‘Open Market Purchase’ Provisions Leave Everything Open
By Linda W. Filardi, Senior Vice President & Associate General Counsel, Lending and Private Banking, Flagstar Bank; Regent, American College of Commercial Finance Lawyers; Co-Chair, American Bar Association Asset-Based Lending Committee
Surprisingly, some loan market participants continue to think that the term “open market purchases” included in many syndicated credit agreements today is intended to require the borrower to buy all the loans of a particular tranche on a pro rata basis, or at least make the offer to all lenders of the associated class. As Serta and other liability management cases take their twists and turns through the courts, see, e.g., In re Serta Simmons Bedding, LLC, No. 23-90020, 2023 WL 3855820 (Bankr. S.D. Tex. June 6, 2023), lenders are taking note of how an “open market purchase” provision can be utilized by a dominant class of lenders to subordinate a minority class. Much has been written on the need for “Serta protections” and on liability management transactions, but there has been no attempt to ink a definition for the term “open market purchases” in the credit agreements being drafted today, and there have been few, if any, successful attempts to amend the existing concept to protect against future problems. As recently as the Loan Syndications and Trading Association/Loan Market Association (LSTA/LMA) conference last quarter, when asked whether lawyers were seeing a defined term for “open market purchases,” experts drew a blank. They were not aware of any credit agreements that contained a definition, nor of any real attempts at a definition in the amendment process—shocking.