Victoria Plc Could Use Uptiering Technique Rarely Seen in Europe to Elevate 2026 Notes; Transaction Could Open Door to Similar Non-Pro-Rata Liability Management Transactions

U.K. flooring business Victoria plc appears to be preparing to implement a controversial transaction seeking to elevate the claims of holders of the group’s outstanding senior secured notes due 2026 (“2026 notes”) in their entirety in exchange for a two-year maturity extension, which would result in its outstanding senior secured notes due 2028 (“2028 notes” and, together with the “2026 notes,” the “notes”) being subordinated. This development comes close on the heels of the company securing a £130 million new super senior facility to replace the company’s existing £150 million super senior RCF due February 2026.

Although it remains to be seen exactly how the priming transaction is structured, it could take the form of an “uptier” transaction. Uptier transactions are a form of non-pro-rata liability management exercises, or LMEs, that have become notorious in the United States ever since a wave of these transactions first emerged in 2020 in the immediate aftermath of the pandemic. However, they have thus far been a rarity in Europe, with Hunkemöller being the only other European credit to have attempted this maneuver so far. The Hunkemöller transaction is being challenged in three different jurisdictions – New York state court, the United Kingdom and the Netherlands – which points to how far disadvantaged creditors are willing to go to challenge it.

In one sense, i.e., from the point of view of the 2026 notes, this is a pro rata transaction (assuming all 2026 noteholders are treated equally and offered the exchange on the same basis), but viewed from the lens of the 2028 noteholders, it amounts to a non-pro-rata transaction because it treats the 2026 notes differently from the 2028 notes despite the fact that they are both senior secured and form a single class for the purpose of the indenture governing the notes.

Apart from the fate of holders of Victoria plc’s 2028 notes who, to put it mildly, will bear the brunt of the uptier, the ultimate outcome of the Victoria plc and Hunkemöller transactions could also be critical for the European leveraged finance market as a whole – its success could trigger a wave of such transactions, and a failure could dissuade other distressed companies from attempting similar non-pro-rata transactions in the future.

That would allow creditors in general to heave a sigh of relief, although it would be a blow to the likes of the U.S.-based debt investor Redwood Capital which, perhaps without coincidence, is at the center of both the Victoria plc and Hunkemöller transactions and stands to gain if they are successful.

In this article, we take a deeper dive into how Victoria plc may be able to pull off the uptier and whether the 2028s noteholders have any grounds to challenge the transaction. We also look at the wider ramifications for the European leveraged finance market.

Some background to begin with. Although LMEs come in various shapes and sizes such as drop-downs, uptiers, double-dips and pari-plus transactions, they can broadly be classified into two categories.

The first category of transactions is pro rata LMEs, where all creditors of the same class are invited to participate in the transaction on similar terms or otherwise afford equal treatment (such as where a transaction raises senior financing from new lenders but nevertheless the original creditors of the same class are treated equally).

The second, and even more controversial, category is non-pro-rata LMEs, where only a subset of a class of creditors are invited to participate in the transaction or the class is otherwise divided and treated unequally. In most cases, this results in elevation of some creditors and the subordination of others, even though they belonged to the same class to begin with. Non-pro-rata LMEs give rise to creditor-on-creditor violence and upend the general traditional theory that all creditors of the same class should be treated equally.

An uptier is a type of LME transaction that falls within this second category. It refers to a two-step LME transaction that shifts the relative priority of a company’s debt in favor of participating majority creditors at the expense of minority creditors. In the first step, the requisite majority of creditors agrees to amend the underlying debt documents to subordinate the liens securing the creditors (or subordinate payment ranking of their debt) and create a new class of priority creditors that could benefit from senior liens or payment ranking.

