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The decision in the Robertshaw adversary proceeding is a mixed bag for distressed debt investors, and the market could be left trying to untangle its nuances for a while — especially because the judgment revolved around the capitalization of a single term in the super priority credit agreement.

On the one hand, Judge Christopher Lopez for the US Bankruptcy Court for the Southern District of Texas found that the appliance partsmaker violated its credit agreement through a December transaction engineered to keep it out of bankruptcy. That could curtail similar maneuvers by other lenders in the future.

On the other, Judge Lopez determined that Invesco is entitled to monetary damages but not to any equitable remedies, and that an ad hoc group of lenders to Robertshaw consisting of Bain Capital, Canyon Partners, and Eaton Vance did not breach the credit agreement and still count as required lenders. Lopez found that Robertshaw’s financial sponsor One Rock likewise did not breach the agreement.

The verdict issued Thursday (June 20) is a win for Invesco, which positioned itself to steer Robertshaw’s bankruptcy only to be pushed out of the process by the ad hoc group, but also a win for the ad hoc group and One Rock since Invesco’s required lender status will not be restored.

“Today’s landmark ruling marks a major milestone in Robertshaw’s restructuring process,” Robertshaw said in a statement issued after the decision. “Robertshaw is pleased to move forward with the plan confirmation process and Court approval of the sale of the Company to the purchaser and continue serving our global customer base with our best-in-class products.”

In writing this opinion, Judge Lopez considered more than just this transaction, but the bigger issues at it relates to liability management exchanges and the role of the distressed debtor.

During closing arguments, Judge Lopez expressed concern over parts of the transaction, saying “amendments two through four trouble me.” He specifically noted that the fourth amendment put in place by Invesco suggested that the company would breach the credit agreement if it did not file for bankruptcy, appoint Invesco as the stalking horse and appoint an independent director who “couldn’t really be independent.”

Judge Lopez then lauded independent director Neal Goldman for saying no to a forced bankruptcy and instead finding what he believed was the best transaction for the company through amendment number five with the ad hoc group.

Still, Judge Lopez acknowledged that the amendment five solution needed to comply entirely with the contract, which unfortunately for Robertshaw was not the case here. Going forward, we can expect much more carefully drafted documents, with the lenders trying to assert as much control as possible and companies painfully aware that loopholes may be harder to find.

Judge Lopez’s decision hinged on the capitalization of the term “Subsidiary,” because section 6.01 of the super priority credit agreement restricts the incurrence of debt to “Holdings, the Borrowers and each Subsidiary.” If the word subsidiary was used as a defined term, the entity used for this transaction (RS Funding) would fall under this category and accordingly be subject to the restrictions.

Robertshaw argued that capitalizing “Subsidiary” in this context was a scrivener’s error — "an overlooked typo never intended by the parties,” as described by Robertshaw’s counsel. However, Judge Lopez did not find that a scrivener’s error could be found here since there was no clear and convincing evidence of error nor absurd result, and an Invesco witness claimed he relied on the capitalized term.

The SPCA contemplates a remedy for when a Subsidiary incurs debt that violates the debt limitation provisions of 6.01 in the form of mandatory prepayments, explained Judge Lopez, which provides that 100% of net proceeds received as part of the transaction must be applied to prepay the outstanding term loan. Here, Robertshaw did not apply 100% of the proceeds and therefore breached the contract.

It is possible Robertshaw will appeal the ruling — though it does seem like this is the best outcome for everyone. Still the decision sends a clear message to market participants that haven’t heard a judge weigh in on a liability management exercise like this one since Judge David R. Jones’ decision in the Serta Simmons case last year.

Serta Simmons involved an uptier transaction where the company received $200m of new-money-financing from one group of first-and-second-lien term loan lenders — known as the “participating term loans” or “PTLs” — who redeemed its loans in exchange for $875m of super-priority loans, effectively subordinating the first-and-second-lien term loans left behind — the non-PTL group.

As part of the Serta transaction, the debtors utilized Section 9.05(g) of the credit agreement which allows lenders to “assign all or a portion of its rights and obligations” on a non-pro rata basis through an open market purchase to retire the PTL group’s loans. The term “open market” is not defined in the credit agreement and the non-PTL group asserted that because the transaction was done behind their back and thus “in private,” the transaction could not be considered an open market purchase.

Judge Jones in a bench ruling concluded that as a previous practitioner and lawyer he believes there is no ambiguity in what open market purchase means in the context of the credit agreement, and the debtors transaction with the PTL group falls squarely within the meaning of open market purchase. This decision is currently on appeal in the fifth circuit.

The facts at issue in Robertshaw are complicated, so let’s back up for a moment to review them.

Robertshaw makes parts for appliances like washing machines and refrigerators. In May of 2023, as the company faced liquidity constraints and other challenges linked to the pandemic, a group of creditors engaged in an uptiering transaction that put other creditors further back in line for repayment.

The group behind the uptiering transaction consisted of Invesco, Canyon, Bain, and Eaton Vance. Subsequent to that move, Invesco pushed for four additional credit agreement amendments that would essentially put it in charge of Robertshaw’s bankruptcy process. Those amendments also set Robertshaw up for a January 2024 Chapter 11 filing.

Notably, Invesco did all of this without looping in the other three firms it teamed up with in the May 2023 uptiering. Based on witness testimony (more on that in a second), the firms were irate, and tried to understand what their options were.

The decision the ad hoc group — now consisting of Bain, Canyon, and Eaton Vance — landed on was to team up with One Rock and Robertshaw to repay virtually all of the appliance partsmaker’s debt that Invesco held while setting themselves up as the new required lenders.

Echoing the ad hoc group’s reaction to its own machinations, Invesco was caught off guard and ended up suing over this latest transaction in New York court — litigation that ended up being superseded by Robertshaw’s bankruptcy filing, bringing us to the adversary proceeding in US Bankruptcy Court for the Southern District of Texas.

Witness testimony painted a picture of surprise and frustration on the part of the ad hoc group.

When asked if he was “angry” after learning of the amendments, Andrew Hailey of Bain Capital said yes. Scott Borenstein from Canyon said he was “shocked” when he learned of the transaction.

Despite the emotional reactions described, witnesses said that those feelings did not motivate the fifth amendment to the credit agreement — the one being challenged in the trial by Invesco.

Witnesses from Invesco likewise described their surprise when they learned of the amendment put in place by the ad hoc group without their knowledge.

In the end, Lopez determined that the messages and commentary from the ad hoc group didn’t indicate there was ill intent behind the transaction that stripped Invesco of its required lender status.

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Robertshaw decision crowns winners on both sides

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