American Tire Distributors, In-Court LME

Welcome to the 142nd Pari Passu newsletter.

Super exciting writeup today! In recent years, Liability Management Exercises have become more and more common, with companies preferring a delay to Chapter 11 bankruptcy by any means possible. This desire to delay bankruptcy has led to an increasingly contentious legal landscape between creditors, as groups will look to exploit their credit docs in any way possible to maximize their own recoveries.

Despite this evolving landscape, one thing has remained fairly constant: the presence of LMEs and contentious transactions have occurred in an out-of-court setting. In Chapter 11 bankruptcies, while contention will exist between different creditor groups, holders of debt within a single creditor class typically work together to maximize that class’s recovery. The case of American Tire Distributors provides insight and precedent of a new wave of legal exploitation with regard to DIP financing. Today, we will look at one of the more ‘underlooked’ cases of 2024/2025, and discuss the implications of ATD's ruling on the bankruptcy landscape.

Landing high-value bankruptcy intel 7 days before the competition

9fin is the AI-powered data and analytics platform that enables finance professionals to analyze a credit, or win a mandate, in one place. We have our finger on the pulse when it comes to distressed and restructuring – with a global team of specialized journalists and analysts to capture nuances other outlets can't.

A great example is our coverage of Del Monte — on 24 June, 9fin was first to report that Del Monte was planning to file for bankruptcy, exactly 7 days before they officially filed on 1 July.

Del Monte’s filing raises questions that may usher us into a new era of LME strategy and litigation. What happens when a company settles LME litigation and then files for bankruptcy within 90 days? Will the court determine that that settlement is valid, or is it a preference claim that can be clawed back? And if so, can this too be gamified?

In this analysis, 9fin's resident LME expert Jane Komsky analyzes the legal precedent, potential defenses, and worst-case scenarios.

Company Overview

American Tire Distributors (ATD) (formerly known as Heafner Tire) was founded in 1935 in North Carolina. Starting off as a single tire mold recapper (process of putting new tread rubber onto a worn tire) and a gas station. From its beginnings, ATD has grown into the largest independent supplier of tires to the tire replacement market, primarily via acquisitions. This scale was achieved through three main acquisitions: Beach Tire Mart, Commonwealth Tire, and Oliver & Winston in 1985, 1991, and 1997, respectively. These brands were brought under the then Heafner Tire Brand, which allowed the company to expand from 1 to 135 locations across the United States. In 2002, Heafner Tire rebranded as American Tire Distributors, and over the following two decades, engaged in several acquisitions that solidified its position as the leading North American independent supplier of tires [1],[2].

Getting into ATD’s business model, the company operates a wholesale distribution model designed to bridge the logistical and operational gap between tire manufacturers and the highly fragmented retail tire market in North America. Its core business involves purchasing large quantities of tires, wheels, and related automotive accessories from top global producers - such as Michelin, Continental, and Hankook - as well as manufacturing and selling its own proprietary and exclusive brands like Hercules and Ironman. These products are stored in over 115 distribution centers across the U.S., enabling ATD to offer same-day or next-day delivery to more than 80,000 customers, including local tire shops, national retailers, dealerships, and e-commerce platforms. The company enhances its business model with other product offerings, such as a digital infrastructure called ATDOnline that gives its customers information on pricing, order, and tracking, as well as franchising programs via Tire Pros, which allows tire retailers to receive advertising and marketing support by being promoted by ATD [1],[2].

A key part of ATD’s value proposition lies in managing the logistical complexity associated with distributing tires. A single tire type is defined by a Stock-Keeping Unit (SKU), which uniquely identifies it based on dimensions, performance characteristics, seasonal application, vehicle compatibility, and brand. Because modern vehicles require increasingly specialized tires, the number of active SKUs in the replacement tire market exceeds 50,000. Most independent retailers cannot afford to hold deep inventory across such a broad SKU range due to space, capital, and risk constraints (a typical retailer will hold 100-1000 SKUs at any given time, depending on size). ATD solves this problem by centralizing inventory, optimizing routing and storage through its logistics network, and fulfilling retailer orders on short notice -enabling retailers to operate leanly while still meeting customer needs [1],[2].

The need for a distributor like ATD exists because tire manufacturers are not structured to service such a fragmented, low-volume, geographically dispersed retail network. Selling directly to tens of thousands of small retailers would require manufacturers to build extensive logistics infrastructure, expand sales and support staff, assume credit risk, and maintain inventory near every point of demand - none of which aligns with their core focus on production and brand development. 

