Selecta’s Majority Lenders Ask Judge to Toss Antitrust Suit

(Bloomberg) — A group of bondholders to Selecta Group BV asked a federal judge to dismiss a lawsuit accusing them of violating US antitrust laws by entering into a creditor pact to negotiate a deal with the Swiss vending machine company that favored them over others.

The motion, filed Friday in the Southern District of New York, is a response to the first-ever lawsuit challenging the legality of so-called cooperation agreements among a majority group of bondholders. It argues that a coordinated effort by a majority group of bondholders to work together isn’t a violation of antitrust laws or akin to price-fixing.

Instead, the majority lenders contend that the pacts are an efficient way to broker a transaction, maximizing repayment and giving the debtor a chance to survive, which is beneficial for the consumer. Without such creditor coordination, they argued, consensual workouts would be more difficult and more companies would go into costlier bankruptcies instead.

Selecta in June reached a restructuring agreement with a group of funds including Strategic Value Partners, Invesco, Man Group and Diameter Capital Partners, to allow some of them to take over the keys of the business, with a trustee foreclosing on the shares and transferring them to a new entity controlled by those funds.

While the deal was pro-rata, creditors outside the cooperation pact risked a greater loss in their investment if they chose to swap their holdings for the most senior debt in the restructuring.

Left-out creditors including Deltroit Asset Management, Algebris Investments and CQS initiated legal proceedings in New York in October, arguing that the cooperation agreement barred any co-signers from backing an alternative restructuring, effectively resulting in the continued exclusion and unfair treatment of the creditors left out of the deal.

The plaintiffs alleged that the majority group of bondholders violated federal law by entering into a cooperation agreement that was used for “anticompetitive purposes” and breached the governing trust indenture, the company’s duty to act in good faith, and the fiduciary duties of Selecta’s directors.

The defendants in the Selecta case argued in their motion that the restructuring was done within the confines of the intercreditor agreement, which allows for a majority of creditors to act collectively in deciding how and when to exercise remedies.

When Selecta defaulted, “the majority chose to exercise a right expressly granted to it in the governing documents: directing the security agent to undertake a foreclosure on Selecta’s shares, approved by a Dutch court, which resulted in all creditors ratably receiving new debt and equity securities issued by a more financially stable business,” the defendants said in their motion.

“Plaintiffs are sophisticated investors and knowingly purchased instruments that were governed by majoritarian principles and permitted the foreclosure. They cannot turn disappointment with the majority’s chosen response to a default into an antitrust complaint,” they added.

These bondholders also noted that the restructuring deal is a foreign transaction and therefore US antitrust laws don’t apply.

Representatives for Deltroit, Algebris, CQS and Selecta did not immediately reply to a request for comment sent outside of office hours on Friday.

Cooperation agreements have become commonplace arrangements in restructuring situations in both the US and Europe. They effectively bind creditors to act together and stop them from breaking ranks to negotiate a more favorable deal with a company and its owner.

Soon after Selecta minority creditors filed their lawsuit, Optimum Communications Inc., formerly known as Altice USA. presented the first challenge to a cooperation agreement brought by a borrower. The company sued its creditors —including Apollo Global Management, Ares Management and Oaktree Capital Management — for allegedly coming together in an “illegal cartel,” locking Optimum out of credit markets.

The antitrust lawsuits “feel more like scare tactics by certain companies and their advisors who would rather they can run over creditors on an individual basis and don’t like the collective action that gives them better bargaining power in negotiations,” said Scott Greenberg, Global Chair of Gibson Dunn & Crutcher’s Business Restructuring and Reorganization Practice Group.

“The uncertainty they are trying to create hasn’t really had any impact we are seeing in the market in terms of people curbing the use of coops as an effective tool in these negotiations,” he added.

–With assistance from Steven Church.

(Updates to include detail of the restructuring terms in 5th paragraph and quote in the last two paragraphs.)

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