Court Finds Wesco/Incora Uptier Exchange Breached Indenture, Restores Liens Securing All 2026 Wesco/Incora Notes

As expected, in an oral ruling this afternoon, Judge Marvin Isgur issued a declaration that all “rights, liens and interests” of 2026 secured noteholders survived the Wesco/Incora debtors’ March 2022 non-pro-rata secured uptier exchange transaction. Judge Isgur also declared that the selection of Platinum to participate in the related non-pro-rata exchange of 2027 unsecured notes for 1.25 lien notes violated the unsecured notes indenture.

The decision could doom the debtors’ proposed plan, which assumes the transaction effectively stripped the liens securing the 2026 notes and allocates virtually all of the debtors’ enterprise value, including 96.5% of predilution reorganized equity, to participating noteholders Silver Point and Pimco on account of their first lien notes from the transaction. Judge Isgur said he expects the debtors to now act on what their capital structure “has been declared to be.” “I think things are now clear enough” to formulate a revised plan, the judge suggested.

Judge Isgur did not comment on the possibility of equitable relief to provide Silver Point and Pimco with value for the $250 million in new financing they provided in the transaction, which might otherwise be reduced to an unsecured claim. The judge emphasized that he believes the new financing was necessary and the participants undertook the transaction in good faith but said that does not permit the company to “breach its obligations to 2026 holders” with respect to their property rights.

Judge Isgur clarified that his ruling restores the liens securing all of the 2026 notes – including the majority held by Silver Point and Pimco before the transaction – and does not affect Silver Point and Pimco’s DIP notes. The judge also noted that he will not grant any relief to the holders of the companies’ 2024 secured notes, whose liens were also stripped in the transaction, because the requisite two-thirds majority – held by Silver Point and Pimco – consented to the stripping of those liens.

The 2026 indenture’s two-thirds requirement for any amendment that “had the effect” of stripping liens was at the heart of the 30-day trial over the validity of the uptier exchange and Judge Isgur’s explanation of his decision today. The parties did not dispute that at the time the uptier closing commenced on March 28, 2022 – with the release of signatures to the third amendment to the indenture – Silver Point and Pimco did not have the two-thirds majority required to strip the liens.

The third indenture itself allowed the debtors to issue $250 million in new 2026 notes to Silver Point and Pimco to give them the two-thirds supermajority necessary to consent to the fourth amendment, which actually stripped the liens. The debtors, Silver Point and Pimco argued that only a bare majority was required to issue new notes, so the third amendment was valid – and validly gave Silver Point and Pimco the votes necessary to approve the fourth amendment.

But Judge Isgur disagreed. According to the judge, the entire transaction was a “domino agreement” – once the first domino toppled, the rest would necessarily fall. When the third amendment signatures were released from escrow at closing – the first domino – all the other steps in the transaction were “inevitable,” including the fourth amendment, because all of the parties had all of the fully executed signatures in their possession from the start and release of the signatures required no further action from any party, Judge Isgur reasoned.

The release of the signatures was part of an “automatic sequence” that, once commenced by the release of the third amendment, effectively concluded at the same time “by the automaticity of the release of the fully executed documents,” Judge Isgur explained. The third amendment “had the effect” of releasing the liens because the fourth amendment would always follow, and thus a two-thirds majority was required for the third amendment, the judge concluded.

Judge Isgur noted that Silver Point and Pimco took great pains to ensure that the issuance of the new, pari passu 2026 notes under the third amendment was inevitably and automatically followed by the stripping of the 2026 notes’ liens under the fourth amendment and the issuance of $250 million in new first lien notes. Pimco and Silver Point never considered providing $250 million in new financing on a pari passu basis, the judge pointed out, and would not have participated in the transaction if they could have been left with $250 million in pari passu notes.

Judge Isgur also noted that the participants originally assumed that Silver Point and Pimco actually held two-thirds of the 2026 notes and the issuance of the new 2026 notes was a “last minute change of plans” after the excluded noteholders secured a blocking position. Silver Point, Pimco and the company believed that issuing $250 million in new notes with a simple majority would solve this problem – but the judge said, “It turns out they were wrong about that.”

Judge Isgur clarified that his decision on the effect of the 2026 notes exchange is not based on the “collapsing” doctrine, where several interrelated transactions are deemed a single, integrated agreement for analysis of their effect on third parties. Instead, the judge said, his decision rests on the “had the effect” language in the indenture, which encompasses subsequent transactions (like the fourth amendment) that follow inevitably and automatically from an initial transaction (like the third amendment).

The word “effect” means “something produced by an agent or cause” or to “bring about or make happen,” Judge Isgur elaborated, citing Black’s Law Dictionary. According to the judge, the third amendment brought about the fourth amendment or made it happen and thus had the effect of stripping the 2026 noteholders’ liens.

Turning to the unsecured notes exchange, Judge Isgur found that the 2027 notes indenture “mandates fairness in the selection of notes to be purchased” in a partial redemption. Platinum’s interpretation of the indenture would effectively read out any limitations on the ability of the company to selectively purchase notes, the judge ruled, and that clearly was not intended.

Judge Isgur also determined that Platinum does not qualify as a “third party” eligible to sell notes to the company in a partial redemption. The term third party is “uniformly” interpreted to exclude affiliates of the issuer such as Platinum, the judge said.

The judge indicated that today’s oral ruling is intended to be interlocutory and that he will issue a full written opinion that replaces and supersedes today’s announcement in due course.