By Dennis Jenkins (Willkie Farr & Gallagher LLP)
As liability management exercises (LMEs) and creditor-on-creditor violence continues, many question whether drop-down, up-tier, double-dip, pari-plus, and similar transactions violate legal limits. LMEs may delay bankruptcy but do so at the expense of creditor priorities, transparency, predictability, and principles of good faith and fair dealing. They also spawn expensive and disruptive litigation, something to which stakeholders of Travelport, Revlon, TriMark, Serta, AMC, Mitel, Robertshaw, and Wesco (to name a few) can now attest.
However, a simple truth is being lost. LMEs often hinge on integrating a loan amendment (or exit consent) that engineers disparate treatment within a class or tranche of lenders, benefiting majority lenders and other stakeholders at the minority’s expense. Loan modification clauses mitigate holdout friction by granting majority lenders discretion to amend most terms, excluding “sacred rights.” But they do not expressly permit majority lenders to exploit the minority. LME proponents dubiously assert they do, assuming that the failure to define guardrails for the majority’s given modification discretion for non-sacred terms means there are none (not even implied duties of good faith).
LME litigation has largely failed to address properly the interpretation of modification discretion. Under New York law, contract interpretation starts with dictionary meaning but also considers purpose, context, circumstances of application, and objectively drawn inferences. Interpretation should be consistent with logic and common sense, sacrificing each party’s major interests as little as possible. This process often obviates the need for extrinsic evidence or judicially-implied duties. Unfortunately, it has been applied inconsistently or incompletely to LMEs.
This article evaluates modification clause meaning so practitioners and courts have a better, if not complete, foundation for considering the viability of LMEs conditioned on exit consents, concluding that, under textualist plain meaning interpretive rules, majority lenders cannot use customary modification discretion to extract value from the minority in an LME.
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