Welcome to the June edition of In the Know, Baker McKenzie's Leveraged Finance newsletter that analyzes significant trends and salient legal issues for participants in leveraged finance and high yield markets around the globe.

In this edition, we discuss the US Bankruptcy Court for the Southern District of Texas ruling in favour of Serta Simmons Bedding LLC's (Serta) Chapter 11 reorganisation plan on 6 June 2023. Judge David R. Jones' decision confirmed the reorganisation plan and validated Serta's 2020 non-pro rata uptiering exchange offer.

Whilst the judgment appears to give the green light to certain uptiering transactions in the US (if the documentation — as with the debt buyback provisions in Serta's case — so permits), several obstacles/protections (depending on your point of view) remain in the European market. Regardless of geography, it is clear now more than ever that careful drafting is required to preserve or deny the flexibility required for these transactions. Or to put it in more neutral terms, to ensure that the parties' collective understanding of the terms of the transaction is reflected. The importance of knowing and understanding your terms cannot be overstated.

Key takeaways

  • The decision confirms that it is possible for transactions that favour a certain group of lenders to pass judicial muster, at least in the US courts. This could go some way to mitigating litigation risk and might encourage more borrowers to consider similar transactions.
  • To avoid uncertainty, parties should define key terms and express their intent in full in the drafting, rather than relying on the court's or the market's interpretation. This is particularly important in European deals, as the lack of litigation means even less certainty around interpretation.
  • Although the decision in the US to approve the Uptiering Transaction, and the continuing loosening of terms, have led to concerns that similar transactions could become a feature in Europe, certain factors continue to present a barrier to similar transactions in Europe.
  • Their ultimate use will remain highly fact- and document-dependent, and particular attention should be paid to the "amendments and waivers" provisions to determine whether lenders are protected from the introduction of a super-priority debt without all lender consent.
  • With European leveraged finance poised to enter a prolonged period of uncertainty, borrowers, lenders, investors and sponsors need to be acutely aware of what they are, and are not, permitted to do under their documents.

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