Few Buyers Were Left for a $700 Million Distressed Loan
The loans had no public price record, the likeliest buyers were barred, and a sale would have transferred the legal claim too.
Law, disrupted · Landmark Serta Judgment - An LME Short Course with Susheel KirpalaniIn June 2020, Serta Simmons Bedding paid $734 million in new super senior loans to about 53 percent of its lenders and gave the other 47 percent nothing. The lenders left out sued immediately in New York state court after learning from a press release that the company had chosen a rival rescue deal.
Susheel Kirpalani, head of the restructuring practice at the law firm Quinn Emanuel and the lawyer for most of those excluded lenders, said the defense at trial was mitigation. Mitigation means an injured party should try to cut its losses, and here the argument was that his clients should have sold their roughly $700 million of old loans. Kirpalani called it an argument, but said it was weak for two reasons, one about the facts and one about the nature of syndicated loans.
The factual problem was finding a buyer. Bonds trade with a system called Trace that records each trade and the price and volume. Syndicated loans, which are large loans shared by a group of lenders, have nothing like it. Trading is word of mouth, calling brokers to ask if there is interest, and if so, at what price and in what amount.
That hunt was especially hard here. The new rescue money stood first in line for repayment, the favored lenders' old debt stood second, and the excluded lenders stood third, with a risk of being pushed to fourth. Kirpalani said even his clients, who were leaders in distressed investing with "access to the best available potential buyers," could not find enough appetite to absorb that much third place debt from a deeply troubled company.
The buyer pool was smaller by design. Bondholders usually do not know each other, while lenders in a syndicated loan are parties to one contract, so the borrower can screen who joins it. Serta and the favored lenders used that power to draw up a disqualified lender list that barred many of the most active distressed investors. Apollo, one of the excluded lenders, found out it was on the list only after it had agreed to buy almost $200 million of the loans.
Even a sale would not have cut the losses. Syndicated loans change hands on standard assignment forms, and the buyer steps into the seller's shoes and receives all the rights, claims, and lawsuits attached to the loan. The buyer would simply have owned the same breach of contract claim.
Questions people ask
What does a mitigation defense mean?
Mitigation is the idea that someone who says they were harmed should take reasonable steps to limit the harm, like finding another customer or selling damaged property. Courts can reduce damages if they find the injured party could have lessened the loss but did not try. In Serta, the court rejected the mitigation defense.
Why does buying a loan also buy the lawsuit?
When a syndicated loan is sold, the sale uses a standard form that passes all of the seller's rights, claims, and causes of action to the buyer. Kirpalani said that is unlike the bond market, where a buyer does not receive those same rights and claims.
How did Serta's disqualified lender list work?
In this case, Serta and the favored lenders created the list after the 2020 deal and used it to block active distressed investors from buying the excluded lenders' loans. Kirpalani said companies, especially ones owned by private equity, often want to pick who their lenders will be. Apollo's experience showed how the list worked, because it learned it was barred only after agreeing to buy almost $200 million of loans.