Priming Transactions Update: TPC Group Inc.

With priming transactions experiencing a resurgence over the past few years, there have been a number of different routes taken by lenders with one goal in mind - Assemble a majority position and exchange, refinance or otherwise abandon their existing positions to move up the capital structure, which in turn helps increase their blended return on their exposure to a borrower and prevents a different configuration of investors from grabbing the “high ground” above them.

For many borrowers, these types of transactions are a last resort intended to stave off bankruptcy often protecting earlier equity distributions and existing equity value. To that end, borrowers will enter into direct priming transactions or drop-down structurally senior financings (as detailed in our prior client alerts (COVID 19: Prime Time for Priming, Predatory Priming: How Can Investors Protect Their Priority? and Priming Transactions Update: Don't Sleep on Serta) to keep the business running by increasing liquidity, extending maturities, restructuring covenants or otherwise taking other steps to preserve equity and gain a bridge to attempt to return to normalized operations. For the lenders participating in these transactions the goals are to provide a financial fix while protecting the return on investment by lending at a senior position to existing debt.

In one of our prior client alerts (COVID 19: Prime Time for Priming), we detailed how debtors such as the Murray Energy Holdings (“Murray”) and Serta Simmons Bedding, LLC (“Serta”) have used a combination of trap-doors, loopholes and exceptions in covenants and/or majority lender votes to prime existing debt. In these instances, the majority lender groups modified existing credits to permit the new priming debt and took positions in the new priming debt. Litigation ensued. While the Murray court largely sided with the majority lenders, and the minority Serta lenders suffered an initial defeat in state court, another group of minority lenders in Serta got past a motion to dismiss earlier this year.

Following Murray and Serta, we detailed in another client alert (Priming Transactions Update: Don't Sleep on Serta) how TriMark USA (“TriMark”) and Boardriders, Inc. (“Boardriders”) took things a step further. In addition to using the majority lender position to roll-up into new priming debt, the lenders modified the credit facility they were exiting to remove most of the covenants, defaults and other lender protections. Taking the extra step of stripping covenants helps to ensure further that the new priming debt is in the driver’s seat for any further restructurings of the borrower’s balance sheet. The resulting litigation was a mixed bag for both sides, as the court in TriMark found the amended no-action clause did not deprive the minority lenders of standing to sue. The court also ruled that it could not decide as a matter of law that the transaction did not breach the existing credit agreement provisions. Shortly thereafter, the parties settled.¹

Now, TPC Group, Inc. (“TPC”) has entered the lexicon of priming transactions. In contrast to TriMark and Boardriders, the majority holders of TPC’s existing $930 million of 10.5% senior secured notes that were issued in 2019 and due in 2024 (the “10.5% Notes”) remained in their junior positions. Still they were able to successfully “uptier” the 10.5% Notes with TPC’s issuance of $204.5 million of 10.875% senior secured notes that were issued in 2021 and due in 2024 (the “10.875% Notes”).

TPC Group Inc.

On June 1, 2022, TPC filed a chapter 11 bankruptcy petition in the Delaware Bankruptcy Court (the “Bankruptcy Court”) to pursue a prearranged financial restructuring. Among other things, the Restructuring Support Agreement sought to eliminate over $950 million of TPC Group’s approximately $1.3 billion of secured debt (primarily comprised of the 10.5% Notes and the 10.875% Notes). TPC sought approval of a debtor-in-possession financing, the terms of which were based on the 10.875% Notes being senior to the 10.5% Notes. The minority holders of the 10.50% Notes filed a complaint seeking a declaratory judgment that the 10.875% Notes were in fact junior to the 10.5% Notes.

On July 6, 2022, while finding that the minority holders of the 10.5% Notes were not precluded from bringing the action because of the indenture’s no-action clause, Judge Craig Goldblatt of the Delaware Bankruptcy Court ruled against the minority 10.5% note holders and found that they were in fact subordinated to the 10.875% Notes.

At issue was whether the indenture’s “sacred rights” required the unanimous consent of all affected holders of the 10.5% Notes to subordinate the liens securing the 10.5% Notes. The amendment provisions of the 10.5% Notes indenture provides that a transaction may not, without the unanimous consent of affected holders, “make any change in the provisions of the Intercreditor Agreement or this Indenture dealing with the application of proceeds of Collateral that would adversely affect the Holders.” The Bankruptcy Court ultimately rejected the interpretation of this language advanced by the holders of the 10.5% Notes that any change that would permit new debt to be placed ahead of the 10.5% Notes with respect to the ability to recover out of the collateral would necessitate obtaining consent from all affected holders. The Bankruptcy Court instead found in favor of TPC’s and the majority holders’ narrower read that this sacred right was limited to modifications of the waterfall for how the indenture trustee would distribute proceeds it actually receives under the 10.5% Notes Indenture. The Court found an agreement that reduced the proceeds the indenture trustee would receive was not implicated by the provision.

In reaching this conclusion, the Bankruptcy Court noted the absence of an express anti-subordination sacred right in the 10.5% Notes indenture. In the Bankruptcy Court’s view, given that these anti-subordination provisions are “common place” in the industry, its absence buttressed TPC’s and the majority holders’ position (we can leave for another day whether it was appropriate for the Bankruptcy Court to consider this “industry practice” evidence when no one argued the indenture was ambiguous and required parole evidence to interpret). In addition, the Bankruptcy Court stated that interpreting this particular amendment provision of the 10.5% Notes indenture to require the consent of all affected holders would create an anomaly when read in conjunction with the other amendment provisions; specifically, another clause in the amendment section of the 10.5% Notes Indenture permits the release of all or substantially all of the collateral with the consent of just two-thirds of the holders. In the Bankruptcy Court’s view, the act of releasing collateral is a more drastic action than subordination. It would be illogical to impose a reading of the indenture that would create a higher consent right for a less drastic action.

Takeaways

While there does not seem to be one panacea that can be used to protect against all possible priming scenarios, TPC provides the latest reminder of the importance of explicit drafting and the undesired outcomes that can flow from leaving provisions open to interpretation. If the parties intended to prohibit this type of priming, the inclusion of an express anti-subordination sacred right likely would have resulted in a different outcome. For additional solutions to increase priority protection for investors, we have outline several possible suggestions in our prior client alert (Predatory Priming: How Can Investors Protect Their Priority? and Priming Transactions Update: Don't Sleep on Serta). Sophisticated parties should not expect courts to read protections into credit documentation that are not clearly expressed.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Daniel S. Shamah, an O’Melveny partner licensed to practice law in New York, Jennifer Taylor, an O’Melveny partner licensed to practice law in California, Sung Pak, an O’Melveny partner licensed to practice law in New York, Evan M. Jones, an O’Melveny partner licensed to practice law in California and the District of Columbia, Jeffrey Norton, an O’Melveny partner licensed to practice law in New York, and Adam J. Longenbach, an O’Melveny counsel licensed to practice law in New Jersey and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.