CURRENT MONTH (December 2023)
‘Open Market Purchase’ Provisions Leave Everything Open
By Linda W. Filardi, Senior Vice President & Associate General Counsel, Lending and Private Banking, Flagstar Bank; Regent, American College of Commercial Finance Lawyers; Co-Chair, American Bar Association Asset-Based Lending Committee
Surprisingly, some loan market participants continue to think that the term “open market purchases” included in many syndicated credit agreements today is intended to require the borrower to buy all the loans of a particular tranche on a pro rata basis, or at least make the offer to all lenders of the associated class. As Serta and other liability management cases take their twists and turns through the courts, see, e.g., In re Serta Simmons Bedding, LLC, No. 23-90020, 2023 WL 3855820 (Bankr. S.D. Tex. June 6, 2023), lenders are taking note of how an “open market purchase” provision can be utilized by a dominant class of lenders to subordinate a minority class. Much has been written on the need for “Serta protections” and on liability management transactions, but there has been no attempt to ink a definition for the term “open market purchases” in the credit agreements being drafted today, and there have been few, if any, successful attempts to amend the existing concept to protect against future problems. As recently as the Loan Syndications and Trading Association/Loan Market Association (LSTA/LMA) conference last quarter, when asked whether lawyers were seeing a defined term for “open market purchases,” experts drew a blank. They were not aware of any credit agreements that contained a definition, nor of any real attempts at a definition in the amendment process—shocking.
As lenders open their documents for amendments in the new year for any variety of reasons—e.g., loosening covenants, extensions of payment schedules, and enhancements to the collateral and reporting packages—they should consider amending the documents to delete the “open market purchase” option entirely, or define it as the following:
a purchase of loans that is (i) offered to all lenders on a pro rata basis, (ii) conducted on an arm’s-length basis, (iii) made in cash and at the current trading prices, (iv) subject to no default or event of default, and (iv) structured so that that the purchased debt be canceled.
The definition of “open market purchase” must also be included in the list of sacred voting rights that requires an all affected lender consent, together with the release or subordination of collateral. Otherwise, a dominant class of lenders would be able to amend the definition to delete these conditions in the process of structuring a liability management transaction.
Please see the related full-length article for a discussion of how the concept of “open market purchases” came into vogue, how it has shifted over time, and risks of current use of the term.
