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Serta Simmons Deep Dive and Chapter 11 Filing, and Rob Citrone
Investing, Banking, Restructuring, Podcast Summaries, and Niche Finance Topics
Welcome to the fourth Restructuring newsletter,
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Today, we will learn more about:
Serta Simmons Deal Overview
Serta Simmons Chapter 11 News Update
Rob Citrone - Capital Allocators Summary
Serta Simmons - One of the most famous restructuring deals of recent years
In 2020, Serta Simmons needed to restructure. Due to the pandemic and the massive debt load it incurred from a private equity takeover, the company was facing steep maturity walls it was in no position to pay [1]. Rather than file for bankruptcy protections which would further destroy value and reduce recoveries, Serta decided to undergo an out-of-court restructuring whose outcome is being litigated to this day. To understand Serta’s restructuring, one must first understand the twin strategies—non-pro-rata uptiers and dropdowns—proposed in its execution. Thus, before delving into the intricacies of what happened/is happening with Serta Simmons, the upcoming slides will explain the proposed restructuring solutions central to the case.
Uptiers
Uptier transactions allow a majority (50% + 1) of secured creditors to prime non-majority secured creditors by giving themselves “super-priority” liens on a loan’s underlying collateral. This differs from another trend in restructuring, IP transfers, by reordering claims on a loan’s underlying collateral rather than stripping it from certain creditors and transferring it to others (although minority creditors would argue they effectively do the same thing). These transactions are contingent on two key factors:
1. Whether credit docs allow for a simple majority to amend lien subordination provisions
2. Whether the debtor is allowed to execute non-pro rata debt-for-debt exchanges
Majority creditors give themselves super-priority liens by amending credit docs to create new tranches of debt above any existing term loans. These creditors then exchange their old debt, at a discount, for new debt within the super-priority tranche (while also contributing new money to the debtor). The debt exchange acts as an out-of-court DIP rollup, while the new money functions as out-of-court DIP financing. This then raises the question, how is this allowed? Doesn’t the priming of minority secured creditors violate pro-rata sharing provisions within credit docs (provisions stating that any term loan pay down must be done equally amongst all term loan holders)? This is where the two necessary factors for an uptier transaction come into play.
For non-pro rata subordination, the devil is in the details.
If credit docs allow for a simple majority to amend subordination provisions, or rather, if they don’t require unanimous consent to amend said provisions, then the creation of super-priority tranches can be done easily. The tricky part is how to justify the debt-for-debt exchanges, as these are only done with a select group of creditors. The key to these exchanges is found within the language surrounding a debtor’s allowed open market purchases (of their own debt). If credit docs allow debtors to conduct cashless transactions (e.g., debt-for-debt exchanges) as a part of their open market purchases, then majority creditors can bypass pro-rata sharing provisions as these purchases, by definition, are done with some creditors and not others [2].
Dropdowns
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