In the second step, the borrower or issuer incurs such new priority debt under a separate instrument, offering it only to the participating majority creditors on a non-pro-rata basis in exchange for the subordinated debt. As a result, participating creditors holding the new priority debt gain senior lien or payment priority over the excluded minority. The key elements to execute an uptier are therefore: (i) the consent threshold required for the subordination amendment and being able to band together creditors that will make up the requisite majority for such consent, and (ii) the ability to offer the new priority debt to the participating creditors on a non-pro-rata basis.

First, let’s take a look at Victoria plc’s capital structure. Apart from £57.5 million of asset-backed debt, £83.5 million of operating company debt and £166.9 million of IFRS 16 lease liabilities, its debt principally consists of (i) a new £130 million super senior facility (“Super Senior Facility”), (ii) €489 million outstanding 2026 notes (maturing on Aug. 24, 2026) and (iii) €250 million outstanding 2028 notes (maturing on March 15, 2028).

The full capital structure is below:

According to reports, Victoria plc is aiming to elevate the claims of holders of the group’s outstanding 2026 notes in their entirety in exchange for a two-year maturity extension. Although we don’t have details on how the transaction will be structured (and there may be other ways to achieve a similar outcome), for the time being, we are assuming this will involve an uptier transaction with the two-step process described above: (i) first, the lien or payment ranking of the 2026 notes and 2028 notes are amended to subordinate them to a new class of priority debt (or, because a class of super senior debt already exists in the case of Victoria plc, the notes are amended to increase the size of the super senior debt basket) and (ii) second, the 2026 notes are offered to be exchanged for new priority notes with a two-year maturity extension that will benefit from senior liens or payment ranking.

We have also assumed the super seniority of the super senior facility will remain intact, effectively creating a three-tiered capital structure consisting of the super senior facility, followed by the new senior 2028s issued in exchange for the 2026 notes and, finally, the existing but now subordinated 2028 notes.

Some of the large bondholders have signed a lockup agreement with the company, which is expected to be circulated to the wider syndicate soon, according to sources. Together with the group’s recent refinancing of its revolving credit facility, this deal will potentially provide Victoria plc with two years of additional runway and liquidity to attempt to implement a turnaround.

To implement the above transaction, Victoria plc will need to amend the indenture under which both of the 2026 notes and 2028 notes have been issued to allow for a change to the ranking of liens securing the notes or the payment ranking of the notes and to subordinate them to a class of debt to be newly created. Although the stripping of guarantees or security requires 90% noteholder consent, changing the aforementioned priorities (or increasing the size of the super senior debt basket) only requires consent from a simple majority of noteholders.

To make matters worse for the 2028 noteholders, the 2026 notes and 2028 notes are issued under the same indenture and are treated as the same class for voting purposes. The offering memorandum under which the 2028 notes were issued states that the 2028 notes will be treated as a single class together with the 2026 notes for all purposes under the indenture, including with respect to waivers, amendments, redemption and offers to purchase, except as otherwise specified.

This means that the 2028 notes do not get to vote on the transaction as a separate class and so long as noteholders holding 50.1% of the principal amount of the 2026 notes and 2028 notes on an aggregated basis consent to the transaction, the uptier transaction can be implemented. With the outstanding amount of the 2026 notes (€489 million) far outstripping the 2028 notes (€250 million), and with some of the large bondholders rumored to have signed a lockup agreement with the company, this is likely to be achievable.

As noted above a similar priming outcome could also be achieved via other methods, such as a drop-down or pari-plus transaction. It is unclear, however, whether a transaction that achieves the purpose of extending the maturity of all of the 2026 notes will be feasible using existing covenant capacities, as we discussed at length HERE.

Of course, the company could seek to amend the terms of the notes to increase covenant capacities to facilitate a bigger drop-down or pari-plus transaction, but that would require the same level of consent as an uptier described above. If that is the case, participating creditors might as well seek to gain priority over all of the collateral in the security package rather than only a part of the assets, as would be the case in a drop-down or a pari-plus transaction. Further, it may well be the case that the group does not have sufficient valuable assets that can be carved out to support a large drop-down or a pari-plus transaction. For these reasons, we think that an uptier will be high on the list for advisors structuring this deal.

