Private Credit LME Arms Race Has Shifted From Financial Engineering to Documentation Engineering: Jayme Goldstein 

By Gaurav Sharma

Liability management exercises are becoming more prevalent in the private credit market and will continue to become increasingly common in the coming years amid rising defaults and liquidity pressure, says Jayme Goldstein, the co-chair of the Paul Hastings financial restructuring group.

Goldstein, who has deep experience in out-of-court workouts, financings and LMEs, says the assumption that LMEs are primarily a phenomenon in the broadly syndicated loan market is no longer accurate as sponsors are more willing to stop supporting portfolio companies and/or consider LMEs for companies that have tapped the private credit markets.

“We’re seeing private credit lenders in these situations feeling compelled to explore more novel or aggressive transactions, with or without the blessing of a given sponsor,” said Goldstein.

Goldstein said that the August 2024 drop-down transaction by the Vista Equity-backed Pluralsight was a “wake-up call” for private credit lenders who were surprised by the company’s move.

Pluralsight moved its IP to a nonguarantor subsidiary and raised $170 million against it, a move that was adverse to its private credit lenders, such as Blue Owl and Ares, before agreeing to a transaction with its lenders.

“Pluralsight was a fascinating situation, as the members of the syndicate were presumably expecting a different initial outcome given their various strong relationships with the sponsor. However, the process resulted in a contentious path before a change-of-control transaction was ultimately agreed to.” Goldstein added.

Talking about LMEs more broadly, Goldstein said they continue to evolve from initially being more “defensive” reactionary measures into increasingly preplanned and creative constructs in the fast-changing sector of restructuring, where companies, sponsors and lenders use credit documents in an “offensive” strategic manner.

According to Goldstein, to combat attempts from companies and sponsors to potentially use their loan documents as a mechanism to aggressively re-architect priority and value flow through the capital structure, lenders today often try to hardwire protections into documentation at origination.

“The arms race is resulting in financial engineering through documentation engineering,” Goldstein said.

Goldstein notes that LMEs are evolving, given the increased litigation risks. He said he is seeing that minority lenders are being offered more economics, lesser subordination and enhanced process benefits given an enhanced focus on avoiding the legal costs and publicity that stem from litigation.
 

 

Perforce Software Inc.

Perforce Software raised approximately $297 million in pari first lien notes to refinance its $300 million second lien term loan. All the company’s existing private credit lenders, including Crescent Capital and Barings, converted their second lien debt into the new first lien notes. The company, backed by Clearlake Capital and Francisco Partners, faced pressure on its private credit-backed debt earlier this year, with its first lien term loans falling into distressed territory amid concerns over a software selloff linked to AI risk. Octus’ coverage of Perforce is HERE.

Real Truck

RealTruck and its largest creditors reached an agreement on the terms for an amendment and extension of its term loans and an exchange for its unsecured notes, providing the company with additional liquidity and the ability to issue more debt for future mergers and acquisitions. The agreement includes $300 million in new 2031 first lien first-out term loans, which are to be offered to all first lien lenders pro rata and backstopped by steering committee lenders.

Existing unsecured noteholders will exchange their notes for new second lien notes due July 2031, with varying exchange rates for cooperative and noncooperative bondholders. The deal also allows for $250 million in additional first-out capacity for future M&A activities, subject to certain conditions. Octus’ coverage of Real Truck is HERE.

Staples

Staples informed lenders this week that it had created a separate entity called “Fulfilled by Staples” within its collateral pool, although the company did not provide further details on the rationale behind this decision. The office supply retailer, backed by Sycamore Partners, reported a 5.3% year-over-year increase in fourth-quarter EBITDA to $220 million and a 3% year-over-year rise in quarterly sales to $2.5 billion. The company’s liquidity at quarter-end was $661 million, with total debt amounting to $5.37 billion. Octus’ coverage of Staples is HERE.

