Below is our initial take on recent bankruptcy-related developments:
On Tuesday, an appeals court ruled that car rental company the Hertz Corp, which emerged from bankruptcy in 2021, must pay over $270 million in post-bankruptcy interest and fees. The higher interest rate and "make-whole" payments were agreed upon in the noteholders' contracts.
S&K Take: Remember when make-wholes were cool? Back in the days before LMEs became all of the rage, make-wholes were a major point of contention in the funded debt world. This case isn’t the classic make-whole fight, it is more of a post-petition (or, or more appropriately “unmatured”) interest question, but it is nice to reminisce over simpler times. The noteholders had objected to Hertz’s plan on absolute priority/solvent debtor grounds, as the plan paid equity approximately $1.1. billion. Bondholders argued that they were owed about $270 million in both post-petition interest and make-wholes (or “Applicable Premiums” per the Third Circuit). Judge Walrath had originally ruled against the bondholders, but certified her decision directly to the Third Circuit, which hadn’t ruled on the issue previously. The Third Circuit, in a 2-1 opinion written by Judge Ambro, found that the make-wholes were unmatured interest (under 502(b)(2), which is generally very bad for a make-whole), dropping this line on us: “[i]nterest by any other name does, in fact, smell as sweet”. Despite that finding, Judge Ambro invoked the absolute priority rule to find that Hertz is required to pay both the PPI and the make-wholes as a solvent debtor prior to making any payment to equity. The Third Circuit joined the Fifth and the Ninth in this regard. We will see if Hertz seeks certiorari, but we would note that the Supreme Court denied cert on this issue in 2023.
On Monday, Ohio-based discount retailer Big Lots announced that it filed for Chapter 11 bankruptcy protection from its debts, blaming inflation and high interest rates for impairing its business. Big Lots plans to sell its assets and remains of its business to Nexus Capital Management, a private equity firm.
S&K Take: There had been a significant amount of speculation about a Big Lots filing (including in these very pages last week) and here it is. And it is glorious. Actually, it is strikingly similar to quite a few recent retail cases, somewhere south of glorious. Prepetition lenders are providing a small(ish) new money DIP with a roll-up while credit bidding their debt for the company’s assets. In this version it is Nexus Capital Management, which is bidding $760 million! Great for creditors, right? No, maybe not, that $760 million includes only $2.5 million in cash, with the balance coming as a credit bid. The sale process runs through November 4. Overbids seem unlikely, but that is why we play the games.
Purdue Pharma has been granted an 18-day extension to its litigation pause to continue settlement negotiations with the Sackler family. This extension comes as the company aims to reach a comprehensive agreement in resolution of its role in the opioid crisis.
S&K Take: This one was actually from Sept. 5, but it is notable because the Sept. 27 expiration of the litigation stay is quickly approaching. The parties remain in mediation trying to solve for the third-party release issue. The extension to 9/27 was supported by the mediators, the UCC and the ad hoc committee, which provided Judge Lane comfort in connection with granting the extension. Opponents argued that there has to be some line in the sand when the clock runs out. Although, as they note, that doesn’t mean that judgments will immediately follow, only that the Sacklers will be open game for litigation. We all wait with bated breath to seek if a new deal can be achieved. bid. The sale process runs through November 4. Overbids seem unlikely, but that is why we play the games.
