CLOs and bond funds started to feel like they had no leverage at all when private equity sponsors and/or heavily levered companies started to strip out assets into unrestricted subsidiaries or strike side deals with a subset of creditors to prime another group. The company-side lawyers viciously exploited loopholes in credit docs and lenders were only too willing to turn on each other if it meant improving their recovery.

Inevitably savvy hedge funds started scouring the market for opportunities to buy into a capital structure at a discount and get the relevant majority to prime the non-ad hoc group, and/or simply to provide new super-priority capital — ushering in the era of creditor-on-creditor violence.

Enter the cooperation agreement — where creditors within a class or across classes agree to behave by a certain set of rules outside of a credit agreement or indenture in theory as an added protection to the benefit of all creditors. The strategy was decades old, but its use exploded starting in 2023, with notable examples including creditor organization in Travelport, Cooper-Standard, Carvana, and Rackspace, as creditors increasingly feared an LME transaction could be lurking around the corner. Now, there’s nary a distressed credit with a large capital structure where a so-called co-op is not in place or at least being discussed. In many cases, it has arguably given creditors some negotiating leverage back in these liability management exercises. 2024 in particular has been the year of the mega-co-op between creditors of companies like Dish Network, all of the Altice credits, iHeartMedia, Ardagh, and Bausch Health.

Companies dissatisfied with this change in power dynamic and who feel these cooperation agreements are limiting the arsenal of options typically available to companies will likely to look to antitrust law to challenge these arrangements.

The technicals

These LME transactions — whether drop-downs, uptiers, or any other imaginable addition or hybrid — occur or do not occur based on what is allowed under the credit documents that govern the company and creditor relationship.

By dropping assets into unrestricted subsidiaries, a company places these assets that were part of the creditor collateral package, out of creditor reach and can use these same assets to raise new money and usually coerce creditors into exchanging the debt currently held in the company’s restricted subsidiary at a discount for a lien on these assets in the new silo.

Instead of creditors caving under the prisoners dilemma protocol and rushing to offer the company the best deal at the expense of other creditors, whether in or out of their class, creditors have rallied across the capital structure and signed cooperation agreements which among other things, restricts engaging, entering, participating, supporting, voting in, or consenting to any liability management transaction, restructuring or the like, or even entering confidentiality agreements to speak with the company, unless the requisite majority, as defined in the cooperation agreement not the credit agreement, gets on board.

In theory, this type of cooperation agreement shifts the power from the company to the creditors, since the company would likely have to offer better terms in order to get everyone across the capital structure to agree, rather than only offering one class or one subset of a class a good deal, and leaving behind or offering the rest of the creditors much less. One could argue that this type of cooperation agreement is an attempt to restore transparency and help a company reach a comprehensive restructuring that addresses all its liabilities and sets the company up for a more sustainable future.

The specific legal challenge that 9fin understands is impending is thus: When a group of creditors gets together and limits in any way a company's options in the market, there is a plausible argument that this is anti-competitive behavior in violation of Section 1 of the Sherman Antitrust Act.

Sherman antitrust act: how does it work?

The Sherman Antitrust Act was passed by congress in 1890 to preserve competition in the market. Section 1 of the act forbids “every contract, combination in the form of trust or otherwise, or conspiracy, that restrain trade or commerce.” According to the National Archives, the act was “loosely worded and failed to define such critical terms as ‘trust,’ ‘combination,’ ‘conspiracy,’ and ‘monopoly,’” however over the years through case law and combined with the Clayton Antitrust Act passed in 1914, the Sherman act has been fleshed out enough to be used effectively.

In interpreting Section 1 of the Sherman Act, courts tend to focus on whether an agreement that causes the restraint of trade unreasonably restricts competition. To conduct this analysis, a court will apply either the “Per Se Rule” or the “Rule of Reason.”

A Per Se Rule violation refers to an agreement that the FTC describes as “so likely to harm competition and to have no significant pro-competitive benefit that they do not warrant the time and expense required for particularized inquiry into their effects.” These types of violation typically include agreement related to price fixing, bid rigging, group boycott, and market allocation, “which invariably have the effect of raising prices to consumers, have no legitimate justification and lack any redeeming competitive purpose.” Courts can therefore consider these violations unlawful without any further analysis of their reasonableness, economic justification, or other factors, according to the Department of Justice’s “element of the offense.”