New Fortress Energy

New Fortress Energy is undergoing a restructuring that will divide its assets into two entities, one that will comprise its Brazilian operations and be privately owned by current creditors, and one that will hold its non-Brazil assets and be publicly traded. We see an initial leverage ratio, based on the company’s forecasts, of 7.3x in 2027 for the businesses outside of Brazil, inclusive of the preferred equity to be issued in the restructuring. Based on the company’s cash flow projections, we think they will be hard pressed to redeem the preferred equity prior to its mandatory conversion into common equity in three years. Octus’ coverage of New Fortress Energy can be found HERE.

Gulfeagle Supply

Gulfeagle Supply amended its credit agreement, replacing its $85 million liquidity covenant with a 7x net leverage test, which will eventually step down. This change follows a previous amendment in the company’s third quarter to loosen its maximum first lien net leverage covenant requirement after the company came close to breaching it. The Florida-based roofing distributor has been facing stiff competition in a weakening market with revenue declining 15.2% year over year in the fourth quarter and adjusted EBITDA declining 44.2%. Octus’ coverage of Gulfeagle Supply is HERE.

AutoLenders

AutoLenders, a car leasing and dealership company backed by Crestview Partners, reached an agreement with its lenders, led by Clearlake Credit and BlackRock, to extend the maturity of its first lien term loan B by two years to 2028. The transaction includes an initial $45 million paydown on the approximately $135 million outstanding under the loan, with a second $40 million paydown expected within six months.

The transaction was supported by all lenders, and the extended term loan maintains the same interest rate as the original. AutoLenders was advised by Paul Weiss and Baird, while lenders were advised by Sidley Austin. Octus’ coverage of AutoLenders is HERE.

Ingenovis

Ingenovis Health disclosed that it has completed another amendment to its credit agreement, extending the RCF maturity to April 24. Backed by Cornell Capital and Trilantic North America, the distressed medical staffing provider is weighing an out-of-court debt restructuring, which features a contribution of $100 million to $150 million in preferred equity from its sponsors and a significant haircut for lenders. A group of lenders is being advised by Gibson Dunn and Houlihan Lokey, while Ingenovis Health is working with Davis Polk and Perella Weinberg Partners. Octus’ coverage of Ingenovis is HERE.

BRC Group Holdings Inc.

BRC Group Holdings Inc.’s value is significantly influenced by the value of its equity investment in Babcock & Wilcox, which increased to $459.7 million as of April 6 from $174 million as of year-end. We estimate that every $1 decrease in B&W’s common share price would result in a 286-bps decrease to the recovery value of the company’s unsecured notes. Octus’ coverage of BRC Group Holdings Inc. can be found HERE.
 

Innovative Chemical Products Group

Some lenders to Innovative Chemical Products Group are working with Akin Gump as legal advisor while Ares and Canyon, two of the largest lenders to ICP, are being advised by Milbank. Ares and Canyon funded an incremental pari first lien loan in February 2024. The Audax-backed company is collaborating with Kirkland & Ellis and Piper Sandler to explore options for its balance sheet. Octus’ coverage of ICP Group is HERE.

Interior Logic

Interior Logic Group is working with Kirkland & Ellis and Guggenheim Partners to evaluate its balance-sheet options amid financial struggles exacerbated by high leverage and an overall weak housing market. An ad hoc group of lenders is being advised by Gibson Dunn and Greenhill, while Interior Logic recently appointed Vipul Soni as its new CFO. Octus’ coverage of Interior Logic is HERE.

Baffinland Iron

Baffinland Iron Mines is exploring options, including a potential CBCA plan of arrangement or seeking protection under the CCAA, to manage its near-term debt maturities amid weak liquidity. The company is working with Davies Ward as legal counsel and is attempting to secure financing for its Steensby railway project, which is crucial for repaying its debts. The company has also selected FTI Consulting as its monitor for a potential CCAA filing, although the decision to take that route has not been finalized. Octus’ coverage of Baffinland Iron is HERE.
 