The importance of ATD in the tire replacement industry led to significant investment in the company over the past few decades, with its largest transaction being a take-private deal by TPG in 2010. TPG purchased approximately 93% of ATD for $1.3bn (specific details regarding debt financing were not publicly disclosed). TPG initially looked to achieve a return on this acquisition in 2014 via an IPO of ATD, but this plan was ultimately discarded as TPG ended up selling 46% (approximately half) of its ownership stake in ATD to Ares for approximately $620mm in February 2015 [1],[2].

Despite these investments, however, ATD began to struggle following Ares’s investment in the company.  The most immediate reason for ATD’s operational downturn post-2015 was the abrupt termination of supply relationships with two of ATD’s largest tire manufacturers: Bridgestone Americas, Inc. and Goodyear Tire & Rubber Company. In 2018, these manufacturers launched a joint distribution venture - TireHub, LLC - that would sell directly to tire retailers, bypassing third-party distributors like ATD. By mid-2018, both Bridgestone and Goodyear had ceased supplying ATD altogether. These two suppliers represented approximately 25% of ATD’s total annual unit volume in 2017, or around 9 million units, which created an immediate and severe disruption to ATD’s inventory, revenue stream, and customer fulfillment capabilities. Importantly, ATD was unable to self-produce to meet this deficit because it did not have the infrastructure in place to do so. Additionally, the company struggled to find new suppliers due to industry-wide changes (discussed in the next paragraph). The loss of high-margin, high-volume flag brand tires had downstream effects on customer loyalty, pricing power, and borrowing base collateral, since much of ATD’s ABL (asset-based lending) facility was tied to inventory and receivables [1],[2].

This disruption occurred against a backdrop of broader structural change within the tire distribution industry, primarily driven by disintermediation. More manufacturers were forming joint ventures or in-house distribution arms to exert tighter control over the retail channel and improve margin capture. Additionally, digital-first players like Amazon had begun offering consumers the ability to purchase tires online with coordinated in-store installation, appealing to convenience-oriented buyers and eroding the traditional wholesale-retail pipeline in which ATD operated. These changes increased competition, depressed pricing, and accelerated the shift to omnichannel retail, making ATD’s legacy distribution model increasingly vulnerable.

The two reasons aforementioned led the company to file for its first bankruptcy in 2018 (not to be mistaken with the 2024 bankruptcy which will be the focus of this paper). Prior to ATD’s filing, the company attempted to engage in operational cost savings by a re-examination of its procurement processes, which was estimated to save $30-$35mm annually, as well as a re-evaluation of its workforce, which was anticipated to save $6mm annually. However, these savings did not prove to be enough. In 2018, ATD hired Kirkland & Ellis as Legal Advisors, Moelis as financial advisors, and AlixPartners as restructuring advisors.

Ultimately, the company filed for Chapter 11 bankruptcy with over $2.5bn in debt. The company's capital structure can be seen in the image below.

Now, while we do not want to spend too much time analyzing the 2018 bankruptcy, we will go over the broad structure of the plan to give an understanding of what the capital structure looked like going into 2024. A key component of the 2018 bankruptcy was the DIP facility. Specifically, the DIP facility provided for $1.23bn in total financing. This included $980mm under an ABL DIP facility and $250mm in a First-in Last-Out (FILO) DIP Facility. Of the $1.23bn of total financing, $639mm of the capital was rolled-up from the outstanding amount under the pre-petition ABL facility (i.e, $591mm of new money was provided). This implies that for every dollar of new money that was provided, approximately $1.08 was rolled up (keep this in mind for our discussion of the 2024 DIP facility, where we will see very different terms present). The 2018 restructuring saw the debt decrease from $2.384bn to $695mm (or by $1.689bn).

• DIP Facility - Repayment in Cash

• Term Loan Facility - Reinstatement of $695mm of pre-petition debt

• Senior Subordinated Notes: Pro Rata share of 95% of common equity

• Sponsors (TPG and Ares): Pro rata share of 5% of common equity

As seen above, the 2018 restructuring was structured around the equitization of the Senior Subordinated Notes. When ATD filed for bankruptcy, it filed the above plan as a Restructuring Support Agreement (meaning it had already negotiated the terms of the bankruptcy in advance of its filing date). As a result of this and the overall simplicity of the plan (just featuring an equitization), ATD was able to exit bankruptcy in just 2 months.

Causes of 2024 Bankruptcy

As we have stated, the company once more filed for Chapter 11 bankruptcy in 2024. The question becomes: what has happened since 2018?