Courts analyze all other violations, under the Rule of Reason to determinate their overall competitive effect, according to the FTC. This requires analytical approach, that according to the DOJ, requires an extensive evidentiary study of “(1) whether the practice in question in fact is likely to have a significant anticompetitive effect in a relevant market and (2) whether there are any procompetitive justifications relating to the restraint. Under the Rule of Reason, “if any anticompetitive harm would be outweighed by the practice’s procompetitive effects, the practice is not unlawful.”

New York University law professor Edward Rock offers a helpful framework to consider whether an agreement presents the requisite concert of action to implicate the competitive concerns under­lying Section 1 at all, and if so, which test to apply. To reach this finding, Rock writes, the first question is whether the parties to the agreement are competitors or potential com­petitors in the market that the agreement affects or to which it is directed. If the answer is affirmative, then the substantive question is whether the agreement between the potential competitors is one that promotes competition or one that suppresses competition. In Rock’s analysis, he lays out a five sequential factor test, adopted from law professor Phillip Areeda, for courts to follow:

• Restraint of trade — Whether the challenged activity is of a type that restrains trade within the meaning of the Sherman Act;
• Quick look — Is there a justification the defendants can offer that a quick look would suggest more analysis is needed;
• Significant magnitude — Plaintiff must show that the type of restraint is likely to be significant enough to cause detrimental effects in order to rule out de minimis or harmless restraint;
• Justifications — Defendant must show if the restraint has procompetitive goals or and if the restraint is reasonably necessary to accomplish these goals;
• Balancing — If there are pro-and-anti-competitive effects, courts much decide which effect is greater:

Competitors or allies? Where Per Se falls short

We at 9fin will attempt to apply the framework offered above in the context of cooperation agreements in one company’s capital structure.

Starting with the first question, regarding whether the parties are potential competitors in the market that the agreement affects, there is room for minds to differ. Creditors — especially those similarly situated — would likely argue that they are not competitors, they are a group who in an ideal scenario, has the same goal, which is to get paid or provide financing on the best terms available to the group. 9fin believes antitrust precedent might disagree with this.

In American Needle, Inc. v. NFL, 560 U.S. 183 (2010), the Supreme Court ruled that an exclusive headwear licensing agreement between all 32 NFL teams and Reebok implicated Section 1 of the Sherman Act, and that the Rule of Reason test must be applied. The court focused on whether the agreement joins together “separate economic actors pursuing separate economic interests” in a way that might deprive the marketplace of actual or potential competition. The court explained that NFL teams are separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned, therefore concerted action between them is subject to the Sherman act. However, teams have common interests such as promoting the NFL brand which can require cooperation to some extent and may provide a justification for many kinds of agreements. Accordingly, the court found that “the restraint (between teams) must be judged according to the flexible Rule of Reason.” With American Needle getting this victory at the Supreme Court level, the case was remanded to the Court of Appeals and settled out-of-court nearly five years later.

Here, like NFL teams, classes of creditors are certainly made up of separate profit maximizing entities; each fund signs the agreement on behalf of its own entity and sometimes even within the same entity, a specific business unit. The second half of the analysis regarding whether they are pursuing separate economic interests in a way that might deprive the marketplace of competition is more controversial. However, a look at recent bankruptcy precedent related to LME’s may shed some light here. In Judge Christopher Lopez’s ruling on the good faith and fair dealing issue involving lenders in Robertshaw, he wrote that “there is nothing in the [the credit agreement] specifically imposing duties between lender parties based on payment of debts or incurring new debt… The [credit agreement] itself is full of blockers and clauses named for other liability management cases.” In other words, the expectation is lenders have separate economic interests and typically they negotiate how to protect themselves from the company, and more importantly in this context, each other through provisions in the credit agreement.

Agreements between competitors — also known as horizontal agreements — that have a blatant effect of raising, depressing, fixing, pegging, or stabilizing prices, are thought to unreasonably restrain competition “per se”. For example, if 10 competitors got together and agreed to only sell their product at a specific price, that would be so obviously anti-competitive that no further analysis is needed. But applying the logic in American Needle here, when the defendants are like members of leagues, where relationships and collaboration is not as obviously anti-competitive and are sometimes needed, which creditors can be analogized to, courts will move to the substantive Rule of Reason test. Therefore, although a company plaintiff could plausibly assert as seen in Robertshaw, creditors are separate competitors within the capital structure and therefore “potential competitors in the market that the agreement affects,” given the need for a certain degree of cooperation, the per se rule would not apply.