Hertz Global Holdings Inc

At a hearing on April 9, Judge Mary Walrath largely rejected the claim of notes trustee Wells Fargo for approximately $31 million to $52 million in incremental amounts that Wells Fargo alleges Hertz Global Holdings Inc. owes noteholders after the Third Circuit’s September 2024 postpetition interest and make whole ruling. The dispute focuses on the calculation of prejudgment interest due on the make whole premiums.

Judge Walrath said the Third Circuit “made it clear” that the contract rate is the applicable interest rate that should be applied, not the higher statutory rate urged by Wells Fargo. The judge also agreed with Hertz that the statutory rate would not apply even under New York law. Octus’ Hertz coverage is HERE.

Saks Global Enterprises

On April 5, the Saks Global debtors filed their first plan of reorganization and disclosure statement revealing the contours of their restructuring support agreement with an ad hoc group of senior secured noteholders. The plan includes $500 million in incremental exit financing, potentially in the form of first lien debt or preferred equity, and proposes converting $1 billion in DIP term loan claims into an unspecified amount of take-back debt and take-back preferred equity.

On April 9, the debtors moved for approval of an exit financing commitment letter, disclosing that the $500 million commitment from DIP lenders in the ad hoc secured noteholder group would be reduced dollar for dollar to the extent the debtors’ projected liquidity on the effective date of the plan exceeds $700 million. The exit financing would be in the form of either a first lien senior secured term loan/notes facility or senior preferred equity issued by debtor Saks Global Holdings LLC and includes a 17.5% commitment premium. Octus’ Saks coverage is HERE.

First Brands Group LLC

Today Judge Christopher Lopez entered an order approving the First Brands debtors’ $25 million sale of certain intellectual property to PGI Northstar LLC, which is backed by auto filter supplier Premium Guard Inc. The judge greenlit the transaction after NOCO Co. withdrew its objection seeking to reopen bidding for the debtors’ wiper business.

At a hearing on April 9, the judge approved First Brands’ settlement with secured lender Evolution Credit, under which the chapter 11 cases of four special purpose vehicle debtors will be converted to chapter 7. The settlement reserves the parties’ rights in Evolution’s adversary proceeding asserting priority security interests in SPV inventory that may have been transferred or repledged to other lenders, and provides releases to the debtors’ independent directors and Alvarez & Marsal-associated officers. Octus’ First Brands Group coverage is HERE.
 

Class Certification Reversed in PacifiCorp Wildfires Case

A three-judge panel of the Oregon Court of Appeals held that the trial court overseeing the liability trial in the class-action lawsuit accusing PacifiCorp of negligently causing 2020 wildfires gave improper jury instructions. The appellate court found that the judge should not have informed the jury that it could “assume that the evidence at the trial applies to all class members” in light of the plaintiffs’ varied theories of fire causation. The panel remanded the case back to the trial court to “reconsider whether a single class is appropriate.” Octus’ coverage of the ruling is available HERE.

Delaware Supreme Court Affirms Stockholder Right to Paramount Record

The Delaware Supreme Court issued a mandate affirming the Delaware Court of Chancery’s Jan. 29 decision allowing then-Paramount Global stockholder Employees’ Retirement System of Rhode Island to inspect the media company’s books and records in connection with the company’s merger with Skydance Media. Octus’ coverage of the opinion is available HERE.

Closing Arguments for Live Nation Antitrust Jury Trial

At closing arguments for the jury trial in 34 states’ antitrust suit seeking to unwind Live Nation’s 2010 merger with Ticketmaster, the state plaintiffs asserted that Live Nation’s “bullying” of venues and outsized market shares in various ticketing markets and the artist-facing amphitheater market have caused considerable consumer harm. The company meanwhile asserted that the plaintiffs failed to show evidence sufficient to prove anticompetitive conduct or damages during the nearly-six-week trial. Octus’ coverage of the hearing is available HERE.