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If faith without works is dead, what about default without enforcement?

In today's world, loose credit documentation gives room for innovative out-of-court restructurings, and almost nothing seems safe. Paranoia has reached a peak for CLOs holding loans that were once first lien, as these too can be structurally, contractually and/or temporally subordinated by credit support moving away from the restricted box, priming debt issued, and/or new debt raised with inside maturities. 

Even with all that creditor and sponsor-on-creditor violence—three concepts remained sacred: Principal, interest and maturity. In every case, sponsors and lenders agreed that none of those could be changed out of court without affected (read: all) lenders’ consent. None of the gameplay even contemplated changing these undisputed sacred rights. Debt that got subordinated could (and often would) get no recovery and was unceremoniously discharged in an eventual bankruptcy — but lenders were never told debt has come due and we’ve skipped interest payments, but we’re neither going to pay you nor file for bankruptcy. 

Enter the private credit world, where loan documents have many of the same structures, but some different terms and negotiation dynamics given there are fewer lenders involved. 

On 26 August, plaintiff Arena Investors, LP through the animus of Arena Vantage SPV, brought a complaintagainst the Amazon aggregator Vantage, doing business as Acquco, the borrower to which Arena is a minority lender (see docket here). The lawsuit, filed via Arena’s counsel Pillsbury Winthrop also names the Deal Agent CoVenture, which is part of the investment firm recently rebranded to Treville Capital Group that includes a venture capital joint venture with Moelis Asset Management that operates under the Crossbeam Venture Partners brand — among other subsidiaries and parties in interest as defendants. CoVenture as Deal Agent is advised by Seward & Kissel, while the borrowers and guarantor are being advised by Latham & Watkins. 

Moelis Asset Management is a separate entity from the investment banking business Moelis & Company. The asset management business was separated at the time of the investment bank’s IPO in 2014, while Ken Moelis remains the ultimate controlling shareholder of both. According to the complaint, Moelis & Company is involved as the borrower’s investment banker in discussions between the borrower, Arena, and other lenders in the case. 

Arena’s main allegation is that the borrower has violated the lender’s sacred rights through the refusal to pay the outstanding principal amount and default interest without Arena’s consent. Additionally, Arena alleges that the Deal Agent, CoVenture, has failed to enforce the lender’s rights pursuant to the loan agreement.

CoVenture, in a motion to dismiss and supporting documents, points out under its reading of the credit agreement, there is no requirement for the deal agent to enforce the default if the required lenders do not ask the default to be enforced. Additionally, CoVenture may take action if they, in their judgment as the Deal Agent, deem enforcement (1) advisable or (2) in the best interests of the lenders. CoVenture contends that neither condition applies. 

Sources familiar with the case suggest that there had been negotiations about various restructuring options, but the bid and ask were always too far apart, so a stalemate has been created here where no one can reach a deal. As a result, a distressed company in a suffering industry (See 9fin’s coverage of Thrasio for more on the conditions that have impacted Amazon aggregators) has blown through a maturity and stopped paying interest to its lenders — possibly because it doesn’t have enough liquidity — and the minority lenders seemingly have no recourse to direct the agent to take action. 

When asked for comment, a spokesperson for Treville responded, “We are unable to comment on an ongoing litigation, but we direct you to the public filings we’ve made in response to Arena’s complaint for further information.”

The December 2020 loan agreement has a total outstanding principal balance of approximately $219m. Arena holds $20m of the outstanding principle, while CoVenture’s Vantage Credit Opportunities Fund holds approximately $177.8m of the outstanding principal amount and constitutes the “Required Lender” under the credit agreement, while a CoVenture-affiliated fund Variant Alternative Income Fund held another $3m. The only other significant lender is Vantage Term Loan, an investment vehicle of Acorn Street Capital, which holds approximately $18.5m of the outstanding principal amount. 

The loan agreement’s maturity date expired on 15 May, and the borrower and guarantors failed to repay the outstanding amounts. While the borrower paid interest to Arena at the contractual default rate for two months following the maturity default, it failed to pay Arena the approximately $262,638.89 of interest it was owed on 15 August and has indicated that it does not intend to make any future interest payments.

Arena has made repeated demands to the deal agent to enforce the maturity default or the interest payment default, through foreclosing on collateral or exercising other rights granted to secured parties. Section 11.2 of the Loan Agreement preserves Arena’s “sacred rights” by holding that

“without the prior written consent of each Lender directly affected thereby, no modification shall be effective to any Transaction Document that would . . . increase or extend the maturity of the Commitment of such Lender or . . . reduce the amount of, or waive or delay payment of, any principal, interest or fees payable to such Lender.”

Concurrent with the failure to pay required interest, Arena stated that the borrower and Deal Agent approached them to request an amend and extend agreement until December 31st, 2025. Arena declined to participate. 

