There’s a new trend in finance happening, especially with struggling tech companies like Rackspace Technology Inc. and Apex Tool Group.
It’s called “non-pro rata up tiering” transactions, where certain lenders get better deals when they exchange their debt.
However, some people are worried this might not be fair and could make financial inequalities worse among lenders.
This trend is happening because borrowing money is expensive, companies have borrowed a lot, and loans today don’t always have strict rules. Jason Mudrick, who started Mudrick Capital, says these factors are behind the trend.
Tech companies, which owe nearly $30 billion in struggling debt, are leading the way in using this strategy to handle their debts during tough times.
Debt Swaps Spark Creditor Disparities
Recent deals have stirred up controversy in the world of debt restructuring. Take, for instance, Apex Tool Group backed by Bain Capital, and Rackspace backed by Apollo Global Management Inc.
They’ve proposed deals where some creditors get better swap rates than others, causing big differences in how they’re treated.
This has sparked conflicts between creditors, with those not involved in the negotiations at risk of losing their collateral and agreements, which could mean they get paid back later.
According to Scott Macklin from Obra, the tough tactics used by distressed funds show how desperate the market is, especially when there aren’t many troubled bonds and loans available.
Legal Moves Raise Ethical Concerns
These tactics might be allowed by law in a lot of cases, but they bring up ethical concerns about how creditors are treated and the fairness of struggling debt markets.
The wording that allows these deals, often added to bond documents during a time when leveraged buyouts were popular, has created a situation where conflicts between creditors and lawsuits happen more often.
A good example is the bankruptcy of appliance maker Robertshaw, where a deal made before filing for bankruptcy with certain investors changed who got paid back first, leaving some lenders in a tough spot.
