Lender on lender violence: Uptier Priming Debt

In the US, position enhancing transactions (PETs) are the PE world’s latest tool for liability management. In the UK, the abuse principle prevents majorities from expropriating minorities’ rights in English law governed debt documents. The application of the abuse principle has grown from its origins in English company law by analogy to the relationship between shareholders but case law shows that the abuse principle is not absolute; it does not require equal outcomes between lenders, nor, fundamentally, does the analogy work for the leveraged loan market. Even post Assenagon, a way through for PETs under English law is now possible, argue James Grand, Ben Jones and Hannah Ward of Simmons & Simmons LLP.

Few excitements await structured credit lawyers caught in the daily cut’n’paste of CLO offering circulars. Alas: at a minimum of 400 pages, printed on single-sided A4 and laid end to end, it will take 3.236m CLOs to reach the moon. Nonetheless, some novelty occasionally sends a tremor through the 10pt type. Remember when risk retention was young? Dodd-Frank? The Volcker Rule? Then along came ESG to daub its wattle over the Risk Factors. And, all the time, the party has been somewhere else: Lev Fin and PE – that was where capitalism wrenched the flesh; where, chained to a desk, the eagle arrived each day to eat your lawyer’s liver for giving humanity to fire.

Now events have brought a collision. The current vintage of European CLO offering circulars has extended its vocabulary to permit CLO managers to invest in “Uptier Priming Debt” (See Glossary 1).

This perkily named category of eligible assets describes the super priority debt that results where a distressed debtor company colludes with a sufficient majority of its lenders to exchange their existing holding of first or second lien for the new super priority debt, on condition (in the form of an “exit consent”) that the lenders vote to release the rights and covenants that protected their original holding but – and here’s the twist – the exchange offer isn’t made pro rata to all the existing holders – only to those holders who are invited and commit their votes to achieve the requisite majority. The ‘winning’ majority trade some combination of new funding, extended maturity and a discount on the principal exchanged, against a higher coupon and improved probability of repayment on insolvency. The ‘losing’ minority are subordinated, relegated down the new order of priority, with the all-but-certain prospect that they will be wiped out if the debtor company becomes insolvent.

Glossary 1: "Uptier Priming Debt" means any Collateral Debt Obligation that is Superpriority New Debt or any Rolled Senior Uptier Debt acquired by the Issuer resulting from, or received in connection with, an Uptier Priming Transaction.

"Uptier Priming Transaction" means any transaction effected in connection with a Collateral Debt Obligation held by the Issuer, in which (x) any of the current creditors (with respect to such Collateral Debt Obligation), including the Issuer, have the opportunity to exchange their current debt for new debt (without any requirement to pay additional amounts, other than reasonable and customary expenses, e.g., transfer costs) issued by the Obligor (or an Affiliate of the Obligor) that will be senior in priority (including structurally senior) to the Collateral Debt Obligation held by the Issuer ("Rolled Senior Uptier Debt") and (y) to the extent offered in connection with the issuance of such Rolled Senior Uptier Debt, new debt is issued by the Obligor (or an Affiliate of the Obligor) of such Collateral Debt Obligation which will be senior in priority (including structurally senior) to the Collateral Debt Obligation held by the Issuer ("Superpriority New Debt"); provided that the Issuer shall participate in Superpriority New Debt only to the extent that it is offered and participates in the related Rolled Senior Uptier Debt.

A history of PETs¹

The short history of this technique comes from the US.

In June 2020, Serta Simmons (Serta), a struggling North American bedding manufacturer and distributor, wrong-footed by direct-to-customer competition, restructured its borrowings using an “exit consent"² to create a $200m new money super priority ‘first out’ tranche and exchanged c. $1.3bn of its first and second lien loans in to a new $875m super priority ‘second out’ loan, thereby relegating holders of c.$895m of the first lien and c.$128m of the second lien to a position of third and fourth priority.³ To no avail: Serta filed for bankruptcy in January 2023 having spawned an industry of “position enhancing transactions” (adorably abbreviating to PETs): J Crew, Boardriders, TriMark, Wesco (Incora), Envision to name a few.