Accordingly, Arena alleges CoVenture has failed to take the proper actions to protect the lenders out of their own self interest. Specifically, CoVenture owns 15% of the borrower’s outstanding voting stock and 81% of the debt. As argued in the complaint, “[T]he economic interests of the Deal Agent are inextricably intertwined with the economic interests of one of the borrower’s most significant equity investors, and one of the equity partners is acting as a key advisor to the borrower.” 

CoVenture also has the power to appoint one board member for the borrower. Their selection was Christopher Ryan, a partner at Moelis Asset Management. Moelis Asset Management is a partner in several of CoVenture’s equity investment funds, according to the filings, while, as mentioned, above Moelis & Company is acting as the borrower’s investment banker. 

Due to these purported conflicts of interest, Arena believes that a bankruptcy pursuing the lender’s enforcement rights would not align with CoVenture’s goals. 

“A bankruptcy would also have negative reputational consequences for CoVenture. On information and belief, in January 2023, CoVenture raised approximately $20 million for a new equity issuance on the proposition that the borrower had a total enterprise value well in excess of the $219,406,000 outstanding under the Loan Agreement. A bankruptcy, filed just over one year later, would put the lie to that value proposition and could cause investors to question whether CoVenture solicited their investments based on accurate information.”

Essentially, the plaintiff’s case is that CoVenture and the borrower have attempted to enforce the amend and extend agreement without their consent, violating the sacred rights guaranteed to Arena under the contract. 

CoVenture’s motion to dismiss the complaint concedes that the borrower has committed a default and that Arena is entitled to interest payments. However, they contest the fact that they must pursue enforcement of the agreement as the deal agent. 

Referencing section 9.1(c) “[t]he Deal Agent shall take such action with respect to such Event of Default ... as may be requested by the Required Lenders, or as the Deal Agent shall deem advisable or in the best interest of the Lenders.” Here, CoVenture holds that enforcement is not advisable nor in the best interest of lenders. “Such a bankruptcy would be destructive to the value of the Borrower and frustrate any ability to satisfy the Lenders’ debt, and Plaintiff itself does not allege any benefit to the Lenders that would result from such action.”

Furthermore, CoVenture points to the specific provisions granting the Lender a remedy. Section 7.2(a) of the loan agreement reads as follows:

“the Deal Agent may, with the consent of the Required Lenders, and shall, at the direction of the Required Lenders (i) declare the Notes (if any) to be immediately due and payable in full (without presentment, demand, protest or notice of any kind all of which are hereby waived by the borrower) and any other Aggregate Unpaids to be immediately due and payable and (ii) foreclose upon and/or exercise any and all remedies in respect of all or any part of the Collateral.”

Under CoVenture’s interpretation this means that more than 50% of the lenders must consent or direct them to take action in order to enforce the Loan Agreement. This assertion was supported in the dismissal of the 2022 Complaint brought by Arena against CoVenture. There, Arena argued there had been insufficient disclosure, thus triggering a default under the agreement. However, a majority of lenders had effectively amended the agreement without Arena’s consent. The Judge explained that “The requirement of signature by the “Required Lenders” is satisfied when lenders representing in the aggregate greater than 50% of the aggregate commitments of advances to the borrower have signed a waiver or amendment.”

Here, CoVenture extrapolates this to any action taken by the “Required Lenders.” There must be majority consensus. Arena retorts by displaying that CoVenture will always be the majority (81%) and can thus manipulate the Loan Agreement in bad faith. This contention was also addressed in the previous litigation as the court held it is not enough to show that the Loan Agreement is abusive to prove bad faith, there must be a display of “fraud, duress or some other wrongful act.”

Additionally, in CoVenture’s reply in further support of its motion, it argues that Arena’s sacred rights are not actually implicated because the loan’s maturity date “has not been amended, waived, or modified,” nor has Arena alleged that it has. CoVenture views Arena’s characterization that the Deal Agent is “simply doing nothing,” as proof that no sacred rights have been infringed upon, explaining the Deal Agent has done nothing, “but that does not mean the Deal Agent cannot do anything—a meaningful distinction.” As argued throughout its brief, CoVenture maintains it preserves the right to take action but only pursuant to direction from the majority of lenders. 

Loans are made based on the fundamental guarantee that the principal will be paid back with interest. Consequently, Arena and its sympathizers believe this guarantee has been broken while CoVenture holds that pursuing the rights under the deal will only cause creditors to receive a smaller recovery. At issue are the rights of majority and minority creditors, the interpretation of contracts, and how courts can do both in the interest of justice. No matter the outcome, minority lenders should be taking a second look at any agreement that provides that required lenders control any enforcement actions that would need to be directed by a “Deal Agent.”

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Arena alleges violation of sacred rights in lawsuit against Amazon aggregator Acquco

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