The Default Position: LevFin’s Latest Game Just Got Shut Down...Sort Of
When 3 Words in Your Documents Can Cost You Billions
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The latest trick in distressed debt is pissing off lenders, and for good reason.
Here’s the deal with non-pro rata “uptiering”—it’s legalized theft dressed up in banker’s clothing.
Normal lending is simple: everyone who loans money at the same level gets treated equally. You’re either first in line or you’re not. No games, no surprises.
But some genius lawyers figured out you could blow this whole system up. Here’s how:
A group of hedge funds spots a company drowning in debt. They buy up just over 50% of the loans, then cut a deal: they’ll provide new money, but only if they get to jump to the front of the repayment line. Everyone else? They can go screw themselves.
Why do companies and lenders do this? Because it’s cheaper than playing fair and easier than real restructuring. Plus, until now, they’ve been getting away with it.
Let’s be clear about what this really is: It’s a massive transfer of value from one group of lenders to another. Pure and simple. The fact that it’s done with legal documents instead of masks and guns doesn’t change what’s happening.
The market got so comfortable with this bullshit that it became standard practice. Your position could drop 30 points just because you weren’t invited to the party. And everyone acted like this was perfectly normal.
That was the case until two courts in two different jurisdictions looked at the same deal structure and came to completely different conclusions.
The Serta Story: When Creative Financing Meets Reality
Remember that mattress company trying to rewrite lending rules? Serta was no small player. We’re talking about the company behind Serta and Beautyrest—the beds you see in every department store in America. But by 2020, they were in serious trouble. Drowning in debt and sales were tanking.
That’s when a group of savvy lenders saw their opportunity. Already holding a chunk of Serta’s debt, they approached with what would become lawyers’ new favorite playbook.
The deal? A group holding 51% of their term loans would provide new money, but only if they got to exchange their old loans for new “super-senior” debt that jumps to the front of the line. The other 49%? They didn’t even get a phone call.
Here’s a sobering fact: non-participating lenders saw their position so deeply subordinated that their recovery prospects plummeted. The new super-senior debt was worth nearly full value, while the excluded lenders saw their position crater.
But here’s where they screwed up.
Their loan agreement only allowed “open market purchases.” Serta’s lawyers tried arguing that their private backroom deal counted as “open market” because... well, just because.
The Fifth Circuit wasn’t having any of it. They said what everyone was thinking: A private deal with hand-picked lenders isn’t an “open market” any more than a private club is a public park.
Even better? The court killed their backup plan too. Serta had promised to protect the participating lenders if things went south. Those indemnification rights? Dead on arrival.
The ruling was brutal in its simplicity: If you want to call something an open market purchase, there better be an actual market involved.
But here’s what makes this case so important—it wasn’t just about Serta. This kind of deal was becoming restructuring lawyers’ favorite new toy. Now? They need a whole new playbook.
And trust me, they’re already writing it.
The Plot Twist: Enter Mitel
Just when everyone thought the Fifth Circuit killed the uptiering game, something wild happened.
On the exact same day—I’m not making this up—a New York court looked at pretty much the identical deal from Mitel Networks and said “Sure, go right ahead.”
Same game, different referee, totally different call.
Mitel pulled the exact same move as Serta. They were drowning in debt, so they cut a deal with friendly lenders to jump them to the front of the line. New super-priority debt paper. Everyone else got pushed to the back.
So what made this different from Serta?
Three words. That’s it. Instead of requiring “open market purchases,” Mitel’s agreement just said they could “purchase by way of assignment.” No mention of open markets anywhere.
The New York court basically said: “Look, if you didn’t want the company doing private deals, you should have said so in the contract.” Those excluded lenders who were screaming about their “sacred rights”? The court told them their rights weren’t so sacred after all.
Here’s the brutal truth—the same transaction either flies or dies based entirely on a few words in your documents. If that doesn’t scare the hell out of every lender out there, it should.
Think about it. Billions in value shifting around based on whether your lawyers included the a few words or not. In what world does that make sense?
But that’s where we are. Serta’s deal is dead because they needed an “open market.” Mitel’s lives on because they didn’t. Welcome to the joy of New York contract law.
And you know what’s really wild? The market’s already adapting. New deals are getting done with Mitel-style language instead of Serta’s. The game isn’t over—the players just found a new rulebook.
Follow the Money: What Happens Now?
If you think these court rulings killed uptiering, you haven’t been paying attention.
The game isn’t dead—it’s just getting more sophisticated. And a lot more expensive for everyone involved.
Remember those three magic words that saved Mitel’s deal? Every lawyer in New York is now obsessing over exact contract language. “Serta Blocker” provisions are now showing up everywhere. Lenders aren’t taking chances anymore—they’re demanding explicit protection against these moves.
But here’s where it gets interesting...
Companies aren’t giving up on aggressive deals. They’re just getting creative. Instead of straight uptiering, we’re seeing:
Drop-down transactions (just ask AMC about their best assets)
Double-dip structures that create multiple claims
Complex exchange offers that pressure lenders to play ball
And the really wild part? These new structures might actually be worse for lenders than the old uptiering games. At least with uptiering you knew you were getting screwed. Some of these new deals are so complex it takes weeks just to figure out how bad the damage is.
Companies can’t just ram through whatever deal they want with 51% support anymore. Now they need broader consensus, better terms, or lawyers who can navigate through a maze of contract terms.
But let’s be real—as long as companies are desperate and lawyer are creative, these deals will keep coming. The only difference is now everyone’s paying a lot more attention to the fine print.
Speaking of which, have you read your loan documents lately? Because that’s where the next battle’s already starting...
Don’t Get Caught With Your Pants Down: A Lender’s Survival Guide
Let me be blunt: if you’re not doing these things right now, you’re basically asking to get screwed.
First thing first: READ YOUR DOCUMENTS. Not next week, not when things go south. Now. And I don’t mean skim them—I mean really read them. Those three words that saved Mitel’s deal? That’s the difference between getting paid and getting nothing.
Here’s your survival checklist:
Pull out every credit agreement you’ve got. Look for these land mines:
What exactly does it say about “open market” purchases?
Are your sacred rights actually sacred?
What voting thresholds really matter?
But reading isn’t enough. You need friends in this market. Lender cooperation agreements (aka “co-ops”) aren’t just nice to have anymore—they’re survival tools. Because when the music stops, you don’t want to be the only one without a chair.
And while you’re at it, simulate your restructuring scenarios. What happens if your company tries to pull a Serta? What’s your blocking position worth? Where are your leverage points?
The smart money’s already doing this. They’re:
Building lender groups before they need them
Getting their rights sorted out early
Keeping lawyers on speed dial
But here’s what most people miss: Watch the courts like a hawk.
Want to know if you’re ready? Ask yourself this: If your company announced an uptiering deal tomorrow, do you know exactly what rights you have?
If you hesitated, you’ve got work to do.
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I can’t believe this is legal but that’s what happens when lawyers are involved. So for example if you were a subordinate lender and the company you lended to did uptiering. Would drop down a seniority level?