Numerous PET variations have now come into being. “Drop downs” (e.g. J Crew) may use “exit consents” to allow a business’s valuable assets – typically IP rights – to be put into an unrestricted subsidiary, where they can be refinanced in exchange for existing debt. Unrestricted subsidiaries falling outside of the requirement to guarantee an existing credit agreement are not bound to the same extent by its covenants and defaults. As such, the debt incurred by unrestricted subsidiaries is structurally senior. In “double dips” (an old idea finding oxygen) a new subsidiary enters into a financing guaranteed by the company. Proceeds are then on-lent to the company, with the aim of giving creditors two separate claims for the full amount of the financing in any insolvency of the company without infringing rules against “double recovery.” Other PETs may use some combination of the above and new and enhanced techniques will develop, as they invariably do.

¹“Position enhancing transactions” a subset of liability management exercises (“LMEs”)
²In the US, the principle that, despite their coercive effect, “exit consents” for the release of bondholders’ rights and covenants (but falling short of expropriation and subject to section 316 of the US Trust Indenture Act of 1939)), do not breach the duty of good faith between issuer and bondholders, was first accepted in Katz v. Oak Industries Inc. (1986) 508 A 2d 873.
³See Serta’s Chapter 11: Upholding the Uptier Updated: July 14, 2023 https://restructuringinterviews.com/blogs/restructuring/serta-chapter-11.

If PETs are now one of PE world’s main tools for liability management, it is not surprising that CLO managers should want clear authorisation in their documents to sign up whatever “cooperation agreement” solicits their binding and unilateral commitment to participate with the majority in a PET. Not to be authorised would amount to self-harm. Although, by itself, a single CLO would hardly be worth soliciting for this purpose, the “cooperation agreement” will likely require all a manager’s CLOs, warehouses and funds, together with those of its affiliates, to agree to participate in the PET. Debt managers and affiliates will need to check documentation and the capacity of each fund holding the relevant debt to deliver on any commitment to exchange. But, beyond the case for carrying out appropriate due diligence before signing up, abandoning the “pro rata” treatment of creditors to restructure a company’s debts leaves managers, investors, liquidity and swap providers and practitioners with many reasons to feel queasy.

After all, one of the 5 C’s of credit is ‘character’. What carefully nurtured relationships with other lenders and investors may be sacrificed through the misalignment of interests in a PET? How do you discover, even, if a PET affecting your holding is in preparation? Strict confidentiality is essential to execute PETs: initiating the necessary actions within the debtor company, due diligencing the existing credit agreements, signing up the necessary majority, negotiating the commercial deal and documenting the outcome before any excluded party gets wind of what is afoot and organises some countermove or demands that it be brought into the exchanging majority as the price of silence. Worse, the record of PETs saving companies from sliding into insolvency is not encouraging so, if you lose out on the exchange, you lose twice. The zero-sum nature of the outcome makes litigation by the aggrieved minority all but inevitable.

Serta’s restructuring, while establishing the legal feasibility of PETs in the US, illustrates these risks well. Those left out of the uptiering exchange included Apollo and Angelo Gordon, who, with others (together, the non-participating lenders), had built up positions in the company’s tier 1 and tier 2 debt and, confident of their position, had proposed a “drop down” exchange to the company, which, if implemented, would have left everyone else in the same forlorn situation as the non-participating lenders’ following the uptiering. In the event, Serta’s PE sponsor, Advent, opted for the more generous uptiering transaction put together at lightning speed by the participating lenders (known as the Gibson/Centerview group). As the non-participating lenders reflected at the time, “Advent has played our two groups off of each other and continues to do so… We concede that the Gibson/Centerview group has outmanoeuvred our group.” You live by it; you die by it.

The irony of the non-participating lenders’ complaint in Serta was not lost on the court in the subsequent litigation to challenge the uptiering. The main legal issues of interest here were whether the terms of the credit agreement prohibited the uptiering transaction (it didn’t) or the uptiering transaction breached the implied covenant of good faith and fair dealing (it didn’t either). To the court, it was clear that the lenders were among the most sophisticated players in the market. Their exposure to the risk of PETs could have been mitigated in the credit agreement with the addition of “a few carefully chosen words” (see Glossary 2). In the end, the parties to the litigation got the bargain they struck.

You don’t have to be a US litigator to see that the sure-fire winners from this decision are debtor companies which, absent a specific prohibition in the terms of their debt, can get to pick and choose the outcome they wish for their lenders - or, more accurately, in the case of the highly levered companies to which PETs apply, their private equity owners get to pick and choose. Some commentators have suggested that the court's reasoning in Serta was diminished by the judge’s observations to the effect that the nature of the parties involved meant that there was “no equity to achieve in the case” – and, on this basis, you can see some limits to the precedent set by Serta.