If the multijurisdictional litigation in Hunkemöller is any guide, the 2028 noteholders will be furtively looking for grounds on which they may be able to challenge the transaction.

There is some nuance to the single class voting described above which may give the 2028s a small glimmer of hope. The amendment provision in the indenture provides for single class voting “unless a modification or amendment will only affect one series of the Notes,” in which case majority consent from noteholders of the relevant series affected will be required. That language suggests the outcome will boil down to a play of words on whether the uptiering amendment amounts to an amendment that affects both the 2026s and 2028s or “only affect[s]” the 2028 notes.

Assuming the transaction is structured so that any 2026 notes (prior to an exchange) and 2028 notes are treated the same (and therefore any 2026 notes stub relating to 2026 noteholders who decide not to exchange into new priority debt are similarly subordinated alongside the existing 2028 notes), the argument that the amendments affect only the 2028 notes weakens under a literal interpretation. The 2028 noteholders will instead be rooting for a broader purposive interpretation looking at the ultimate implication of the transaction following the second step exchange. They will no doubt argue that the amendment to lien or payment priority will as a practical matter affect only the 2028 notes (particularly if take-up from the 2026 noteholders for the exchange is close to 100%) and that therefore this should require 50.1% consent of the 2028 notes voting as a separate class. However, on the basis of the current trading price of the 2028s – trading in the 30s – the market does not appear to be placing much hope on the chances of success of this argument.

Unfortunately for the 2028 noteholders, the notes do not have the benefit of a “payments for consent” covenant requiring issuers to offer the same consideration to all bondholders when seeking their consent to amendments or waivers. This provision ensures equitable treatment of all noteholders during consent solicitation processes. In theory, such a provision would block an uptier transaction because the offer to exchange into new priority notes afforded to the participating noteholders in the second step of the transaction would amount to consideration for the consent required in step one of the transaction. As this consideration is not being offered to all noteholders, in this case the 2028 noteholders, it would fall foul of the payments for consent covenant.

Of course, even in cases where the provision is included, it suffers from a notable weakness in most cases, as it can itself be amended or removed by a majority of lenders, creating a circular vulnerability. This has come into focus since the payment for consent provision was included in Hunkemöller’s notes but did not prevent the uptiering, as the provision was removed with majority consent beforehand. However, it should be noted that a key ground of challenge by Hunkemöller’s minority noteholders that still needs to play out before the New York court is that the removal of the payments-for-consent provision violated the provision itself. In this regard, on July 17 the New York state court issued a mixed ruling on Hunkemöller’s motion to dismiss the minority noteholders’ complaint, but in doing so it notably denied its motion to dismiss the breach of contract claim relating to the payments for consent provision.

2028 noteholders could also try to hang their hat on a breach of director duties claim. A strict director duties regime on this side of the Atlantic is often cited as one of the reasons Europe has not seen the same wave of aggressive liability management transactions as has been witnessed in the U.S. so far.

Directors of any English obligor within the structure may find themselves in hot water if the company later falls into a formal insolvency process. This is because the U.K. directors’ duties regime can constrain LMEs, particularly when a company faces financial distress. Under section 172(1) of the Companies Act 2006, directors must act in good faith to promote the success of the company for its shareholders. However, section 172(3) qualifies this duty, requiring directors to consider creditors’ interests when insolvency is imminent.

In BTI 2014 LLC v. Sequana SA [2022] UKSC 25, the Supreme Court confirmed that this “creditor duty” arises when directors know, or should know, that the company is insolvent or nearing insolvency, or if insolvency is probable. This duty is not separate but embedded within the broader fiduciary duty to the company. As financial difficulty intensifies, directors must increasingly prioritize creditors.