While the company had emerged from its 2018 restructuring with a deleveraged balance sheet and new financing commitments, its recovery proved temporary. ATD was temporarily supported by strong performance in 2020 and 2021, but the drivers of that growth - COVID-era demand surges and inflation-driven margin expansion - masked deep vulnerabilities in its business model. As the macro environment normalized and structural headwinds intensified, ATD’s core distribution platform was left overextended, misaligned with market demand, and unable to generate sufficient cash flow to support its capital structure (as a note, the company has remained private during this time and no detailed financials were provided in the 2024 first day declaration - as a result no details regarding the liquidity position of ATD can be provided) [2].

Let’s first look at the Covid-era boost to financial performance. As COVID-19 disrupted global supply chains, a severe shortage in semiconductors hindered new vehicle production. This triggered a surge in used vehicle sales across the U.S. - a trend that directly increased demand for replacement tires and automotive maintenance (as used cars typically required maintenance before their sale). This behavioral shift coincided with large amounts of government stimulus, which injected disposable income into the hands of consumers who then spent heavily on durable goods like tires and wheels. This trend provided a positive image of ATD’s financial performance as they directly benefited from the uptick in demand.

Compounding the volume-driven revenue gains was an unusual inflation dynamic that temporarily boosted ATD’s margins. Because ATD typically maintains six to twelve months of inventory, it had large stockpiles of tires acquired at pre-inflation costs. As inflation surged in 2021, so did retail pricing for tires, allowing the company to sell lower-cost inventory at materially higher prices. This timing mismatch produced significant gross margin expansion - one not reflective of underlying operating efficiency, but of temporary market distortion. ATD used this as an opportunity to reinvest heavily into adjacent businesses rather than service its debt repayments / manage its capital structure. Specifically, ATD stated that it used the additional cash flows to invest in its digital presence [2].

By late 2022 and into 2023, the macroeconomic tailwinds reversed. Demand normalized, stimulus effects faded, and inflation remained elevated - raising the cost of new inventory, freight, and labor while compressing margins. Compounding this, consumer preferences shifted sharply toward lower-cost tires. ATD, which had historically focused on providing premier tires (which carried a higher cost), had limited access to low-cost suppliers outside of its own Ironman brand and was unable to pivot its product mix quickly [2]. 

In addition to pressures post-Covid, structural changes in the tire replacement industry continued to impair ATD’s pricing power. As we discussed earlier, ATD has historically thrived by acting as the middleman between retailers and manufacturers - selling directly to thousands of independent retailers at a premium to the discounted price they purchase in large bundles from the manufacturers. ATD historically benefited from an open-market model - selling directly to thousands of independent retailers at market-driven prices. However, the landscape shifted toward fixed-price distribution. Large national retailers began negotiating directly with tire manufacturers, effectively relegating ATD to a fulfillment role within pre-negotiated supply chains. Fixed-price sales, which comprised less than 10% of ATD’s business in 2018, accounted for nearly 40% by 2023. These fixed-price sales carried substantially lower margins because ATD could no longer mark up prices as it once did under its open-market model [2].

To fund its operations during this time, the company resorted to raising debt again. Although not disclosed when each piece of debt was raised between 2018 and 2024, the capital structure for the company prior to its filing in October 2024 can be seen below. In the image below, it can be seen that the company had around $1.9bn in debt by 2024. Given the company exited bankruptcy with less than $1bn of debt in 2018, this means the company raised significant financing post-emergence. 

So, by the end of 2023, the company was facing pressure from all parts of its business structure. Its costs were elevated due to inflation, and its margins began to depress. The industry landscape began to shift towards fixed price contracts that put additional downwards pressure on the company, and interest rates became elevated on a capital structure that increased its total leverage since its last bankruptcy. As a result of these events, the company was forced to file for Chapter 11 Bankruptcy on October 22, 2024.

Now, in the first day declaration, the company did not cite / comment on their out-of-court attempts prior to filing for bankruptcy. While we can only give our opinion, the causes of distress for ATD that we discussed above represent fundamental flaws in the business, particularly stemming from the fixed market contracts with its customers and suppliers which depict a structural change in the replacement tire market. For a situation like this, a bankruptcy supervised process is arguably the best option because it provides an opportunity to re-evaluate strategic options without additional pressures from ATD’s creditors [2].

Proposed Restructuring Support Agreement

Similar to the 2018 restructuring, ATD came into its second bankruptcy with a proposed Restructuring Support Agreement. However, unlike the previous bankruptcy, this agreement did not have the consent of every creditor class, but rather certain ad hoc groups. Below, we have outlined the two key components of this proposal.