Promoting or suppressing competition — it stands to Reason?

In these more complicated cases, where creditors — even within the same debt instrument — are likely viewed as potential competitors, the Rule of Reason must be applied to cooperation agreements which affect the market in which they compete. We therefore move to the five part substantive analysis as to whether the cooperation agreement between the creditors is one that promotes competition or one that suppresses competition.

1. Restraint of trade — A company can likely show that cooperation agreements restrain trade within the meaning of the Sherman Act. Just like an agreement among various car manufacturers to sell cars at a coordinated price benefits the sellers but restrains trade, creditors agreeing to only speak to the company who is looking to buy back or exchange a limited number of debt if certain conditions are met, may benefit the creditors but does restrain the company’s ability to access the market available to it on the most competitive terms — and might even be considered an illegal boycott under Section 1.

2. Quick look — Creditors who signed the cooperation agreement, can likely pass the quick look justification test. Unlike car manufacturers who are purely adversaries in the market, creditors would argue that they are co-owners of a common asset, debt of the corporation, and a cooperation agreement necessary to prevent creditors from being frozen out of the process and in fact the agreement will allow the company to reach the highest value deal by setting ground rules which may prevent subsequent litigation and allow the company to get a deal that has more value. Looking at precedent, a company would certainly prefer a result more similar to Magenta Buyer than Incora (transactions discussed here and here, respectively).

3. Significant magnitude — Although it’s hard for the company to argue and show proof that, but for the cooperation agreement, the company would have gotten a better deal, the fact that the creditors will not even speak to the company and hear its offer likely could satisfy this requirement. The company under certain cooperation agreements is significantly limited in how it can even go into the “market,” as any transaction the company would pursue requires existing creditors who therefore possess significant market power and limiting the company’s options for how it can negotiate has a detrimental effect. Creditors can argue in response that the minimum conditions required under the agreement are the minimum conditions they would expect anyway and therefore the restraint is of minimal significance.

4. Justifications — As discussed briefly in the “quick look” paragraph above: (1) Creditors hold a shared asset, debt of the company, and accordingly could argue that disorganized bargaining and disparate treatment could lead to holdout power and subsequent litigation and without communication and transparency could restrain the company from exploring the best deal. The company would disagree with this characterization since even without a cooperation agreement, the company could choose to involve all creditors and offer as much or as little transparency as it believes necessary to reach the best deal and this concerted action simply restricts the menu of available options. (2) Certain creditors will argue that, absent cooperation agreements, they may be frozen out of the deal, which would be litigated after the fact, since most credit agreements and indentures give wide latitude to a majority or super-majority of a class. Still, this seems to take away the company’s business judgement regarding what type of transaction, and with whom, it should pursue. Finally, one additional justification the creditors could offer is that the car manufacturer analogy fails further since the creditors are not the ones selling a car here. The creditors can be more properly analogized to car owners, who already own the car — or rather parts of a whole car — but are bargaining with the manufacturer over a replacement car they are being told they have to buy but may not want. No creditor wants to be left with just the wheel if all the other creditors agree to trade in the rest of the car, and so they are just setting ground rules to incentivize the company to make a competitive offer, thereby promoting competitive goals.

5. Balancing — Here there are arguably competitive effects, and accordingly a court will have to decide which effect is greater. It is hard to say with certainty which way a court will lean. Given that the plaintiffs will have discretion about where to bring this action, it is worth noting that they will probably bring it in a more “pro-company/business” court.

Conclusion

Cooperation agreements have been used to reach competitive and and comprehensive agreements between companies and their creditors. Still, even if creditors are more like NFL teams than they are car manufacturers, that does not mean that these agreements are not subject to section one of the Sherman antitrust act and would not be considered a restraint on trade. It is only a matter of time until some law firm brings this challenge, and when they do, it will be a challenge to be taken seriously, especially since if a violation is found, creditors would owe the company treble damages.

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