It’s tempting to divert into polemics for a moment. Upholding the validity of “big boys’ rules” is fine so long as only “big boys” are playing and, with PETs, isn’t that the overwhelming reality? To which the pious retort is that bad rules make for bad markets, to the disservice of all. New entrants in the market are small and the most vulnerable. Allowing PETs more generally alters incentives and so will change behaviour. LP investors in PE funds will want to see the envelope pushed. If ‘down-tiering’ works once, what stops it working twice? The debt markets and CLOs on which PE depends need certainty of treatment to model and price credit risk and to set portfolio rules and credit ratings. You can’t estimate loss given default if your historical models are based on “pro rata” treatment and, as a result of PETs, the recovery in any distress scenario can switch suddenly, and entirely arbitrarily, from, say, 75%+ to zero on individual holdings in the same instrument. Many may also have a philosophical objection to the risk of PETs driving an assumption that the solution to an overleveraged business is to add more debt. Well, maybe. But no wonder debt market participants are queasy.

CLO investors checking to see if their deals allow for Uptier Priming Debt might also ask how their CLO manager evaluates the exposure to PETs. “Restructured Obligations” (and similar) have long been a necessary constituent of CLO portfolios. Eligibility Criteria commonly require obligations to be secured by a first priority security interest and at least a 66.6% majority for any change that is adverse to the interests of the holders, but that does not stop a PET. If PETs can be blocked by a few carefully chosen words in the debt terms (see Glossary 2), which bonds and loans in the portfolio have the necessary blockers? If PETs are a risk in documents governed by US laws (i.e. New York law), do PETs also work under English law?

Which begs the question: would the conclusion in Serta have been different if the terms of the credit agreement were governed by English law?

Glossary 2. A few carefully chosen words:
A “Serta blocker” requires that the consent of all affected creditors is needed for amendments that “subordinate, or have the effect of subordinating, the obligations hereunder to any other indebtedness [or] the liens securing the Obligations to liens securing any other indebtedness.”

A “Chewy Blocker” refers to provisions of a credit agreement intended to prevent a subsidiary guarantor from being released from its guaranty obligations because it is no longer wholly owned by the borrower.

A “J. Crew blocker” prohibits the transfer of specified assets (commonly limited to IP that is “material” to the overall business) to unrestricted subsidiaries.

Informing the development of US laws in relation to liability management transactions (tender and exchange offers, consent solicitation fees, exit consents and the like) is Section 316 of the US Trust Indenture Act of 1939. Section 316 requires unanimous consent for the amendment of terms affecting bondholders’ rights to payments of interest and principal. As a result, the emphasis of innovation in US restructurings has been to avoid the obstructions caused by ‘hold outs’ and their enrichment at the expense of other lenders ready to accept losses to facilitate a solution for the debtor without formal proceedings⁴. The intellectual force of this legacy goes some way to explaining US courts’ understanding for restructuring measures that sanction non-participation or are otherwise coercive of the minority, provided such measures are permitted by the terms of the debt.

English law started from a different place. To the courts, it was axiomatic that powers given to majorities in a company’s constitution allowed them to control their own but also others’ property and so were liable to abuse. The law should therefore protect the minority from being confiscated or expropriated. Reconciling this concern with the problem of “hold outs” led English law down two parallel tracks.

Statutory “schemes of arrangement”⁵ were introduced early on to facilitate company restructurings: providing for a court sanctioned process to compromise the debts and/or reallocate the capital of a company on the basis of a 75% majority of each relevant class. The court’s role was to ensure the overall fairness of the scheme and the legal certainty of its outcome. Fairness in this context includes testing whether creditors in each relevant class would be treated in same way in whatever the alternative may be to the scheme - usually insolvency – thereby upholding the “pari-passu” principle⁶. Just as Section 316 has at some level informed the approach of the US courts to PETs, the availability of schemes of arrangement may influence the English courts.

Separately, a legal principle (the “abuse principle”- see Glossary 3) emerged that the powers of majorities to bind minorities must be exercised in good faith and (in the case of debt⁷) bona fide for the benefit of the relevant class as a whole – not merely individual members. The test here is one of “rationality”; could no reasonable person honestly conclude that the decision was capable of being of benefit to the relevant class as a whole?⁸ The popularity of schemes of arrangement in the UK has meant that, while the English courts have not enjoyed quite the scope or continuity of experiment afforded to their US counterparts, to consider the “abuse principle” in relation to PETs, they still have had plenty to say on the use of “coercive restructuring tactics” in respect of “exit consents” and consent solicitation payments.

