LME Perspectives: 5 Reasons Serta Decision May Prove More of a Speed Bump Than a Stop Sign

Credit Research: Jared Muroff, CFA After the Fifth Circuit’s Dec. 31, 2024, decision in Serta, which some have suggested could bring the end of non-pro-rata uptier transactions, we thought it made sense to take a contrary view and lay out some reasons why the decision may not have as much of an impact on the credit markets as it at first seems. We can think of several reasons why transactions of this type will continue to proliferate:   Creditors left out of a transaction will still have to bring a legal case to have these transactions overturned. It remains unclear whether, and how much, courts outside of the Fifth Circuit will rely on the Serta decision, and we would expect proponents of a non-pro-rata uptier to force holdout creditors to take up costly and lengthy litigation to protect their rights. Transactions featuring a more disparate minority group or situations where minority groups have not formed could make it difficult to fund potentially costly litigation. Additionally, there is potential that these deals could be structured to cause the plaintiffs to “pay twice” for the litigation, as theoretically, the company’s costs associated with litigation are ultimately borne by all of its creditors.   As[...]