Closing the Door on Open Markets - Serta Confirmation Opinion Defines an 'Open Market Purchase' and Finds Transacting Lenders Acted in 'Good Faith'

Seth Kleinman, Sean Daly, and Darren Smolarski authored an article for the New York Law Journal about the U.S. Bankruptcy Court for the Southern District of Texas issuing an opinion approving confirmation of the Chapter 11 plan of Serta Simmons Bedding and its affiliated debtors, marking another win for lenders holding a majority of loans in a syndicated debt instrument.

“The District Court’s observation that the uptier transaction ‘subverted’ the lenders’ expectations regarding the priority of, and therefore the rationale for, their initial investment highlights the importance of this issue for the over $3 trillion leveraged loan and high-yield bond markets,” the authors wrote.

They added: “The opinion, which confirmed the terms of the plan, crystallized the non-PTLs’ [participating term lenders] worst fears: the disclosure statement for Serta’s plan estimated the non-PTLs’ recovery at 0.6%, whereas the PTLs were estimated to receive a 75.6% recovery. Without their consent, the non-PTLs saw their loans go from first in the repayment priority to effectively out of the money and a near-total loss on the approximately $862 million of Non-PTL first lien loans.”

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