Applying the “abuse principle” to the facts of a Serta-like PET throws up some obvious challenges. To begin with (and often overlooked), the powers given to majorities under English law are to be construed so that they are not extended by ambiguities beyond their intended application. So, for example, a power of the majority to modify bondholders’ rights against a company does not, in principle, include a power to relinquish those rights⁹. In the absence of clear words to authorise each of the steps required for a PET, English law would likely not permit the sort of ‘purposive’ reading of the powers on which the majority in Serta depended to enable the issuer to create and exchange for the new super senior debt.

Second, the need for strict confidentiality in preparing the PET and, by design, the sharing of information with only the smallest and/or the most favoured and select group needed to authorise the transaction, immediately raises an inference of bad faith and the oppression of the minority by the majority¹⁰. An aggravating feature is that if non-participants are not even made aware that a PET is being prepared, then they cannot coordinate an alternative.¹¹ However, it is worth remembering that the participating lenders in Serta triumphed because, although the group planning the “drop down” was taken by surprise, it seems to have assumed nothing would come of any alternative. In these circumstances, there was no breach of the US’s implied duty of good faith and fair dealing. In the same circumstances, before an English court, what act of “bad faith” by the winning majority could the plaintiff minority prove?

Finally, a Serta-style “exit consent” authorising the creation of a new super senior class of debt for the benefit of a chosen few, subordinating the existing holdings of the non-participating lenders and releasing rights and covenants protecting them, and the resulting asymmetry of the outcome between participating and non-participating lenders in a PET, at first sight, all but flies in the face of what may rationally be considered to be an exercise of voting power for the benefit of the relevant class as a whole – not merely individual members.

Glossary 3. The most famous formulation of the English law “abuse principle” comes from Lindley MR in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 concerning the alteration of the articles of a company: “the power conferred… must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed.” To which Vaughan Williams LJ, sitting in the same case, appended “I also take it to be clear that the alteration must be made in good faith; and I take it that an alteration […] which involved oppression of one shareholder would not be made in good faith.”

⁴Fuelled, at least in part, by the emergence of specialist distressed investors opportunistically buying in to an issue for cents on the dollar, then to be paid out at par, at the cost of the debtor company’s long term investors.
⁵Now Part 26A of the Companies Act 2006.
⁶Re AGPS Bondco plc [2024] EWCA Civ 24
⁷Case law has extended the principle to debentures so that “the benefit of the company as a whole” should instead be read as referring to the benefit of the lenders [of the relevant class] as a whole (Mercantile Investment and General Trust Co v International Company of Mexico [1893] 1 Ch 484) and applied as per Viscount Haldane in British America Nickel Corporation, Limited v MJ O’Brien, Limited [1927] AC 369 p. 371.
⁸As per Bankes LJ at para 85 in Shuttleworth v. Cox Brothers and Company (Maidenhead), Limited [1927] 2KB 9 and cited by Rimer J at para 106 of Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch).
⁹Mercantile Investment and General Trust Co v International Company of Mexico [1893] 1 Ch 489.
¹⁰This factor has been decisive in English cases relating to consent solicitation payments in other contexts. In British America Nickel Corporation Ltd v MJ O’Brien Ltd [1927] AC 369 a scheme failed after it was revealed that certain benefits had been offered in secret to a participant whose consent was crucial to approving the scheme. Conversely, in Goodfellow v Nelson Line Liverpool Ltd [1912] 2 Ch 324, the documents openly provided for benefits to a specific party whose consent was crucial to the success of the scheme, and was upheld.
¹¹As per Briggs J at para 85 in Assénagon Asset Management SA v Irish Bank Resolution Corpn Ltd (formerly Anglo Irish Bank Corpn Ltd) [2012] EWHC 2090 (Ch)

The force of the precedent set in this connection by the Assenagon case¹² justifies some explanation here. Following the 2008 credit crunch, Anglo Irish Bank failed and was nationalised. As part of its 2010 restructuring, the bank proposed to issue a senior class of debt with a sovereign guarantee, for which holders voting in favour were entitled to exchange the bank’s existing subordinated notes in the ratio of €0.2 for every €1 of principal held. As a condition to the exchange, holders were required to approve a resolution giving the bank the right to redeem the subordinated notes of holders not agreeing to the exchange for €0.01 per €1000 of principal outstanding. The resolution was approved by a 90% majority. Non-exchanging holders were redeemed at a 100,000^th of face value. There was no common interest between the majority and the minority in the outcome of the resolution to approve the new redemption rights.