DIP Financing

There are two sources of DIP financing in ATD’s bankruptcy, which total approximately $2.3bn in DIP financing. The first comes in the form of a DIP Term Loan Facility. The DIP TL features a new money commitment of $250mm and a roll-up of the pre-petition term loan of an amount equaling $750mm. Additionally, the DIP TL rolls up the outstanding Delayed Draw FILO Loans of $92mm. Finally, the DIP TL included other fees (OID and issuance fees), which totaled $31.2mm. As a result, the total DIP Term Loan amounts to $1.123bn [2],[3].

The second source of DIP financing comes in the form of a DIP ABL Revolving Credit Facility. The DIP ABL represents the complete roll-up of the $1.1bn pre-petition revolving credit facility, as well as the roll-up of the $100mm of FILO loans (no new money provided here). This totals to $1.2bn [2],[3].

Credit Bid

The 2024 restructuring proposal was centered around the sale of ATD to the DIP Term Loan Lenders via a credit bid. Before we dive into the details of this transaction, let’s take a moment to review how a credit bid functions. In bankruptcy, companies have access to Section 363 of the bankruptcy code, which allows a company to sell its business ‘free and clear’ of any liens. Outside of bankruptcy, when a company engages in an acquisition, it has to either assume or repay the obligations. In bankruptcy, however, the buyer can simply purchase the company without any of the debts associated with it (hence the term free and clear). This makes acquisitions in bankruptcy incredibly attractive for some buyers.

In the case where a company is unable to attract any buyers, however, it has another alternative. The company can go to its creditors (typically secured creditors) and allow them to ‘credit bid’ - meaning that the creditors can purchase the company by using some or all of the debt owed by the company. The best way to look at this is via an example. Let’s say company A has assets worth $500mm and total debt worth $300mm. If the company is unable to find a buyer willing to purchase the company, it can have its creditors purchase the company for $500mm instead. However, because the creditor is technically owed $300mm, it can engage in a ‘set-off’ of claims, where the amount the creditor is owed reduces the purchase price it has to pay. So, in this case, if creditors want to purchase Company A for $500mm, it only has to provide $200mm of new capital. As a result, their $300mm will be assumed as repaid / the obligation is no longer outstanding. 

Now, looking back at the case of American Tire Distributors, the Restructuring Support Agreement called for a credit bid (undecided amount at the time of filing) by the creditors that hold the DIP Term Loan Facility. Given that the size of this facility is $1.23bn, the minimum purchase price creditors will pay for the company will be $1.23bn. The purchase price, however, will be determined by traditional valuation methods / whatever the creditors think a fair value of the company is [2],[3]. 

It is also important to note that credit bids are often the choice of last resort. As a general rule, secured creditors will prefer to obtain their recovery in bankruptcy in the form of new debt or, ideally, cash. The reason for this is that creditors are going to be risk-averse (especially secured creditors as they provided capital that sits higher in the capital structure). Equity, particularly equity of a reorganized company, is extremely risky. Because credit bids result in the creditor obtaining 100% of the equity in the reorganized company, it will be a last resort form of recovery. This was the case in ATD, as the company engaged in a lengthy sale process prior to its bankruptcy filing. During this sale process, the company only found 1 buyer (undisclosed company), who ultimately did not go through with the purchase. 

Analysis ATD’s DIP Proposal

Now that we have outlined the terms of the restructuring, we can take a closer look at the DIP proposal and why it was such a contentious aspect of this bankruptcy process.

As a reminder, there were two components to the DIP facility - a DIP Term Loan ($1.123bn) and a DIP ABL ($1.2bn). Now, the DIP ABL does not materially change anything about the capital structure besides the fact that it allows for full access to the $1.1bn of the prepetition ABL facility. Additionally, the DIP ABL rolls up the entirety of both the prepetition revolver and the FILO Facility ($100mm), making both pari passu with each other (in the prepetition capital structure, the revolver sat ahead of the FILO Facility). The changes to the capital structure from the DIP can be seen in Figure 2 above. [4],[5],[6]. 

However, the DIP TL featured material changes - and was quite contentious as a result. As aforementioned, the DIP TL included the roll-up of $750mm of the prepetition TL facility, and the lenders that rolled up their debt also provided $250mm of new money. As an aside, this DIP features a roll-up to new money ratio of 3:1, a stark increase from ATD’s last bankruptcy which featured a ratio of approximately 1.08:1. While this may seem like a large increase, it is important to note that it generally reflects a broader trend in the DIP financing space. As companies are in increasing need for capital (and unable to find it elsewhere), DIP lenders are able to ‘push the envelope’ continually in terms of obtaining better terms for their capital, and this has resulted in the increase in roll-up to new money ratios that are present in ATD and elsewhere in the marketplace [2],[6]

Back to the DIP TL, it also featured the roll-up of the Delayed Draw Filo Loans of $92mm (as well as $31mm of issuance fees). This led to the DIP Term Loan Facility having a total size of $1.123bn. Below, we have provided an image showing the changes to the capital structure.

