Anatomy of a Co-Op: Initial Party Concept, How Treatment/Fees Work, Trading Rules

What does a cooperation agreement include?

Octus, formerly known as Reorg, obtained and reviewed a copy of a co-op prepared last year by a prestigious law firm for creditors in a large-cap situation. The document, about a dozen pages, sheds light on the ubiquitous and evolving creditor tool that is creating bylaws for creditors without the borrower’s involvement.

Recitals

This section references the issuer’s debt documents at issue and states that certain creditors have retained advisors and plan to start or continue discussions with the company regarding a potential transaction involving the issuer’s debt. It also mentions that the members of the ad hoc group wish to cooperate with one another in connection with the negotiation of a potential transaction.

Definitions

This block defines terms in the agreement, presented with initial capital letters, including Approved Transaction, Effective Date, Initial Party, Non-Confirming Transaction, Outside Date, Potential Transaction, Qualified Marketmaker, Qualified Unrestricted Instruments, Required Parties, Subsequent Party, Support Deadline and Transfer, among others.

Agreement of the Parties

During the Cooperation Period, each Party to the co-op shall not approve or negotiate any transaction with the company other than a Potential Transaction supported by the Required Parties, paying the advisors’ fees, providing each Initial Party with the ability to participate on equivalent terms for treatment of their holdings, fees, new-money financing and any backstop opportunity, and providing each Subsequent Party with the ability to participate on equivalent terms solely with respect to treatment of their holdings. Note above the different economics between what an Initial Party would receive and what a Subsequent Party would get. Some co-ops also have economic carve-outs for the creditors’ steering committee, often referred to as a “Carve-Out Premium,” according to sources.

Additionally, during the Cooperation Period, the Parties will cooperate with one another to render any proposed Non-Confirming Transaction an Approved Transaction. The co-op does not obligate any Party to become a plaintiff in any litigation, incur any monetary obligations, participate in an Approved Transaction or take any action that would violate or cause a breach of any agreement, regulatory obligation or organizational document of such Party.

Transfer of Loans

This section details the extensive rules for co-op paper changing hands. Each Party shall not transfer its loans to any Company Affiliate other than pursuant to an Approved Transaction or transfer its loans unless the transferee executes a joinder within a certain amount of days, or transfer its loans unless to another Party to the co-op. This is a similar concept that exists in a restructuring support agreement, or RSA.

The co-op paper cannot be “dropped down” or unrestricted either: No Party may create or utilize any subsidiary or Affiliate to acquire any loans subject to the co-op from a Party without first causing such subsidiary or Affiliate to agree to be bound by the co-op.

The terms regarding trading that involves a Qualified Marketmaker center on keeping the co-op paper changing hands as co-op paper and bind the new owner of the paper to the co-op agreement.

Further Acquisition of Loans

This section deals with the scenario of any Party to the co-op buying more of the issuer’s loans. The co-op does not preclude any Party to the co-op from acquiring additional loans. But any additional loans shall automatically be subject to the terms of the co-op, and the Party has to disclose whether the loan acquired was co-op paper already, and if it is an Initial Party that acquired the additional loan, the additional loan shall be treated as the holdings of an Initial Party. The latter case potentially gives power to the largest holders in a non-inclusive co-op situation because the Initial Party record date essentially gets manipulated, and the dynamic resembles a hunter-gatherer scenario, according to sources.

Some co-ops also include provisions that prohibit a co-op party from participating in the company’s new issuances or stipulate that if a co-op party sells out, they cannot participate in new issuances of the company for a period of time, according to sources.

Effectiveness

The co-op becomes effective when a certain percentage of the holders of the loan execute the agreement. Typically it is 50.1% of a particular debt instrument, according to sources. For any Party that is not an Initial Party, the co-op becomes effective on the date they sign the co-op or a joinder.

Termination of the Parties’ Obligations

Any party that no longer holds any loans because of transfers and is not then in material breach of the co-op may terminate its obligations under the agreement, but the Terminating Party may still have obligations that survive termination of the co-op – for example if the Terminating Party breached or had nonperformance of any obligations under the co-op before the Transfer Termination Date.

The co-op automatically terminates upon the earliest of an Approved Transaction being consummated, a chapter 11 petition or other insolvency proceeding, an involuntary petition, Required Parties electing to terminate the agreement, and Outside Date.

Representations and Warranties

This section makes sure that each Party understands that it can perform in accordance with the co-op and that the agreement is a binding obligation but that enforcement may be limited by other laws relating to creditors’ rights and equitable principles.

Disclosure

This block stipulates that each Party has to accurately report its holdings and updated holdings on the signature page and to the creditors’ advisors, who shall not disclose the holdings to any other person or entity without the prior consent of the disclosing Party. But the advisors shall be permitted to publicly disclose Basic Information about the co-op, and each Party shall be permitted to disclose the Basic Information to other holders.

This section notes that the existence of the co-op is not confidential and that the Parties have no obligation to refrain from disclosing the co-op. However, no Party shall disclose the identity of any other Party by name, including to the company or its sponsor.

Reservation of Rights

This section says each Party still has the ability to protect and preserve its interests, including its claims against the company. This segments also reiterates that nothing in the co-op restricts any Party from trading in the company’s debt.

Amendments and Waivers

The co-op may not be amended without the consent of every Party to the agreement. Some co-ops can be amended with 50.1% consent, according to sources.

Successors and Assigns

The co-op binds and benefits each Party and their successors.

No Third-Party Beneficiaries; Relationship Among Parties

No other person or entity shall be a third-party beneficiary of the co-op. The Parties do not constitute a “group” within the meaning of Rule 13D regarding the company’s equity securities.

Specific Performance

Money damages would not be a sufficient remedy for any breach of the co-op, and each non-breaching Party shall be entitled to seek an injunction or other equitable relief to prevent breaches or threatened breaches of the co-op and/or to seek specific performance.

The section touches again on how the co-op does not preclude any Party from trading.

Representation by Counsel

Essentially, each Party is sophisticated enough to enforce the co-op, and lack of legal counsel is not a viable argument.

Severability

If any provisions of the co-op are held invalid or unenforceable, the remaining provisions shall continue in full force and effect. Upon any such determination of invalidity, the Parties shall negotiate in good faith to modify the co-op to effect the original intent of the Parties to consummate the transactions contemplated.

Miscellaneous

This section mentions that the co-op shall be governed by the laws of the state of New York, and that any legal action in regard to the co-op may be brought in state and federal courts in the state of New York.