Assenagon, an asset manager, sued and succeeded in overturning the resolution on a technicality, but the judge (Briggs J) made plain that their case would also have succeeded because of the exit consent’s coercive threat to the minority and the destruction of the value of the notes being of no conceivable benefit to the noteholders as a whole; all of which amounted to an abuse of the majority’s powers in approving the redemption rights.

¹²Assenagon Asset Management SA v Irish Bank Resolution Corpn Ltd (formerly Anglo Irish Bank Corpn Ltd) [2012] EWHC 2090 (Ch)

The judgment of Briggs J in Assenagon still leaves English law some flexibility for manoeuvre in relation to PETs.

The objective of the resolution in Assenagon and the manner of its implementation was extreme. No counter was possible. No mitigation was offered to the minority.¹³ PETs subordinate existing debts contractually or structurally to the new super senior class: they do not simply write-off the non-participating lenders’ debt. (Indeed, if the trust deed in Assenagon had to comply with Section 316 of the US Trust Indenture Act of 1939, the requirement for unanimity would have prohibited the change to the redemption rights from the outset). In other circumstances, relaxations of certain covenants (negative pledges, non-disposal covenants and the like) may facilitate the raising of new funds and so be beneficial to the existing lenders.

Other cases show that, in a restructuring context, principle can be surrendered to the practicalities of the situation.¹⁴

¹³At para 76 Briggs J acknowledged in his judgment that the outcome of the Assenagon case might have been different if the exchange had included a “drag along” right for the minority.
¹⁴Goodfellow v Nelson Line Liverpool Ltd [1912] 2 Ch 324 and Azevedo v IMPCOA – Importacao, Exportaacao e Industria de Oleos Ltda [2012] EWHC 1849 (Comm) uphold the offering cash payments and other inducements selectively to individuals whose participation is crucial to the success of a scheme. However secrecy about inducements was fatal in British America Nickel Corporation Ltd v MJ O’Brien Ltd [1927] AC 369.

Some 10 years before Assenagon, Redwood¹⁵ (see Glossary 4) is authority that, provided there is no bad faith, “the benefit of the lenders as a whole” does not require equal outcomes between different lenders in the context of restructuring a loan. If there is a benefit to the lenders as a whole, there can be winners and losers. The loss to one class can be the others’ gain. That fits PETs provided the benefit to the underlying borrower equates to a benefit for the lenders as a whole. A restructuring by a majority that simply wishes to improve its own position at the expense of the minority will still fail the test of good faith¹⁶.

Redwood also illustrates the potential disaster that awaits a distressed debtor if a court, applying the abuse principle, must then undo a restructuring, with the risk that the debtor will suffer some irreparable harm or be forced into a formal insolvency. This was scarcely a factor in Assenagon. Anglo Irish Bank was already insolvent and had been taken into state ownership. A bespoke legislative solution was always the alternative, and the consequences for the debtor of reversing the “exit consent” did not weigh heavily in the court’s reasoning when applying the abuse principle.

Nonetheless, the underlying test of good faith for the benefit of lenders as a whole still stands.

Glossary 4. Redwood relates to the restructuring of a distressed company’s debts.

The lenders under a fully drawn B Facility formed the majority authorising the waiver of a condition precedent that permitted the defaulting borrower to drawdown on a smaller (but undrawn) A Facility under the same agreement.

The drawing under the A Facility was used to repay the B Facility in part. The repayment schedule of the A Facility was considerably longer than the B Facility. Switching the drawings between the B and A Facilities, optimised and extended the borrower’s repayment profile.

For lenders whose pro-rata exposure to both Facilities had not changed, the transaction was cash neutral day one. However, some B Facility lenders had sold their A Facility commitments, leaving the A Facility-only lenders as net payers-in, with the benefit going to certain B Facility lenders, whose overall exposure was reduced by the same amount. The request for the waiver to which the majority acceded was initiated by the borrower. In the event, 14 of the 29 lenders benefited.

Despite the real prejudice and cash cost to the A Facility-only lenders of allowing the drawing (and their quite legitimate expectation that they were protected from that outcome by the condition precedent) the court upheld the waiver on the basis that there was no evidence of bad faith by the majority and the resulting overall reduction in the Facilities agreed with the borrower was of benefit to all.

