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If advisors to the sponsor community wanted to send a clear message as to whether or not they would be cowed by the Fifth Circuit’s Serta Simmons decision into slowing the liability management train or at least offering minority lender better economics — it can’t get any more crystal than the change in tack in Better Health.
The Kinderhook Industries-backed primary care service provider is set to close the initial phase of an LME with holders of 85% of its first lien term loan — the Davis Polk and Houlihan Lokey ad hoc group as well as the most prominent non-ad hoc group lenders including another group represented by Glenn Agre — on effectively the exact same terms as they had structured before the Serta decision, but with a different structure, according to sources familiar.
Instead of using the “open market purchase” exception under the credit agreement, the participating lenders will exploit the language in the loan modification sections and amend and extend provisions to execute effectively the same outcome as before but as follows:
- Participating lenders are going to agree to extend the maturities of their loans under the existing facility, and effectively become a new class (or sub-tranche) of loans under that facility. This could potentially be permitted by as few as one lender as it is not a sacred right under the facility, according to sources.
- The participating lender group — that is now in a different class but still holds the majority needed to amend the credit agreement — will then enter into other amendments to the credit agreement that will act as a strip, allowing for covenant and payment subordination of the other sub-tranche which will be held by the non-ad hoc, non-priority group lenders.
- Participating lenders will then exchange into the new permitted debt where their class is no longer subject to other classes restrictions into the new priority debt.
To reiterate the economics earlier agreed on, in phase 1:
- $112.5m in new money in the form of first-out loans will be provided by all participating first lien lenders
- $105m of the existing revolver will exchange into a first-out revolver
- The ad hoc group will exchange their 64% of the existing $740m term loan debt at par into $162.5m of new first-out paper and $308m of new second-out.
- The “priority group,” which now includes the Glenn Agre group combining for 21% of the term loan, will exchange at 80 cents on the dollar into a combination of second-out and third-out loans.
In phase 2, the non-ad hoc and non-priority group lenders will be offered an exchange of their term loan holdings at 70 cents into equal parts new second-out and third-out loans.
Advisors to lenders, Better Health and Kinderhook declined to comment.
