Breaking the Chain: District Court’s Wesco Opinion Limits ‘Effect of’ Sacred Rights Protections, a Boon for Vote-Rigging and Other Multi-Step LMEs

• In a memorandum order released this week, District Court Judge Randy Crane ruled that the March 2022 amendments enabling Wesco’s two-step uptier of its 2026 secured notes did not violate the relevant indenture.
• The ruling reverses Bankruptcy Court Judge Marvin Isgur’s finding that the initial amendment issuing $250 million of additional secured notes to the Pimco- and Silver Point-led majority group (and which granted the incremental voting power needed to pass a subsequent lien-stripping amendment) had the “effect of” releasing all or substantially all collateral without the requisite supermajority consent.
• Pending a likely appeal to the Fifth Circuit, the district court’s decision could have important implications for how “effect of” language, which is generally understood to broaden the scope of lenders’ sacred rights, will be interpreted across the leveraged loan and high-yield bond markets, including in the ongoing STG Logistics liability management exercise litigation before the New York Supreme court.

The Wesco dispute has spanned several years and multiple proceedings. Octus has covered this dispute from the outset. More fulsome background on the transaction can be found HERE, and on the dispute more broadly HERE.

As part of Wesco’s 2022 uptier exchange (the “2022 Transaction”), a group holding a majority of the company’s 2026 secured notes led by Pimco and Silver Point (the “Majority Group”) implemented two amendments to the 2026 secured notes indenture that enabled the majority group to exchange its holdings into priming debt while stripping the liens and covenants of the excluded minority. The crux of the dispute at issue in Judge Randy Crane’s opinion is whether the majority group had the requisite consents for the amendments that implemented the transaction.

Under the 2026 secured notes indenture, Wesco needed the consent of 66-2/3% to make an “amendment, supplement or waiver” that “may … have the effect of releasing all or substantially all of the Collateral from the Liens created pursuant to the Security Documents…”

The Majority Group lacked a supermajority position in the 2026 notes. To meet the supermajority threshold, Wesco and the Majority Group amended the 2026 notes (through the execution of a third supplemental indenture) to issue the Majority Group additional 2026 notes (“Amendment No. 1”). With the requisite supermajority, Wesco and the Majority Group entered into a fourth supplemental indenture (“Amendment No. 2”) under which liens securing the 2026 notes were removed, certain negative covenants stripped, and the notes’ exchange authorized.

All documents necessary to consummate the uptier exchange were executed and consummated over seven hours on a single day (March 28, 2022) in a prenegotiated and preplanned process. That process involved the sequential release of the agreements from escrow under agreed-upon closing mechanics.

Throughout the litigation, the Majority Group’s position was that Amendment No. 1 required only majority noteholder consent, which the Majority Group held at the time it entered into Amendment No. 1.

A group of minority lenders (the “Minority Group”) raised several objections to the 2022 Transaction, including that Amendment No. 1 had the “effect of” releasing all of the collateral backing the 2026 notes because it was the predicate for Amendment No. 2, and the entire structure of the 2022 Transaction was pre-ordained. Thus, according to the Minority Group, Amendment No. 1 was invalid because the Majority Group lacked the required supermajority at the time it was passed.

In its Report and Recommendation issued on Jan. 17, 2025, the Bankruptcy Court sided with Minority Group on its “effect of” argument.

The Bankruptcy Court in its review of the process surrounding the 2022 Transaction found that the collateral release under Amendment No. 2 was effectively baked into the 2022 Transaction at the time all of the documents were executed and delivered into escrow, finding that the “moment the Third Supplemental Indentures were executed, the rest of the documents (having already been delivered in executed form subject to release) were released and effective automatically and instantaneously.” As illustrated below, according to Bankruptcy Court Judge Marvin Isgur, the entire transaction was a “domino agreement” – once the first domino toppled, the rest would necessarily fall.

The district court flatly rejected the Bankruptcy Court’s Report and Recommendation and took specific issue with the bankruptcy court’s characterization of the 2022 Transaction.

The decision rests largely on: (1) the court’s view of the plain language of the indentures and the “sophisticated entities” that were parties to them, and (2) in stark contrast to the bankruptcy court, the court’s finding that the serial steps of the 2022 Transaction were not automatic or irreversibly preordained.

Adopting a literal approach that, in our view, is divorced from the context and purpose of the 2022 Transaction, the court specifically focused on the express terms of Amendment No. 1 and found that Amendment No. 1 complied with the terms of the indentures. Amendment No. 1 simply authorized the issuance of the additional notes for which only majority consent was required and did not have the “effect of” releasing any collateral. The court found that each other component of the 2022 Transaction complied with the express noteholder voting thresholds. According to the court, it simply refused to read any “implied sacred rights” into the indentures.

To read the full analysis, please email [email protected]