Distressed Debt Legal Insights

Anthology's Non-Pro Rata DIP Rollup

Welcome back to Distressed Debt Legal Insights, Ropes & Gray's new source of timely insights for professionals navigating the complex world of liability management. In this edition, we're looking at how Anthology resolved an objection to its proposed non-pro rata DIP rollup.

Background

Anthology filed for Chapter 11 on Sept. 29 in the Southern District of Texas with a restructuring support agreement signed by 87% of first out lenders and 68% of second out lenders.

On Oct. 27, revolving lender Vector Capital filed an objection to the proposed $100 million priming rollup DIP facility. The objection asserted that Vector was excluded from being offered any right to participate in the priming rollup DIP, and such exclusion violated the pro rata treatment and non-subordination protections in the governing prepetition credit agreement.

Vector and the debtors have prior history. In March of this year, Astra (the prepetition borrower of the Anthology credit agreement) requested a $100 million draw on its revolver, despite the occurrence of several events of default. Vector refused to fund its portion of the draw because of the events of default, which Astra said had been waived by required lenders. On April 7, Astra sued Vector in NY state court for breach of contract, which Vector promptly moved to dismiss. The motion to dismiss was “fully briefed and pending”; per the New York Supreme Court docket, the last filings were on July 28.

In its DIP objection, Vector alleged that it is being “punished” because of the ongoing litigation and that the debtors “seek to weaponize this bankruptcy to gain leverage in that litigation.”

The Objection

Vector's objection argued that the priming rollup DIP would violate both the express terms of the prepetition credit agreement and fundamental bankruptcy principles.

Per its objection, excluding Vector from participating in the rollup “constitutes a payment to select lenders in violation of the mandatory pro rata sharing provisions.” The objection cites the recent American Tire decision in which that court held that if a rollup is a draw on the DIP to pay down the prepetition agreement, it must make the paydown “in accordance with the prepetition agreement, including its pro rata sharing agreement.” According to Vector, the prepetition credit agreement does not vary the pro rata treatment requirements in the context of a DIP, so excluding Vector without its consent violates this provision.

Vector also argued that the DIP would violate the anti-subordination sacred right, which again does not contain a DIP carveout. Vector asserted that because the prepetition credit agreement did not include a DIP exception, it should follow that the parties to the prepetition credit agreement “made a deliberate choice to require unanimous lender consent for any subordination, without exception.”

Turning to bankruptcy principles, Vector argued that the rollup violates the good faith requirements of Section 364 of the Code by unfairly discriminating among identical first out lenders in a way that does not benefit the estate. Vector does not challenge “the concept of a dollar-for-dollar roll-up” but rather the “selective and discriminatory nature” of the rollup in this case, which violates good faith principles.

Excluding Vector had no “legitimate business purpose” – Vector's inclusion would not jeopardize the DIP or harm the estate, especially because the DIP is fully backstopped. Here, the objection cites ConvergeOne for the holding that giving preferential treatment to some parties may be impermissible discrimination.

Resolution

On Nov. 11, the night before the scheduled hearing on the final DIP, Anthology's counsel filed an amended proposed final DIP order that resolved Vector's objection. Judge Alfredo Perez entered the final, uncontested DIP order on Nov. 12.

The final DIP order reserves all rights against Vector in the ongoing NY State litigation but otherwise treats Vector like the other first out lenders. Vector will join the RSA and be permitted to provide new money term loans on a pro rata basis and will participate in its share of the rollup.

Why This Matters

Although the parties resolved the dispute before we gained any judicial insight, the resolution in itself is indicative of the market's current uncertainty regarding non-pro rata DIPs following American Tire  and ConvergeOne. Anthology creates an additional roadmap for excluded lenders to use as a basis to levy objections. Lenders excluded from a rollup who object to the non-pro rata nature thereof are currently in a stronger negotiating position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.