The Fifth Circuit Court of Appeals has invalidated Serta Simmons Bedding’s 2020 uptier exchange, ruling that private transactions with select lenders fall outside “open market purchase” exceptions to pro rata sharing requirements.
It’s the first appellate guidance on uptiers—of which the formerly Advent International-owned Serta was among the first—and adds uncertainty to the controversial liability management exercise.
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Serta argued that its privately negotiated exchange of $875 million in existing loans for new super-priority debt qualified under a carveout in its credit agreement allowing for non-pro rata repurchases if conducted as an “open market purchase.”
While the transaction provided Serta with $200 million in new money from participating lenders, it effectively subordinated Apollo, Angelo Gordon, and other excluded lenders who held identical debt.
Case: 23-20181, United States Court of Appeals for the Fifth Circuit; Illustrative example from Parikh, Creditors Strike Back: The Return of the Cooperation Agreement
The Fifth Circuit reversed a 2023 ruling from the U.S. Bankruptcy Court for the Southern District of Texas that had validated the transaction, rejecting the interpretation of scandal-plagued ex-bankruptcy judge David Jones.
Instead, the court ruled that open market purchases must occur in the secondary market for syndicated loans rather than through private negotiations.
The Fifth Circuit explicitly noted the broader implications of its ruling on existing credit agreements with similar open market purchase language.
While many post-2020 agreements include specific uptier blocking provisions, the court wrote that numerous legacy deals rely on open market purchase exceptions that “will often not justify an uptier.”
The court also struck down provisions in Serta’s bankruptcy plan that would have indemnified the participating lenders against claims related to the uptier.
Referencing provisions prohibiting contingent claims where the claiming entity is co-liable with the debtor, the court called the participating lenders’ indemnification claims “an impermissible end-run around the Bankruptcy Code.”
“The lenders wanted SSB to reimburse them for future losses they have not yet suffered and for which they were co-liable with SSB, their contractual partner in the Uptier.”
The decision creates a path for the excluded lenders to pursue potentially “hundreds of millions of dollars” in damages and returns the case to the lower bankruptcy court for reconsideration.