Selecta and Bondholders Ask US Court to Dismiss Antitrust Lawsuit Over Creditor Pact

Two motions filed Friday in the US District Court for the Southern District of New York argue that the arrangement among a majority of bondholders was lawful and served a practical purpose in restructuring negotiations, according to Bloomberg. The filings respond to what is described as the first lawsuit challenging the legality of cooperation agreements used by groups of creditors during corporate restructurings.

The defendants maintain that bondholders joining forces to negotiate with a distressed company does not amount to antitrust violations or price-fixing. Instead, the coordinated approach is presented as a mechanism to streamline negotiations and reach a restructuring agreement more efficiently, per Bloomberg. They argue that cooperation among creditors can help maximize recoveries and increase the chances that a struggling company survives rather than entering a more expensive bankruptcy process.

According to Bloomberg, the majority lenders said such agreements allow creditors to organize their efforts and work toward a solution that benefits both the company and consumers. Without coordination among lenders, they contend, reaching consensual restructuring deals would become more difficult and more companies could be pushed into formal bankruptcy proceedings.

Selecta itself defended its actions in a separate filing. The company argued that negotiating primarily with the majority creditor group does not constitute anticompetitive behavior. In the filing, Selecta said negotiating with those bondholders isn’t “anticompetitive conduct; it is doing what any rational economic actor would do.”

Related: Hedge Funds Invoke Antitrust Law in Landmark Selecta Debt Battle

The dispute stems from a restructuring agreement reached in June between Selecta and a group of investment funds including Strategic Value Partners, Invesco, Man Group and Diameter Capital Partners, according to Bloomberg. The arrangement allowed those investors to assume control of the business through a process in which a trustee would foreclose on the company’s shares and transfer them to a newly created entity controlled by the funds.

Although the restructuring was structured on a pro-rata basis, creditors who were not part of the cooperation pact faced the possibility of larger losses if they opted to exchange their bonds for the most senior debt issued in the deal, per Bloomberg.

Several excluded creditors later challenged the arrangement in court. Investment firms Deltroit Asset Management, Algebris Investments and CQS filed the lawsuit in October, arguing that the cooperation agreement effectively prevented participating creditors from supporting any alternative restructuring proposals, according to Bloomberg. They claim the pact left other bondholders sidelined and subject to unfair treatment.

The plaintiffs also allege that the majority bondholder group violated federal antitrust law by using the cooperation agreement for “anticompetitive purposes.” In addition, they claim the arrangement breached the trust indenture governing the bonds, as well as the company’s obligation to act in good faith and the fiduciary duties of Selecta’s directors, per Bloomberg.

The court has yet to rule on the motions to dismiss. The case could have broader implications for how creditor cooperation agreements are used in future restructuring negotiations if it proceeds.

Source: Bloomberg