Oaktree deal crushed leveraged loan and exposed market woes

About three months after a controversial debt deal rewrote the rules of the leveraged lending market, tipping the scales in favor of distressed borrowers and pitting creditors against each other, another deal pushed the newly established precedent even further.

Last week’s deal – a $ 120 million loan to cash-strapped restaurant provider TriMark USA – not only unilaterally put new lenders above everyone else in the repayment pecking order, but he also stripped some of the older creditors of the guarantees they had written. in contracts to protect their investments, according to people familiar with the matter.

When the deal’s announcement, which was led by Oaktree Capital Management of Howard Marks, hit the market in mid-September, it sparked panic. Investors abandoned old loans at such a frantic pace that the price of one hit 20 cents on the dollar in a matter of days.

The massive sell-off revealed the scale of the problem facing fund managers in the leveraged loan market. Desperate to generate higher returns during a decade of ultra-low interest rates, they haggled many of their legal rights. Now they are left with valuable protection for their investments, just as the pandemic is causing a wave of business failures across the country. This makes them vulnerable to the types of hyper-aggressive movements seen in recent months.

Marks has long been considered one of the most poised voices in a world full of distress and pugnacious vultures, and so the fact that Oaktree was behind the most recent deal to shake up the market doesn’t help. only to make it clear that all is well. in the world of leveraged loans today.

“It’s a civil war between lenders, and we’re going to see more of it,” said Thomas Majewski, managing partner and founder of Eagle Point Credit Management. “Almost all companies that restructure their debt are exploring these possibilities. “

The TriMark transaction, similar to another loan that surfwear maker Boardriders Inc. recently entered into, followed in the footsteps of a division funding by Serta Simmons Bedding earlier this year. The mattress maker has raised $ 200 million in new capital from existing lenders, including Eaton Vance Corp. and Invesco Ltd. These lenders moved up to the front line for repayment if the business went through a rough patch, pushing Serta Simmons’ other lenders further in a process known as seed money.

There is nothing new about the seed, but the way the lenders did it in the deal with Serta Simmons has given rise to litigation. The investor group led by Eaton Vance and Invesco did not give all other lenders the right to participate in the new loan, a decision authorized by many transaction documents, but which had not really been made before. Lenders who were left out, including Apollo Global Management, sued the company, but a state court allowed the case to continue, setting a new precedent in the market.

“Serta opened the floodgates in this regard,” said Tim Sullivan, analyst at Xtract Research, “because it showed how very common provisions in agreements today can be used to incur seed debt.”

Aggressive maneuvering with creditors does not always work. When Oaktree proposed such a deal for PSAV Inc., a company to which the investment firm had loaned, he was not selected. Oaktree declined to comment through a representative.

A growing number of businesses in the United States are going bankrupt as the pandemic saps their revenues. Fitch Ratings predicts that 7-8% of leveraged loans will default by the end of 2021, up from 1.8% in 2019. After years of rapid growth in the loan market, unsuccessful businesses now have less and less income or assets to cede to creditors, making fights between all parties more acrimonious.

In the case of Boardriders, Oaktree was one of the shareholders. The company negotiated $ 135 million in financing, including a $ 45 million loan that takes priority over all others. The debt came from the biggest lenders at Boardriders, a group that included Brigade Capital Management, Canyon Capital and MidOcean Credit Partners, according to people with knowledge of the situation.

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