¹⁵Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch)
¹⁶As per Rimer J, paras 87 and 105 in Redwood.

So what is the future for PETs in English law?

The availability of schemes of arrangement will continue to pose a threshold challenge to the usefulness of PETs. If “a few carefully chosen words” prohibit a PET, a scheme may be the only option. Schemes, once agreed and sanctioned by the court, ensure legal certainty. For anyone subscribing a new money issue in a PET, the prospect that a challenge by an excluded minority may invalidate the transaction after the money has gone in (to the benefit of that minority) makes the advantage of a court-sanctioned scheme obvious. Schemes may also apply to non-UK companies with English law debts. The advent of schemes permitting cross-class cram-downs of hold-outs enhances their flexibility if the relevant conditions can be met. However, the jurisdiction of the UK courts is limited. Nor can a company be obliged to use a scheme of arrangement in its dealings with its creditors. There may be practical and other limitations that rule a scheme out. Schemes are public processes and reveal the borrower’s problems to the world. The issues between lenders may be intractable. A 66²/₃% majority commonly provided for in loan documentation is materially less than the 75% needed for a scheme. Where the option of a scheme of arrangement is available, a court may question why a PET should be allowed to succeed if it would fail the test of fairness as a scheme.

The growth of the PE industry, funded on a highly levered basis by specialist lenders and CLOs, changes something in the reality from where English law’s principled “pro-rata” approach has developed.

What was originally a principle of English company law has spread by analogy to the relationship between shareholders. It is hard to characterise leveraged loan investors as engaging in some common enterprise, let alone from the perspective of the underlying debtor company. The money borrowed is not, after all, invested in the borrower’s business or working capital but instead goes to paying a purchase price to former shareholders (calculated as a multiple of EBITDA) or to funding a dividend recap. The loans incurred for this purpose are liquid, drafted to be easily tradeable, bought and sold as investments by highly sophisticated participants, and refinanced by the PE owners the moment market conditions stack up. Lenders are selected on the basis of approved lists and perceived ‘bad actors’ are excluded from acquiring a position by the debt terms. In reality, the lenders’ customers are the private equity owners. The debts are incurred for the benefit of a company’s owners and not the company; but, if it all goes wrong, the lenders’ recourse is to the company alone.

The interests of the company, with its real world customers, trade creditors and employees, are not for nothing. Primly testing the good faith of the majority in agreeing a desperately needed restructuring for the benefit of all lenders, grants this hyper-sophisticated community protections beyond what they are apt to negotiate for themselves (see “a few carefully chosen words” above) and creates a dilemma in the law’s priorities. The consequences of violating the abuse principle are binary. If the remedy of the aggrieved minority threatens irreparable harm to the debtor company or will force it into insolvency, absent some egregious facts, a court must pragmatically opt for the lesser of two evils or stretch itself to compensate the injury by some other means: damages or a forced rebalancing of the exchange to preserve the economics of the restructuring for the debtor on a more equitable basis, perhaps? There is room for judicial creativity.

PETs are not going to vanish as an idea; nor will the abuse principle. The burden of proving bad faith will still fall on the plaintiff minority. Taking the lead from Redwood, might it be possible to implement a PET that did not raise a question of bad faith by the majority? The abuse principle should comfort lenders that, away from transactions to relieve over-indebted companies, the scope for experiment with PET-like devices is limited. A PET by a majority that simply wishes to expropriate the minority or to fund the owners’ dividends or acquisitions at the minority’s expense will fail a test of good faith.

Consider, however, the following scenario: a company, whose debt is trading at a fraction of face value and is desperately in need of new funds, (uninhibited by any “carefully chosen words”) offers to “uptier” the necessary majority, which is selected through a reverse auction of the rate at which a lender will agree to exchange its current holding into new second tier debt, and approve a new money super-senior debt issue. No discretion is used to select the majority. What “oppression” or “bad faith” is there between the majority and the minority?

Given the current distress in PE world, even with the deterrent of Assenagon, the English courts may soon be asked the question in relation to a PET. Good faith is not an indivisible absolute, independent of its coordinates. The argument made by Serta in the US courts for upholding PETs, while not binding, illustrates the standard of ‘good faith and fair dealing’ to which the leveraged debt market now subscribes in restructurings. And here the significance of EU CLOs providing for investments in Uptier Priming Debt will come into play. The expectations of market participants that investing in Uptier Priming Debt is both permissible and desirable – regardless of the outcome - will be there in the CLO offering circulars for all to see.