As seen in the Figure above, there remains $256mm in the pre-petition term loan facility after these changes. We also provided some information regarding the amount of debt that sits ahead of the pre-petition Term Loans prior to and after the DIP raise. Prior to the DIP raise, the Term Loans were subordinated to the RCF, FILO Facility, and the Delayed Draw FILO Loans. However, after the transaction (given that not all term loan holders participated), the remaining $256mm was subordinated to $2.323bn in total debt. Because the TL’s were always subordinated to the $1.2bn from the ABL and FILO facility, the remaining term loans were effectively primed by the new money and roll-up amounts of the Term Loan Facility (because these amounts were previously pari passu with the existing term loans). As a result, the difference between the debt ahead of the pre-petition TLs in the capital structure of $1.031bn represents the amount that the remaining TL holders were subordinated by in the capital structure - a material amount given the capital structure only consists of $2.5bn of debt in total after the DIP raise [3],[6].

The reason that we bring this point up is because of how this deal was structured. The $750mm of debt that was rolled up represented the claims of 90% of the pre-petition term loan holders (we will call them the Ad Hoc Group / AHG). The remaining $256mm were the claims of the remaining holders (we will call them the Non-Ad Hoc Group). Typically, when a DIP is being raised from both new money and roll-up capital, the company will offer the group that rolls up its debt (in this case, the full pre-petition Term Loan) the opportunity to participate in the roll-up and new money DIP by providing its pro-rata share of capital. In the case of ATD, however, it was reported that only the AHG was provided the opportunity to participate in the DIP Facility. The non-AHG saw this as a violation of the prepetition credit agreement and argued that they should be allowed to participate pro-rata in the transaction. Before we dive into the legality surrounding the non-AHGs argument, let us first take a second and look at why it is so important and beneficial to participate in DIP facilities. 

Below, we have provided the key terms of the DIP Term Loan. Importantly, the DIP Loan features an interest rate of SOFR + 950 (we will assume a flat SOFR of 4.5% to provide an all-in interest rate of 14%). Additionally, the DIP TL features an Upfront Fee (calculated as a percent of the new money term loan amount) and an Exit Fee (calculated as a percent of roll-up term loan amount). Finally, the DIP Motion Date was filed on October 2024, and the company exited bankruptcy in February 2025. 

To show the benefits of participating in the DIP facility, we have provided a return analysis below (where the AHG recoveries compared to the non-AHG recoveries can be seen in different bid value scenarios). As some simplifying assumptions, we assumed the DIP loan was issued on the DIP Motion Date (this is not the case in practice - it is issued on the DIP Final Order date). Additionally, we assumed that the fees, interest, and principal repayment all came on the Sale Effective Date (in practice, it would be paid periodically / throughout the term of the DIP loan). Additionally, we want to provide further clarity on what the bid values represent. The Winning Bid Amount represents the total purchase price that is paid for the company. Under the bid amounts, we assume that the AHG credit bids its claims for any amount up to $1.123bn, and any bid in excess of this value will have the excess value paid for in the form of new money. Additionally, the Face Value represents the claims outstanding at the time of this analysis (which occurs after the DIP facility has been consummated, but prior to the sale of ATD to the AHG).

Before looking at the output of the analysis above, we should take a moment and try to understand what the valuation seeks to do. First, looking at the capital provided by both the AHG and non-AHG, the former provided a total of $1.092bn in debt. This came from the $750mm of prepetition Term Loans, $250mm of New Money DIP, and finally the $92mm Delayed Draw Facility (as it turned out, the prepetition TL holders provided this capital and were cross-holders in the capital structure). On the other hand, the non-AHG provided the remaining amount outstanding in the TL facility of $256mm [2],[3]. 

