No Repayment for You: Companies Threaten LME Holdout Lenders With Stub Piece Nonpayment at Maturities

Corporate borrowers and their advisors have threatened holdout lenders during liability management exercise processes that their stub debt pieces may not get repaid at maturity, according to sources.

This punishing “stick” by issuers in the LME context may be in response to a strategy of some minority lenders, the sources said. Some minority lenders sometimes refuse to accept worse deal terms than their majority lender peers and instead hope to be quietly taken out at par when their holdings mature.

The tactic also represents an extension and escalation from companies skipping coupon payments without defaulting, a development started by Diebold Nixdorf, Robertshaw, and Cornerstone Chemicals and later used by issuers employing tiered transactions. The threat to not pay stub pieces in full on maturity also calls into question whether what are typically considered “sacred rights” are indeed sacred.

The exact mechanism to do away with repaying stub debt pieces at maturity is unclear and depends on the specific debt documents, but some key aspects may include, among others, introducing an indefinite forbearance, using the power of requisite lenders to amend relevant provisions, tweaking lenders’ enforcement capabilities among other logistical items, and changing what constitutes an event of default, the sources said.

“We have seen many LMEs where borrowers and majority lenders agreed to extend the grace period for making interest payments under the credit agreement governing the stub debt. Those parties have taken the position that such an amendment does not violate the sacred right mandating unanimous lender consent for changing the stated date for making interest payments. Courts haven’t yet opined on this issue,” according to Shai Schmidt, partner at Glenn Agre, when contacted by Octus on the topic.

“Threatening not to repay principal at maturity – whether by extending a grace period or simply refusing to pay – may seem like a natural addition to a borrower’s bag of ‘sticks’ as it tries to garner support for an LME,” Schmidt said. “But a borrower’s obligation to repay the money it borrowed on the loan’s maturity date is enshrined as a sacred right under every credit agreement and is viewed by the lender community as a fundamental expectation that cannot be eviscerated by a subset of lenders. While the specter of not being repaid at maturity can be an effective (albeit coercive) negotiating tactic, making good on this threat would also significantly increase the likelihood of litigation. Market participants seem to recognize this, which is perhaps why we have yet to see this threat materialize.”
 

Borrower and majority-lender groups in several transactions have sought to deny minority lenders their right to payment, including two notable instances – Arena and STG Logistics – that are being litigated in New York state court.

In the Arena litigation, the majority lender and the agent – which is an affiliate of the majority lender – both refused to take any action after the borrower failed to pay principal on maturity and interest. The sacred rights encompassed extending the maturity date, and reducing the amount of, or waiving or delaying, payment of principal and interest.

Arena, the facility’s minority lender, argued that doing nothing in response to a payment default effectively extended the loan’s maturity date or waived the payment default without Arena’s consent, in violation of Arena’s sacred rights. Arena’s claim for breach of contract against the borrower was dismissed on standing grounds, but its other claims survived a motion to dismiss.

Arena subsequently obtained summary judgment on its breach of contract claim against the guarantors, and its claims for breach of contract against the agent and breach of the implied covenant continue. (Various appeals appear to be pending.)

In the STG Logistics litigation, a group of holdouts from the company’s October 2024 non-pro-rata double-dip-plus exchange have argued that the exit consent that facilitated the transaction violated their right to timely interest payment and several other sacred rights under the existing credit agreement. Unlike in Arena, where the minority lender was denied its maturity payment by the majority lender’s (and agent’s) refusal to enforce, STG deals with an exit consent that effectively postponed interest payments to holdouts through manipulation of grace periods.

The tactic being challenged in STG is increasingly common in exit consents for aggressive LMEs, but so far we have only seen it used to delay interest payments. Expanding this practice to postpone principal payments beyond maturity to punish holdouts from an LME would be a serious escalation of creditor-on-creditor conflict, one that, in the view of Octus legal analysts, would plainly violate the spirit of most credit documents, yet could still fall within the letter of some.

Mechanics of the Approach

In a typical LME exit consent, in-group lenders holding at least a majority of the facility agree to amend the existing credit documents to remove nearly all negative covenants and lender protections that are not sacred rights. This typically includes stripping the agreement of most events of default other than those related to payment and bankruptcy.

To postpone payment, the exit consent does not delete the nonpayment event of default. Instead, it modifies what constitutes such an event of default by giving the borrower sole discretion to set a grace period, which is the time that must pass before the missed payment, referred to as a “Default,” matures into an “Event of Default.”

This distinction between a Default and an Event of Default matters because many important lender remedies, such as the right to accelerate, are triggered only upon an Event of Default. With total discretion to manipulate the grace period, a borrower can effectively delay or suspend those remedies while maintaining the formal right to payment, notwithstanding the fact that the left-behind lenders control 100% of the stub paper.

The Question of Sacred Rights

It may seem that the right to payment cannot be altered without unanimous consent. In practice, however, many credit agreements draw a subtle (and possibly unintended) distinction between the right to receive timely payment of principal and interest, which is almost always sacred, and the provisions that define what constitutes an Event of Default, which typically are not.

As a result, an amendment that extends the grace period for nonpayment may effectively postpone a scheduled payment without technically violating the sacred right to payment, unless that right is expressly drafted to cover amendments with such an “effective” impact, which is rarely the case. As noted above, this exact issue is being disputed in the STG Logistics litigation in New York state court.

Interest vs. Principal Payments

Again, so far this tactic has only been applied to postpone interest payments. Most broadly syndicated loan agreements already include a short grace period for missed interest payments, typically around three to five business days, so postponement is achieved simply by extending that period.

Most credit agreements, however, provide no grace period for failure to pay principal, which means that nonpayment, including at maturity, will typically constitute an immediate Event of Default. But using the same logic applicable in the interest payment scenario, that Event of Default could arguably be modified by inserting a grace period that is then subject to further extension at the borrower’s sole discretion.

In fact, many broadly syndicated loan agreements even specify that changes to, or waivers of, the Event of Default provisions will not of themselves constitute a postponement of payment or an extension of maturity, creating a narrow but explicit opening that could allow a borrower and majority lenders to weaken enforcement rights while preserving the technical payment obligation. An example of such language, excerpted from GoDaddy’s Twelfth Amended Credit Agreement dated as of Dec. 16, 2024, is highlighted below.
 

How Can Lenders Defend Themselves?

A small number of credit agreements, mostly those that are post-LME or have adopted post-LME style protections, have addressed the risk of a nonconsensual maturity extension by (a) omitting the carve-outs highlighted above and (b) expressly including grace period extensions (and changes that have the “effect of” an extension) among the sacred rights. An example of this more protective formulation of the sacred right to payment (which, notably, also addresses PIK conversion amendments) appears in Commscope’s post-LME-style credit agreement dated Dec. 17, 2024, excerpted below.