Angelo Gordon, one of the world’s savviest corporate credit investors, has found itself on both sides of a contentious divide roiling Wall Street.
The $50bn fund manager is a longtime lender to Revlon, the cosmetics company, and to Serta Simmons Bedding, the mattress group. Each company is in US Chapter 11 bankruptcy proceedings after falling behind on debts.
But Angelo Gordon’s status as a creditor is starkly different in the two cases. At Revlon it is poised to seize control after joining a slim majority of lenders that offered rescue financing in May 2020, a deal that left other creditors behind.
At Serta, however, it was among the creditors excluded from a similar emergency financing assembled in June 2020. Now at risk of recovering pennies on the dollar from its investment, Angelo Gordon and other stranded creditors will try to convince another bankruptcy court that the majority group violated their rights.
The stances strike some observers as inconsistent.
“It is definitely a bad look to try to propose an amendment [to a loan contract] that may have left minority lenders behind, and then complain about lack of good faith when they’re on the receiving end,” said Randall Klein, a lawyer at Goldberg Kohn who specialises in corporate debt.
Angelo Gordon’s differing positions in the Revlon and Serta cases show how corporate debt contracts have become unsettled by disputes over a set of novel financing structures.
The structures give highly indebted companies financial lifelines. But they come with a catch, allowing a majority of lenders to swap existing debt into a tier of newly issued debt that receives the first claim on a company’s assets. In the Revlon and Serta cases and others, this majority has been accused of steamrollering a smaller, seemingly unsuspecting group to snatch outsized profits when companies are reorganised in bankruptcy.
Bankruptcy disputes are familiar territory for Angelo Gordon, which in the years since it was founded in 1988 has not shied away from complex or controversial situations.
The New York-based fund’s head of distressed and corporate special situations, Ryan Mollett, is an industry veteran who previously worked at Blackstone, where he was the architect of a so-called “manufactured default” at the US homebuilder Hovnanian. In that strategy, Blackstone sought to provide financing to the company in exchange for Hovnanian missing a debt payment so the fund manager could win a wager on credit default swaps.
Angelo Gordon believes that the technical differences between Revlon and Serta transactions leave it on the correct side of both, according to court filings and people familiar with their thinking. A representative of the group declined an interview request.
The bankruptcy disputes at Revlon and Serta are expected to be resolved in the next few months, either through a settlement or a judge’s ruling. Revlon and Serta declined to comment.
The novel financing structures were devised by lawyers and investment bankers to raise capital for companies in distress by cleverly exploiting rivalries among lenders.
“If a company dangles an aggressive restructuring move without guaranteeing a privileged position to anyone, it can help the company by pitting creditors against one to offer up a better deal,” said Eric Talley, a professor at Columbia Law School. “They’re in a financial Hunger Games scenario, with each tribute hoping against hope that the odds will ever be in their favour.”
These novel financings take two main forms, known as “drop-downs” and “uptiers”.
Revlon used a drop-down to borrow from a group led by Angelo Gordon. Revlon said permissive loan covenants provided leeway to create, or drop down, a new subsidiary that in turn borrowed $880mn from Angelo Gordon and others. The lenders in this majority group were able to claim several top Revlon brands as collateral, taking them outside the reach of existing lenders.
In the most controversial step of the deal, the Angelo Gordon group was allowed to transfer about $1bn of the previous loan into the new subsidiary, in a move called a “roll-up”.
The remainder of the loan, held by the stranded group of minority investors, has since plunged to less than 40 cents on the dollar after it was no longer backed by the transferred collateral.
The minority has alleged in bankruptcy court that Revlon rigged a vote in order to win the majority approval it needed to execute the drop-down. Revlon denied that claim, saying that it rejected a rival plan offered by the excluded group and gave that group the opportunity to participate in the drop-down. Angelo Gordon has also argued that the 2020 deal was permissible.
The issue will go to trial in March.
The more novel uptier transaction, used at Serta to the exclusion of Angelo Gordon and others including Apollo Global Management, has proven even more controversial than drop-downs.
The mattress company, in raising the $200mn in new cash in 2020, created a new “super-priority” top layer of debt that ranked ahead of an existing $1.95bn first-lien loan. Similar to Revlon, the funds investing the new cash also rolled several hundred million dollars of their existing debt into the new debt level.
Angelo Gordon and other Serta lenders that were left out of the transaction argue in lawsuits that all lenders, not just a majority, should have been granted the option to participate in the roll-up. Moreover, changing the repayment “waterfall”, or the order of debt repayments at Serta, required unanimous consent of incumbent lenders, they said.
Serta, in court papers, said that it chose an uptier structure over a competing drop-down proposal from Angelo Gordon, which it believed would cost the mattress company more.
Angelo Gordon’s lawsuit against Serta, filed last year in New York state court, is in its early stages. A separate ruling on whether Serta’s uptier transaction should be allowed may come sooner in bankruptcy court.
In a separate 2021 lawsuit filed by another creditor, US District Judge Katherine Polk Failla in Manhattan last year agreed with Serta in ruling that only a majority of creditors was needed to approve a new a super-priority debt tier.
However, she refused to dismiss the case entirely, ruling that Serta’s ability to roll old debt into the uptier required a separate trial. Her willingness to at least partially question the uptier had grabbed the attention of the lawyers, bankers and companies in the realm of distressed debt.
“Indeed, one could reasonably conclude from Plaintiffs’ allegations that [Serta] systematically combed through the Agreement tweaking every provision that seemingly prevented it from issuing a senior tranche of debt, thereby transforming a previously impermissible transaction into a permissible one,” the judge wrote in her ruling.
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