Next, we can look at the notional return amount for the AHG and non-AHG. This amount is determined by a simple waterfall analysis. As we previously discussed, under the proposed RSA, the AHG is the group that will be credit-bidding for the entire business. So, the amount the AHG credit bids for the business represents the purchase price of the business. Importantly, under the sale-purchase agreement, the ABL DIP facility will be assumed - meaning that it will be reinstated in the new company as exit financing. So, if the AHG credit bid their claim of $1123, they would be repaid first (in the form of 100% equity), and then the non-AHG would get whatever value is left over (in this case, there is no value left over, and they receive a 0% recovery). Additionally, the AHG’s recovery will be boosted from the effects of the fees and interest rate, which total to an additional $105mm of value generated from the DIP Motion Date to the Sale Effective Date.

As seen above, we have provided a range of credit bid amounts to demonstrate the difference between recoveries for the AHG and non-AHG. Even in situations where the AHG purchases the company for a value in excess of its $1.123bn of claims, its recoveries are still substantially higher than those of the non-AHG. For example, assuming a purchase price of $1.375bn, the total MOIC of the AHG is 15% greater than that of the non-AHG, demonstrating how beneficial it is to be a part of this DIP facility. However, we want to note that it is unrealistic that the creditors will bid $1.375bn - in practice, they will just bid their claims and provide new money to the extent they need to in order to secure the deal. Think about it from a broad perspective - the AHG is only concerned about its own recoveries, and as a result, any new money in excess of its claims represents an additional stake that only helps the return of the non-AHG. As long as there are no other bidders (which is the case for ATD), the AHG only needs to bid its claims amount of $1.123bn.

Importantly, we should discuss why the disparity exists to such a large extent. Yes, it is true that the non-AHG lose out on two obvious benefits: 1) their claims are being primed by over $1bn in debt, and 2) they lose out on additional interest income and fees. In addition, a more nuanced reason that is driving this analysis is the ability of the DIP lenders to drive the sale process. As we discussed earlier, ATD was unable to find any other company / entity willing to purchase its company. As a result, there is no ‘market-testing’ to determine what a fair valuation for the company is (in a competitive bankruptcy sale process, a fair value can be reached for what the company is worth because it will simply be whatever another company is willing to pay for it). Without a market-testing approach, there is no real way to figure out if the purchase price determined by the DIP TL holders is a fair price (there are traditional valuation methodologies, but in bankruptcy, these are often inaccurate due to the volatility of the business). Thus, the DIP lenders can purchase the company for the absolute minimum amount such that it receives 100% of the equity (in this case, just credit bidding $1.123bn). By doing so, the AHG can effectively push out the non-AHG and prevent any recovery from going to those claimants. As an important note, we should highlight that technically, the non-AHG could have purchased the company themselves (using their credit bid of $256mm and financing the rest via new money). This is unlikely to occur, however, because it will be substantially harder for this group to provide a bid in excess of the bid coming from the AHG. This is because the non-AHG has to cover over $1bn in capital (assuming the bid is in excess of the claims held by the AHG of $1.123bn) in the form of new money, which requires the non-AHG to invest significantly more capital into a distressed entity. This substantially increases the risk for the non-AHG lenders, given that the turnaround of ATD after its 2024 bankruptcy is not certain (the company still has to recover operationally despite a resolved capital structure).

Given that the non-AHG was subjected to the possibility of a 0% recovery, it made sense to challenge the legality of a transaction. Specifically, the non-AHG lenders argued that the non-pro rata nature of the deal (in the fact that the deal was only offered to the AHG group) violated the pre-petition credit agreement.

Before we look at ATD’s credit document terms that the non-AHG claims were violated, it is first worth providing some context around how prepetition credit agreements account for pro-rata sharing provisions inside and outside of bankruptcy courts. In recent years (in out-of-court settings), we have seen creditors find various exploitations of their credit agreements. One such exploitation surrounds the use of non pro-rata exchanges. Broadly speaking, a non pro-rata exchange will take the following form: First, the company will seek to raise additional debt by exchanging some of its existing debt into new senior debt. Given that the company doing this transaction is likely distressed, they will have to make the exchanged debt senior (if not the most senior) piece in the capital structure, and this will come at the expense of priming other pieces of debt in the capital structure. Now, we will not go into how priming works with respect to a credit doc as it is slightly beyond the scope of this paper, but the debt being exchanged will likely come with significantly better terms for the creditor (higher interest rates, tighter covenants, etc). As a result of the incremental interest the company is likely to face in an exchange like this, it may not want to offer this exchange opportunity to all creditors, and this is where the benefit of non-pro rata terms comes into play. A pro-rata sharing provision seeks to ensure that any repayment (or exchange, as it is in this case) must be done on a pro-rata basis. So, in our example, if there are pro rata sharing provisions in place, the company must offer the opportunity to exchange into new super-senior debt to all creditors (and we discussed earlier why this may not be beneficial for the company). Recently, we have seen deals, however, where creditors have been able to get around this issue by amending the pro-rata sharing provision. This amendment typically only requires the consent of at least 50.1% or, in some cases, 66.67% of creditors in a given class. So, if a company can get the lenders that make up this class (denoted as the required lenders), it can amend the underlying pro-rata sharing provision to allow for non-pro rata exchanges. In recent years, transactions like this have occurred - and to prevent it from happening in the future, creditors have made pro rata sharing provisions a sacred right, meaning that any amendment of the pro rata sharing provision requires 100% of lender consent (not just the required lenders). Assuming there were no exceptions to the sacred right for pro rata sharing, this ‘blocker’ effectively prevented non-pro rata exchanges from occurring in the marketplace [6].

