Blog Post
The newest tool in the LME toolkit? CDK’s co-op agreement
“Stand clear of the closing doors, please.”
CDK Global’s lenders might have had this classic New York City subway announcement in mind when they received an email from Gibson Dunn lawyers around 7 p.m. ET on Friday, April 24. The message: sign a cooperation agreement as soon as possible, because initial party status is reserved only for the first signees until a 13.5% cap is filled.
By changing the condition for initial party status from signing by a deadline to filling a quota, the latest co-op technology forces creditors to make up their minds and show loyalty quickly. A day later, on Saturday, April 25, Gibson Dunn informed CDK Global lenders that the 13.5% cap had been reached. Those who signed afterward will be treated as subsequent parties.
When the economic pie is not big enough to go around, fear of an LME is often justified and later validated, and ad hoc group representation invites fierce competition. It was only a matter of time before the membership rule changed to “first come, first served” — and at some point, the “sold out” sign lights up.
As the Chinese idiom goes, it’s a new bottle filled with the same wine. Capping how much debt a tier of lenders can hold as part of a co-op is an evolution from explicitly tranching lenders into different classes that would receive better or worse treatment in a hypothetical LME — hello, Medical Solutions.
The innovation is likely to stick and spread to other co-ops. Lenders who missed the initial party window at CDK, and who will become subsequent parties, have spoken with Cadwalader about strategies.
When the doors are closing, the coterie of lenders not to be forgotten is the steerco — already seated in the subway car. In exchange for their sizable holdings, heavy lifting in negotiations and deal backstopping, a carveout premium, sometimes essentially unlimited, is baked into the co-op for them.
But the question is: how big a spread between the haves and the have-nots is warranted?
To learn more about what lenders can do to protect themselves, join us on May 14 at 11:00 ET for a webinar with Glenn Agre on LMEs and minority lender tactics and strategies.
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