Therefore, for Victoria plc, if insolvent liquidation or administration becomes inevitable, creditors’ interests become paramount. Directors must ensure that any LME (which was undertaken within a relevant look-back period – usually two years) does not unfairly harm creditors. Actions such as preferring certain creditors, taking on risky new debt, or asset sales at undervalue may expose directors to personal liability if they worsen the company’s financial position. Careful adherence to fiduciary duties is therefore essential for Victoria plc. In fact, an earlier proposed iteration of Victoria plc’s uptier transaction, where an ad hoc group, or AHG, led by Redwood Capital had been aiming to elevate its stake in the 2026 notes and 2028 notes as part of a “mixed uptiering” deal designed to prime the company’s remaining 2026 notes and 2028 notes, may have been susceptible to such a claim, as it clearly disadvantaged one set of creditors when the group’s debt was just about to go current.

The same arguments could be applied here, although there is one big difference: If the 2026 notes are extended, there is no debt that would be current, perhaps giving directors some breathing room. Our recent piece on considerations for LMEs in England, including director duties, is HERE.

If the Victoria plc and Hunkemöller uptiering transactions are successful and overcome any legal challenges, they could usher in a wave of aggressive non-pro-rata LMEs in Europe, which have so far been few and far between in comparison with the United States. As a result, creditors will likely need to pay closer attention to the uptier risk and how they can protect themselves from the same. On the other hand, distressed funds with a playbook, such as Redwood Capital, may be on the lookout for similar opportunities.

So, how does the uptier risk permeate through the European leveraged finance market, and in particular, does it affect loans and bonds equally? As discussed HERE when drawing out some lessons from the Altice France saga, there appears to be an elevated risk under New York law bonds when it comes to uptier transactions. Perhaps it is no coincidence that both the Hunkemöller and Victoria plc transactions are with respect to New York law governed bonds – this is the other commonality between the two situations other than Redwood Capital’s role. We reiterate our reasons for this view below.

Most fundamentally, bonds lack the type of pro rata sharing provisions typically seen in loans. As a result, bonds permit non-pro-rata repurchases without restriction. In fact, it has become very common for bond issuers to include disclosure in offering memoranda specifically disclosing that the issuer may engage in open market purchases or privately negotiated purchases.

On the other hand, English law facilities agreements usually provide for pro rata application of any prepayments and sharing among lenders of the same tranche. Yet, various alternative processes are often included in such facilities agreements for permitted buybacks of loans that are not caught by the pro rata requirement. These are known as “debt purchase transactions,” and more often than not they include relatively well fleshed-out mechanics (at least compared with the undefined “open market purchase” and “purchase” concepts that were at issue in the Serta and Mitel decisions dished out by U.S. courts) in the form of a solicitation process and/or open order process. These are competitive processes where bids are solicited from or offers made to all of the lenders – in other words, they do not permit a non-pro-rata exchange necessary to implement the second step of an uptier transaction without a rateable offering being made.

In addition, some deals limit the source of funds that could be used for such debt purchase transactions. While a number of European deals also allow for debt purchases transactions via a bilateral process, independent of a solicitation or open order process, where the borrower may purchase debt by negotiation with any individual lender – which if included this would permit a non-pro-rata exchange – the relative majority of deals do not permit non-pro-rata exchanges of debt.

One point to note is that it is quite often the case that the provisions governing debt purchase transactions are not included in the “sacred rights” and can therefore be amended by a majority of lenders. This is similar to the circularity issue we discussed above with the regard to the payments for consent provision and could potentially open the door for non-pro-rata exchanges even when the original terms of the facilities agreement do not permit this, since the requisite majority can in any event amend the agreement to allow for debt purchase transactions to occur via a bilateral process.

With respect to the ability to introduce a new super senior class of debt required for an uptier transaction, European high-yield bonds typically lack “Serta” protection. A Serta blocker, which limits the ability to do this by making amendments to the priority of the liens securing the bonds (or the position of the bonds in the waterfall for the application of proceeds from security enforcement) subject to a supermajority consent threshold, is very much in the minority, appearing in only 13% of first-half 2025 bonds. In addition, in Europe, all-bond capital structures that do not include a term loan will usually have a super senior revolving credit facility, therefore already allowing a class of super senior debt. The quantum of this debt is typically able to be increased by a simple majority of bondholders.