In practice, we do not often see a blanket blocker to prevent any amendments to pro rata sharing provisions; there are typically some exceptions to the provision that offers some flexibility to the borrower. This was the case for ATD, and their exception specifically regarded raising DIP financing. This can be seen in the figure below.

What section h(ii)(y) seeks to do is state that a debtor-in-possession facility can violate the pro rata sharing provisions of the credit agreement (i.e, DIP financing can be raised on a non-pro rata basis). Now, just looking at this, it would appear that the DIP TL for ATD did not violate the credit agreement - it was done on a non-pro rata basis, but that was allowed under this section of the credit agreement.

The non-AHG agreed with the perspective that the incurrence of new money financing (the $250mm) did not violate the credit agreement. However, the non-AHG contested that the roll-up portion of the TL facility (the $750mm) was not allowed under the credit agreement. Let’s explore the logic behind this argument [4],[5].

If we look at the Bankruptcy Code, roll-ups are not included in Section 364, which outlines the process of obtaining postpetition financing, or anywhere else. Rather, roll-ups are a market-created process that was used to add benefits / incentivize existing lenders to provide new capital to the distressed company when the company was unable to find financing from outside sources. If we think broadly about what a roll-up seeks to do, however, it gives the lenders participating in the roll-up an opportunity to have their current claims repaid, and then have those exact claims reinstated as priming, super-senior debt at the top of the capital structure. The opportunity to have one’s claims repaid and then reinstated as super-senior debt has historically been done on a pro-rata basis with regard to DIP financing, but for ATD, it was done on a non-pro rata basis, and that is what we are going to be focusing on and analyze if it was allowed.

The non-AHG focused their challenge on whether the carve-out in subclause (y) of Section 10.01(h) applied only to the incurrence of priming DIP debt or also extended to permit non-pro rata repayment (i.e., the roll-up). Section 10.01(h)(i) and (d) generally prohibit altering pro rata sharing of payments without the consent of all adversely affected lenders. While subclause (y) allows for exceptions in the context of debtor-in-possession facilities - permitting priming DIP debt to be raised without offering equal participation to all lenders - the non-AHG argued that this carve-out was limited to new debt incurrence under Section 10.01(h)(ii) (this argument would mean that under the credit document, non-pro rata exceptions were only permitted for new debt financing, which would only be the $250mm in the proposed DIP facility by the AHG). According to them, nothing in the agreement explicitly authorized using DIP proceeds to repay or roll up old loans unequally. If the parties had intended to allow such treatment, they contended, the agreement would have included an explicit carve-out from 10.01(h)(i) and (d), which it did not.

To add more clarity to the paragraph above, we want to note that the ambiguity arises from the phrase “in each case of the foregoing,” which appears at the end of Section 10.01(h). The AHG’s position was that this language applied to all of Section 10.01(h), including subsection (h)(i), thereby extending the DIP carve-out to pro rata payment provisions as well. However, the non-AHG pointed out that the exceptions listed in subclause (y) - relating to permitted senior debt and DIP facilities - refer exclusively to the incurrence of new debt (discussed in the above paragraph), not to the repayment or recharacterization of old debt. Therefore, in their reading, the carve-out should apply only to subsection (h)(ii), not to (h)(i). If correct, this would mean that the roll-up feature - by elevating AHG claims without offering the same treatment to others - constituted a non-pro rata repayment in violation of the credit agreement.

To summarize, there are two interpretations of the language in Figure 6 above. One reading of the terms supports the AHG. This broad view says that the carve-out for DIP financing applies to all of Section 10.01(h), including the rule that usually requires equal (pro rata) treatment. The key phrase is “in each case of the foregoing,” which could be read to apply to both (h)(i) and (h)(ii). If true, this would let ATD roll up AHG debt without offering the same to everyone.

