RCF Lender Excluded From Anthology DIP Objects to Final Approval; Cites ConvergeOne, Serta Decisions on Equal Treatment Among Similarly Situated Creditors

Relevant Document:
Vector Objection

Anthology first-out RCF lender Vector Capital objected this afternoon to final approval of the debtors’ $100 million DIP from an ad hoc term lender group, arguing that the facility violates the pro rata treatment and nonsubordination protections in the prepetition credit agreement and “fundamental bankruptcy principles” by excluding Vector from participation in the DIP without any business justification.

Non-pro-rata DIP loans, backstops and rights offerings that favor majority holders have become commonplace in large chapter 11 cases, but the Southern District of Texas’ Sept. 25 rejection of a non-pro-rata backstop in ConvergeOne and the U.S. Court of Appeals for the Fifth Circuit’s December 2024 Serta uptier decision suggest appellate courts might be reining in the practice. Vector cites both cases for the proposition that non-pro-rata DIP loans violate the principle of equal treatment of similarly situated creditors under the Bankruptcy Code.

“The proposed DIP Loans, negotiated with and provided solely to a closed group of lenders holding identical first-out claims as Vector, are the same kind of closed-market restructuring prohibited under ConvergeOne and Serta,” Vector argues.

Vector also cites Judge Craig. T. Goldblatt’s November 2024 American Tire decision denying approval of a non-pro-rata DIP rollup. According to Vector, in that case Judge Goldblatt concluded that a rollup “is a draw on the DIP to pay down the prepetition credit agreement” that “must comply with pro rata sharing requirements” in the prepetition agreements, like an out-of-court liability management exercise.

Vector says the debtors’ proposed non-pro-rata DIP rollup violates its “sacred rights” under the prepetition credit agreement by “converting up to $50 million of Prepetition First-Out Obligations held exclusively by Ad Hoc Group members into the DIP Obligations” while its pari passu $7.5 million in funded RCF claims are “categorically excluded from participation.”

“If the parties to the Prepetition Credit Agreement had intended to permit non-pro rata roll-ups, they would have included an express DIP exception” but they did not, Vector says. “Unless Vector is allowed to participate in the DIP Facility, the Debtors and the Ad Hoc Group will be in breach of Vector’s ‘sacred’ contractual rights protecting against non-pro rata payments and distribution of proceeds under the Prepetition Credit Agreement,” argues Vector.

Vector points out that there is no commercial reason for the debtors to exclude it from participating in the DIP. “Vector’s participation would represent approximately $1 million of the $50 million Roll-Up, a modest fraction that would have no material impact on the facility’s economics or timing,” Vector notes.

Instead, Vector maintains that it was excluded as punishment “for exercising its contractual right to decline to fund its portion of a disputed $100 million draw request in March 2025 based on uncured events of default – a dispute currently pending before the New York Supreme Court.” “The Debtors now seek to weaponize this bankruptcy to gain leverage in that litigation and improperly elevate the Ad Hoc Group’s claims above Vector’s identical first-out position,” Vector contends.

Vector also argues that the DIP is an improper sub rosa plan of reorganization because it would ensure Vector receives less value under any eventual plan than similarly situated lenders. “Through the Roll-Up mechanism, the Ad Hoc Group’s RCF and Tranche A claims receive superpriority DIP status” while Vector’s claims would “remain subordinated prepetition debt” and receive less value under a plan, Vector explains.

The confirmation protections of section 1129 of the Bankruptcy Code – including compliance with section 1123(a)(4)’s equal treatment of similar creditors requirement – “cannot be circumvented by embedding plan-like distributions in a DIP financing,” Vector concludes.

The final DIP hearing is scheduled for Nov. 12 at 2 p.m. ET.