KBRA Releases Research – Private Credit: Putting Serta to Bed

NEW YORK--(BUSINESS WIRE)--KBRA releases research examining how the recent Serta ruling raises the legal and economic risks of exclusionary liability management exercises, particularly in the private credit market.

In a market where J.Crew and Neiman Marcus refer not to storied retailers but to landmark liability management transactions—and the contractual protections designed to prevent them—Serta and its eponymous blocker have become the defining shorthand for the current generation of liability management drafting. However, following the recent Serta decision and the bankruptcy court’s imposition of a substantial cash judgment in favor of previously excluded lenders, Serta has become more than a drafting reference. It is now a judicial one as well. The decision has implications for both the broadly syndicated loan (BSL) and private credit markets. The message is clear: lenders contemplating exclusionary liability management exercises (LME) must now weigh not only the contractual path to execution, but also the potentially significant litigation and economic costs where the contractual path is uncertain.

For private lenders, the Serta precedent adds legal and financial risk to transactions that already carry substantial relationship and reputational costs. To be sure, Serta will not eliminate LMEs. Credit agreements, including those in the private credit market, continue to provide flexibility, and new structures will likely continue to exploit provisions that have yet to be tested. However, the ruling should raise the bar for lenders considering exclusionary transactions while further differentiating the private credit market from the more fragmented broadly syndicated loan market.

Key Takeaways

• Serta materially changes the economics of participating in an aggressive LME. Lenders must now consider not only litigation costs, but also potential damages measured by the value denied to excluded lenders, along with interest accruing from the transaction date.
• The chilling effect should be strongest in private credit. Concentrated lender groups, repeat sponsor relationships, portfolio overlap, and greater access to consensual amendments already make exclusionary LMEs less common in the private credit market. Serta adds another incentive to negotiate rather than prime.
• Del Monte provides a counterpoint, but not a durable roadmap. A New Jersey court allowed a cashless debtor-in-possession (DIP) roll-up to proceed without triggering immediate pro rata sharing. The facts were more lender-inclusive, and future credit agreements will likely clarify whether exchanges and roll-ups constitute payments, limiting Del Monte’s precedential value.
• While LMEs may arise in isolated private credit situations, particularly where sponsors have significant equity at risk, they are unlikely to become a market trend. The relationship-driven nature of private credit, heightened litigation risk following Serta, and KBRA’s observation that exclusionary LMEs are rarely contemplated as a restructuring solution for stressed private credit borrowers should continue to limit their use.

Click here to view the report.

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About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

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