early on, ensuring that the documentation is in a form that the administrative agent can process and strictly adheres to the mechanics of the credit agreement. This might include ascertaining whether there is a special assignment form exhibit for affiliated lender buybacks and whether any representations regarding MNPI are required. The company will also need to determine and timely communicate to the agent what entity is purchasing the loans, which may affect how the agent plans to process the buyback.
Some credit agreements have addressed the “open market purchase” issue by permitting the Borrower to prepay outstanding term loans on a non-pro rata basis at or below par with the consent of only the lender being prepaid. While this mechanic helps the parties cut to the chase without conducting any borrowing buybacks, the company and agent still need to determine the specific form of lender consent that allows the administrative agent to process a below par and/or non-cash prepayment.
In each case, a master assignment or consent agreement will likely be the most suitable document to handle a multi-lender buyback or prepayment. The agent and its legal advisors may need some time to review that documentation, particularly the schedule of loans subject to extinguishment: for good reason, agents are typically deliberate in following the credit agreement when taking loans off a register for anything other than cash at par, and, as discussed in Part 1, shifting from automated to manual processes may take time.
Double Dips
Adding two new credit agreements to a transaction in order to effectuate a “double dip” - which typically results in participating lenders having direct recourse to a Newco (or other non-loan party entity designated to be the double dip borrower), a guaranty and security from RemainCo loan parties, and an indirect pledge of Newco’s receivable payable by RemainCo (i.e., the double dip) - requires planning to execute. Thinking about the following questions ahead of time will be helpful:
- Who will be the collateral agent or secured party on the intercompany loan? The lenders may want the Newco collateral agent to serve in that capacity, and the agent institution will need time to put into place new agency arrangements (including fee arrangements).
- Moreover, are the participating lenders comfortable with the same collateral agent serving in such capacity on both the RemainCo and Newco credit agreements? Will a third-party agent need to be brought into the deal?
- Will the amount of the intercompany receivable be based on anything other than new money lent to Newco? If there is a revolver at Newco, will the proceeds of the revolver be on-lent to RemainCo, and how will those proceeds be captured in the double dip receivable?
- Will it be more efficient to include the double dip intercompany receivable as an incremental facility under the RemainCo credit agreement? How might the RemainCo lender votes be affected?
- Is there a global intercompany note that needs to be amended? For instance, does the existing global note state that it represents all receivables between the borrower and the loan parties (which is no longer accurate once the double dip receivable is established)?
Letter of Credit Issuer Consent Rights
It’s hard to end a blog post without reminding everyone about the intricacies letters of credit bring to a restructuring (and not holding back here). Post-restructuring, it is not uncommon that the agent and the letter or credit issuer are no longer the same institution. When negotiating any future amendments, keep in mind whether any modifications affect the letter of credit issuer, in which case its consent will be required in addition to the requisite lenders, the company, and the agent.
Happy executing and hope all your deals go seamlessly.
