Litigation Coverage: STG, Participating Lenders Argue Mitel Decision Requires Dismissal of Excluded Lenders’ Drop-Down Suit Because Transaction Did Not Directly Affect Sacred Rights

Relevant Documents:
Amended Complaint
STG Motion to Dismiss
Participating Lenders’ Motion to Dismiss
Antares Motion to Dismiss

On March 31, Wind Point- and Oaktree-sponsored STG Logistics and the majority first lien lenders that participated in the company’s October 2024 drop-down liability management exercise moved to dismiss a New York state court suit brought by excluded lenders Axos and Siemens. Wind Point and STG argue that the transaction was “negotiated, agreed-to, and implemented in strict compliance” with the credit agreement.

According to the excluded lenders, STG transferred “critical collateral assets and guarantors” to unrestricted subsidiaries STG Distribution LLC and STG Distribution Holdings LLC, prepaid the participating lenders’ loans, took out new loans secured by the transferred assets and the assets remaining in the restricted group, and stripped “critical lender protections,” including payment and default provisions, from the original first lien credit agreement.

The excluded lenders maintain the drop-down “ran afoul of several lender protections in the existing credit agreement,” including protections added in May 2024 “to expressly prohibit exactly this type of abusive transaction, in exchange for the lenders’ forbearance for nearly two years on leverage covenants.” The excluded lenders specifically point to a May provision requiring that “any opportunity to participate and/or receive” favorable non-pro-rata treatment “be held open to all Lenders for at least five Business Days.”

According to the excluded lenders, that new provision, combined with sacred rights already included in the credit agreement, “closed potential avenues” for liability management transactions involving “dropdowns to unrestricted subsidiaries or non-pro-rata treatment of Loans.”

However, STG asserts in its motion to dismiss that the excluded lenders “ignore STG’s right to amend nearly every provision in the credit agreement with the consent of a simple majority of lenders,” including provisions restricting non-pro-rata loan redemptions and the new anti-drop-down language cited by the excluded lenders.

Like Hunkemöller International, which moved to dismiss a similar liability management suit on March 31, STG argues that none of the transaction amendments directly affected the excluded lenders’ sacred rights and, under the Dec, 31, 2024, Mitel decision, amendments that do not directly modify sacred rights “cannot support a ‘sacred rights’ claim even if these amendments are alleged to ‘effectively’ impact Plaintiffs.”

STG also maintains that even prior to the transaction amendments, the credit agreement allowed it to selectively exchange existing loans for new unrestricted subsidiary loans at a discount using “internally generated funds or otherwise.” STG insists that it exchanged the original loans with “internally generated funds” in the form of “an intercompany loan that moved cash between entities in the STG Defendants’ corporate structure.”

Finally, STG points out that it offered minority lenders the opportunity to exchange their existing loans for second- and third-out unrestricted subsidiary loans at a discount and that only the excluded lenders refused. “Plaintiffs are holdout lenders who refused to participate in crucial financing transactions despite approval by over 93% of their fellow lenders,” the company concludes.

The excluded lenders call the “Second Class Offer” to participate in the exchange a “coercive consolation prize.” “Lenders accepting the Consolation Prize,” the excluded lenders say, took a deeper discount than the controlling lenders and received a worse mix of unrestricted subsidiary loans, meaning “they would sit lower in priority than the Defendant Lenders despite everyone starting from the same first-lien position.”

According to the excluded lenders, the purpose of the “consolation prize” was to coerce a sufficient number of excluded lenders to waive their litigation rights and reduce holdouts to those with “positions too small to justify litigation.”

The participating lender defendants – which include Deutsche Bank, Audax, Fortress, Drawbridge, Invesco, BlueMountain and Fidelity affiliates – generally make the same arguments as the company in their motion to dismiss. In addition to pressing the validity of the transactions under the existing and amended credit agreement, the participating lenders assert that the excluded lenders lack standing to sue under the credit agreement’s no-action clause.

Loan agent and participating lender Antares filed a separate brief echoing the company’s and participating lenders’ arguments. Antares also argues that it cannot be liable as agent for participating in the transaction because it followed the instructions of the company and required lenders, on which it was entitled to rely.