On the other hand, although this needs to be analyzed on a case-by-case basis, English law facilities agreements tend to do a better job at requiring all affected lender consent for such subordinating amendments. That said, broad exceptions are quite often included to this requirement (such as an amendment in connection with a structural adjustment or incurrence of an incremental facility or incremental equivalent debt), and this could muddy the waters. Further, many facilities agreements leave scope for altering, with mere majority consent, the payment waterfall in the event of a partial payment that is insufficient to pay the full amounts due, and this could be another avenue for uptier transactions by allowing a new first-out tranche under the facilities agreement. Still, something is better than the nothing one usually gets with European high-yield bonds.

Apart from the arguably better documentary protection, another major factor influencing the ability to execute an uptier is the uncertainty around the validity of “exit consents” under English law governed agreements after the 2012 Assénagon case. This case established the “abuse principle” in English law and has caused exit consents to be used conservatively ever since. The case held that it was not “lawful for the majority [of creditors] to lend its aid to the coercion of a minority by voting for a resolution which expropriates the minority’s rights under their bonds for a nominal consideration.”

The “abuse principal” is often cited as a factor by market participants as to why there are fewer LMEs on this side of the pond, because an uptier transaction will by its very nature require a requisite majority to consent to the transaction at the expense of the non-participating minority. Although Assénagon involved an extreme example, making it difficult to determine where the line between abusive and non-abusive exit consents should be drawn, it does present an additional hurdle for stressed companies and their advisors to overcome.

Even though there is still plenty we don’t know about Victoria plc, including how the transaction will eventually be structured, there are already a number of lessons that can be drawn from this situation (as well as Hunkemöller). Creditors who do not want to be at the wrong end of an uptier transaction should look out for (or if investing in the primary market, negotiate) the following provisions:

• A robust “Serta” blocker: This blocker should prohibit amendments that subordinate or have the effect of subordinating creditors in right of payment or lien priority (in addition to the stripping of guarantees and security) to other debt without supermajority consent. Ideally, in bonds this super-majority should be the 90% consent level required to change fundamental “money matters” such as amendments to reduce the rate of interest, reduce the principal or extend final maturity or make notes payable in any money other than originally stated. In loans, this should require all affected lender consent, and to be effective it should be subject to none of the broad carve-outs that we often see (i.e., amendments in connection with a structural adjustment or incurrence of an incremental facility, or incremental equivalent debt should not override the blocker).
• Supermajority consent to increase existing super senior debt capacity: For structures that already contemplate a super senior revolving credit facility it will be important to supplement the Serta blocker described above with a prohibition on the ability to amend the original size of the super senior debt basket without the same supermajority consent. Otherwise, an issuer can simply achieve the same result by amending the super senior debt baskets without necessarily creating a new class of super senior debt under the intercreditor agreement.
• Payments for consent covenant: A payments-for-consent provision requiring the same consideration to be offered to all bondholders that consent to an amendment should be included in bonds with limited or no carve-outs. This provision, which until a few years ago was relatively standard in European high-yield bonds, is seen only rarely now. A search on our Market Maker database reveals that only 5.6% of European high-yield bond deals included this provision in 2024, declining from 23.7% in 2018.
• Single series versus class voting: A quirk in Victoria plc is that the 2028 notes vote together with the 2026 notes and are therefore outnumbered. For bond indentures with multiple series of notes that vote on amendments as a single class, it is worth considering single series voting – this would require consent from the requisite majority of the individual series to the extent any such series is proposed to be treated differently as a result of the amendment.
• Sacred rights: Finally, each of these provisions themselves should be added to the list of items that require a super-majority to amend to avoid a Hunkemöller-type weakness. In loans, adding the debt purchase transaction provisions to the list of sacred rights should also be considered.

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