Hedge funds have adopted a new tactic in the distressed debt wars, arguing in a New York lawsuit filed on Tuesday that heavy-handed deals violate US anti-monopoly and cartel laws.
Manulife’s CQS, Algebris Funds and Deltroit Asset Management claim they were cut out of a deal that handed a group of other similarly situated bondholders disproportionate economic benefits in a debt restructuring earlier this year.
The lawsuit, which relates to the recent restructuring of Swiss vending machine operator Selecta, represents the first time that competition law has been invoked as an alleged charge of wrongdoing in the increasingly fractious realm of distressed debt litigation.
The claimants allege that a so-called co-operation agreement struck between the majority bondholders — a group that included Invesco, Man Group, Strategic Value Partners and Diameter — was specifically designed to keep the bulk economic benefits of a bond exchange from those not invited to join.
According to the complaint, the bonds currently held by the majority group trade at more than 70 cents on the dollar while the minority group has paper trading at half that level.
“The co-operation agreement is a classic example of an anti-competitive and collusive agreement between competitors . . . to control the price for Selecta Group BV’s first lien debt”, the complaint said. It alleged the agreement violated the federal Sherman Act and the New York state Donnelly Act.
So-called non pro-rata debt restructurings, where lenders or bondholders holding equally-ranked paper get different payouts, have proliferated in the US over the past decade. But only in recent years have European companies attempted such manoeuvres.
The Selecta deal drew attention this year among analysts and investors for what was believed to be one of the most complex and aggressive bond exchanges in recent memory.
Selecta, which was previously owned by KKR, had sought a solution to upcoming maturities in a near €1.5 debt stack it could not pay off.
The majority bondholder group used Dutch law on distressed disposals to take control of Selecta, and then offered a coercive bond exchange to the smaller holders.
That offer presented the smaller holders with a choice to either keep their existing paper, but pushed to the bottom of the creditor hierarchy, or take new senior paper which gave the majority group the ability to strip covenants and other protections ahead of potential future transactions through which the majority group could extract even more benefits.
Litigation over non-pro rata debt exchanges has typically centred on contract or securities law, which generally requires unanimous or supermajority approval within a class of creditors to change debt terms or execute a refinancing transaction.
Theories about how competition law may apply in intra-class disputes have surfaced in recent debates between academics and advisers.
However, those had focused on circumstances where a debtor company declared that a creditor co-operation agreement was anti-competitive, not a dispute between creditors as with Selecta.
The plaintiffs, who have separately alleged the restructuring violated contractual provisions of the bond indenture that required 90 per cent support for the deal, are requesting damages.
Samir Parikh, a law professor at Wake Forest University in North Carolina, expressed scepticism about the chances of success of the minority bondholder’s claims, but said that such a lawsuit was predictable.
“Parties resorting to antitrust law is unsurprising given the strong desire to undermine co-operation agreements and the relative ineffectiveness of other levers that have been pulled to date.”