But a narrower view supports the non-AHG. This reading says the carve-out in (y) only applies to (h)(ii), which is about raising new debt, not repaying old debt. The two items listed - DIP loans and permitted senior debt - both relate to debt issuance, not repayment. So, the carve-out does not allow selective roll-ups, and the roll-up violates the pro rata payment rules in (h)(i) and (d).

The presiding judge, Judge Craig T. Goldblatt, ultimately adopted a narrower judicial role that did not favor the minority, non-AHG lenders despite expressing skepticism about the roll-up's legality. While he acknowledged that the proposed roll-up may have breached the prepetition credit agreement - suggesting that the minority lenders would likely prevail in a breach-of-contract lawsuit - he declined to condition approval of the DIP on pro rata participation. Judge Goldblatt reasoned that approving the DIP fell within the debtor’s sound business judgment and that the appropriate venue for challenging non-pro rata treatment was through contractual enforcement, not bankruptcy law. More simply put, while Judge Goldblatt believed that the roll-up was likely an exploitation / violation of the credit doc, he also believed that that determination was to be made in contract law courts (not bankruptcy courts). Thus, although he preserved the minority lenders’ right to litigate the issue (where he held the stance that the non-AHG would likely win in contract litigation), he allowed the DIP and roll-up to proceed without modification. Contrary to the assertion that the credit agreement prohibited non-pro rata repayments absent a specific exception, Judge Goldblatt did not interpret the agreement to bar the roll-up outright, nor did he mandate pro rata treatment as a prerequisite for DIP approval [5].

48 hours after Judge Goldblatt’s comments, the AHG announced that there was a full resolution of the DIP financing contention. Specifically, the AHG of lenders agreed to remove the term loan roll-up component of the DIP loan. As a result, the new DIP facility was reduced by $750mm (this amount remained in the pre-petition TL facility with the rest of the non-AHG claims). As a result of the reduced DIP facility, the size of the Credit Bid Changed. Specifically, the AHG engaged in a credit bid of 100% of the New Money DIP ($250mm) plus $585mm of Term Loan Secured Claims (assumably part of the pre-petition Term Loan claims the AHG holds), as well as the assumption of substantial liabilities (which is the entire DIP ABL facility [4],[5]. Although not disclosed, the information above implies a total bid value $835mm (not accounting for the $1.2bn of liabilities from the DIP ABL that will be assumed). Given that this change happened just 48 hours after Judge Goldblatt’s comments, it is likely that the AHG believed they would lose in future contract litigation (as Judge Goldblatt stated that the non-AHG would likely win). 

Given that they would likely lose in contract litigation and the incremental legal expenses associated with said litigation, the resolution likely depicts the next best outcome, where they can still credit bid some of their pre-petition Term Loan claims as well as the new money DIP Term Loan. 

Implications of the DIP Ruling

The American Tire Distributors (ATD) ruling has large implications for the credit agreement terms and lender protections in Chapter 11 cases. Most notably, ATD will result in other companies inserting American Tire blockers in their credit agreements, which are contractual provisions that explicitly entitle all lenders to participate on a pro rata basis in any DIP financing or roll-up structure approved by the majority lender group (remember, Judge Goldblatt did approve the DIP financing in bankruptcy courts - but he provided his opinion on the likely outcome if litigated in contract courts). In many current deals, sacred rights provisions prohibit amendments that alter pro rata payment waterfalls or subordinate existing debt without the consent of all adversely affected lenders. However, these clauses often contain carve-outs for DIP financing or are silent on roll-ups entirely. The ATD case illustrates how such gaps can be exploited. Because roll-ups are typically structured as “non-cash exchanges” rather than direct payments, they may fall outside pro rata protection unless specifically captured in the agreement. Without unambiguous language to the contrary, majority lenders can use DIP structures to elevate their own claims, converting prepetition debt into superpriority post-petition obligations and effectively subordinating minority lenders.

The broader consequence is that non-pro rata DIP structures are becoming central tools in liability management strategy. Sponsors and controlling creditors now have a better understanding of using roll-ups and exclusionary DIP terms to consolidate ownership and extract value. As a result, the market is likely to see an intensification of conflict between AHG and non-AHG lenders. Minority lenders will increasingly find themselves disadvantaged unless they proactively negotiate DIP participation rights at origination or in subsequent amendments. In this environment, defensive credit structuring becomes paramount. The ATD ruling doesn’t reflect a dispute over a single DIP loan but rather marks a broader shift in power dynamics within distressed capital structures and reinforces the need for carefully crafted and properly negotiated credit agreement terms.

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