Trinseo Excluded OpCo Lender Group Sues to Invalidate Double-Dip LME, OpCo Intercompany Loan; Accuses Super HoldCo Lenders of Inequitable ‘Loan-to-Own’ Strategy

Relevant Documents:
Complaint
Excluded Lender DS Objection
Excluded Lender DIP Reservation

The ad hoc group of excluded Trinseo OpCo term lenders led by alternative DIP bidder CastleKnight and represented by Pallas Partners launched its opposition to the debtors’ proposed prepackaged plan overnight on May 26 by filing a complaint challenging the company’s 2023 double-dip liability management exercise and 2025 exchange offer, an objection to approval of the debtors’ disclosure statement and a reservation of rights regarding the proposed DIP facility.

According to the excluded lender group, the debtors’ plan assumes the validity of the challenged transactions by allocating substantially more of the company’s value to the Super HoldCo lenders that participated in the LME – and the validity of the transactions must therefore be determined prior to confirmation of the plan on the debtors’ proposed expedited schedule.

In their DS objection, the excluded lenders assert that if either of the challenged transactions is invalidated, “the proposed Plan falls apart.” “There must be a full and fair resolution of the Adversary Proceeding before Disclosure Statement approval, not after,” according to the group.

A first day hearing is scheduled for today, Wednesday, May 27, at 2 p.m. ET. A Rule 2019 statement detailing the holdings of the group is HERE. CastleKnight is by far the largest holder in the group, with approximately $271.8 million in OpCo term loans; the rest of the group combined holds approximately $21.9 million.

In the complaint, the excluded lenders allege the LME transactions violated the OpCo credit agreement and “laid the groundwork for the chapter 11 plan of reorganization now before this Court – a plan that would transfer control of the Debtors” to the Super HoldCo lenders, compensate them for inequitable conduct and “substantially impair recovery on over $700 million” in 2028 OpCo term loans.

Prior to the 2023 transaction, the group maintains, the debtors’ capital structure consisted largely of the OpCo term loans, which “provided limited flexibility to raise new financing” in the form of a $375 million new indebtedness basket – “a fraction of the $1.077 billion that the Debtors sought to borrow.” The group points out the OpCo credit agreement also prohibited the OpCo borrower from guaranteeing any new lending, preventing the company from attempting a drop-down LME.

To circumvent these limitations, the group says, the company created a special purpose entity, Luxco SPV, below parent Trinseo plc to borrow $1.077 billion from the Super HoldCo lenders. Luxco SPV then used $125 million in proceeds from the loans to “manufacture an ‘equity contribution’” to the OpCo borrower and used this “fictional basket capacity” to transfer the debtors’ valuable joint venture interest in Americas Styrenics, or AmSty, into an unrestricted subsidiary.

The AmSty unrestricted subsidiary then guaranteed the new Super HoldCo loan, the group continues, and contributed $948 million of the Super HoldCo loan proceeds to the OpCo borrower via a sham intercompany loan “to manufacture an artificial claim in bankruptcy for the Super HoldCo Lenders.”

“The intercompany ‘loan’ was a loan in name only,” the excluded lenders insist, and “had every hallmark of an equity contribution between corporate affiliates.” The “loan” had “no legitimate business purpose,” “was entered into between conflicted fiduciaries of the two borrowers” and “would mean the Debtors collectively incurred roughly $2 billion in new debt to obtain roughly $1 billion of new capital,” the group asserts.

Via the 2025 transaction, the group adds, the debtors “upsized the intercompany ‘loans’ by nearly $500 million” and took on the $300 million OpCo RCF, to which the debtors afforded “super-priority” status “through an off-market intercreditor agreement.” “As the Debtors’ insolvency became apparent,” the group says, the Super HoldCo lenders secured other “unusual” intercredit agreement provisions allowing them to purchase the OpCo RCF, “positioning themselves to execute a loan-to-own strategy upon the Debtors’ anticipated bankruptcy filing.”

“The net result is the chapter 11 plan now before this Court,” the excluded lenders conclude. “The Super HoldCo Lenders stand to receive substantially all of the takeback debt and equity of the Debtors at emergence, along with substantial backstop fees, DIP financing fees, and other transaction-related compensation,” while the OpCo term lenders “stand to receive virtually nothing.”

According to the excluded lenders, the transactions must be invalidated because the “financial engineering” used to “manufacture” additional basket capacity did not comply with the credit agreement. The new AmSty unrestricted subsidiary’s guarantee also violated the credit agreement’s prohibition against distributions on OpCo borrower equity and “prevented the issuance of the $948 million intercompany ‘loan,’ which is otherwise subject to recharacterization and thus void,” the group argues.

Because the 2023 transaction is invalid, the 2025 exchange and RCF intercreditor agreement are also invalid, according to the group. “Each of these subsequent transactions depended on consents that could be delivered only through votes of the intercompany ‘loan,’” the group explains, and thus the voiding of the intercompany loan requires the voiding of those transactions.

The excluded lenders alternatively argue that the Super HoldCo lenders’ RCF claims should be equitably subordinated as part of the Super HoldCo lenders’ inequitable loan-to-own strategy. “In the period leading up to these Chapter 11 Cases,” the group says, the Super HoldCo lenders “acquired the OpCo RCF for the purpose of effectuating their loan-to-own strategy, concealing the prior breaches, and constraining the AHG’s rights in these proceedings.”

The group also says the DS cannot be approved because the plan is patently unconfirmable. First, the group says the plan improperly places the “diametrically opposed” $1.5 billion intercompany loan in the same class as the OpCo term loans solely to ensure that the accepting votes of the intercompany lenders “swamp” the rejecting votes of the non-RSA OpCo term lenders and avoid a cramdown fight.

Second, the excluded lenders argue the plan unfairly discriminates among OpCo term lenders on the basis of their acceptance or rejection of the RSA, in violation of the Southern District of Texas’ ConvergeOne decision and section 1123(a)(4) of the Bankruptcy Code. The plan provides RSA OpCo lenders, but not the excluded lenders, with a $23.7 million “gift” from the intercompany loan claimants, rights offering backstop premiums, “the ability to monetize or transfer subscription rights for additional value,” governance and control rights and reimbursement of fees and expenses, the group points out.

“The aggregate supporter-only consideration represents approximately $56 million, a 7.8% recovery of principal” that bears no relation to the postpetition risk taken on the RSA OpCo lenders, the excluded lenders contend. Instead, this incremental recovery for some, but not all, of the OpCo term lenders “is solely on account of the holders’ prepetition decision to sign the RSA on the Debtors’ timeline.”

Finally, in their DIP reservation of rights the excluded lenders call the postpetition loans “the capstone of a months-long campaign by the Super HoldCo Lenders to seize control of these chapter 11 proceedings,” “preordain key merits issues” and prevent the excluded lenders from challenging the LMEs.

The excluded lenders say they are working with the debtors to ensure the proposed interim DIP order “does not prejudice their rights and ability to fully litigate the issues raised in the Adversary Proceeding, the forthcoming objections to the Plan, and any other disputed issues or proceedings.”