Now on to the main event…

The morality tale about creditor-on-creditor violence, which has become all the rage on Wall Street, began innocently enough less than two years ago. In July 2024, a group of creditors at the cable company Altice USA, led by the affiliates of such debt powerhouses as Apollo, Ares, BlackRock, and Oaktree, joined together in a sort of co-op to prevent its owner, the reclusive French-Israeli-Moroccan billionaire Patrick Drahi, from playing them against one another. Drahi, of course, is legendary for pushing risk onto his creditors—Altice, now known as Optimum Holdings, has some $26 billion of debt—and is equally renowned for his ruthlessness and savvy. The Optimum co-op worried that Drahi would try to pull off a liability management exercise and pit one group of creditors against another to improve their standing in the capital structure, should the inevitable “absolute priority” rule get invoked in an ultimate bankruptcy.

Alas, Drahi did not love his creditors’ strategy. Last November, he sued most of them in the Southern District of New York, claiming that their little co-op arrangement—which he called a “cartel”—violated U.S. antitrust laws against collusion. Personally, I’m not sure what the difference is between the creditors’ cooperation agreement and an old-fashioned creditors’ committee, but obviously Drahi felt differently. (Kirkland & Ellis, which had been advising Optimum on its restructuring options and strategy, relinquished the assignment after Drahi filed his lawsuit using other attorneys, due to conflicts across the firm.)

Last week, the creditors struck back. Advised by the powerhouse law firm Sullivan & Cromwell, the co-op filed their blistering response. “This case is an effort to weaponize the antitrust laws to give [Optimum] leverage to which they are not entitled by contract—so they can extract individual concessions on billions of dollars of pre-existing debt,” the firm wrote. Optimum’s complaint “does not allege that the lending markets were rigged at the point that debt was issued, when competition actually occurred,” the filing continued. “Instead, it challenges creditors’ subsequent decision—after the debt was issued—to coordinate their response to Optimum’s restructuring overtures and proposed amendments, rather than agree to being pitted against one another through individual renegotiations. But antitrust law protects competition”—emphasis mine—“not a borrower’s desire for leverage in renegotiating its liabilities in times of distress.”

The group’s lawyers went on to argue that Optimum was trying to prevent its own creditors from “coordinating to maximize their collective ability” to get their money back, or as much of it as they still can. In its own complaint, Optimum had argued that antitrust law required Apollo, Ares, et al. “to compete with one another in renegotiations” with the company that holds their assets. “That theory is wrong,” S&C fired back. “As part of the same transactions that provided Optimum with billions in capital, Optimum’s creditors are entitled to repayment. Optimum and [its creditors’] relationships are defined by the underlying debt instruments, not antitrust law. [The creditors] are not bound by the Sherman Act to indulge Optimum’s preferred renegotiation strategy.”

Faithful readers know that I have been fascinated for the past few years by the various innovations, if you can call them that, that have been developing in the credit markets—especially when it comes to corporate borrowers trying to grapple with the fact that they have way too much debt on their books. Historically, of course, equity holders get wiped out during a bankruptcy and debt holders end up with control of the company, as I witnessed firsthand during the six years I spent at Lazard in the early ’90s, working on a number of important restructurings, including those for Revco, Allied-Federated Stores, and Woodward & Lothrop.

Nowadays, you’ve got companies engaged in liability management exercises, or out-of-court restructurings where debt can be renegotiated or bought back at discount, which in turn often results in the aforementioned creditor-on-creditor violence, wherein collateral can be moved around to advantage some lenders over others, owing to the permissiveness of “cov-lite” loans. As I reported last week, other companies are simply filing for bankruptcy protection in the U.K., which allows equity holders to get even better terms. In the U.K., there’s no adherence to the so-called “strict priority” rule, where debt is repaid or gets recovery based on its priority in the capital structure. The battle between Altice and its creditors, however, may begin to rebalance the scales—at least somewhat.

In its letter in defense of the veritable creditor co-op, S&C made the very good point, citing legal precedent, that fierce competition exists between creditors at the time the loans are made—not when a borrower later seeks to negotiate a discount on those loans, instead of paying them back in full. S&C further argued that the cooperation agreement among the creditors in the Optimum situation was hardly a surprising reaction to the L.M.E.s and creditor-on-creditor violence that have permeated the restructuring environment in recent years. “The creditor cooperation alleged here is a permissible response to that dynamic,” S&C wrote. “In short, the cooperation [Optimum and Altice USA] attack is not merely lawful—it is procompetitive, and it benefits borrowers and consumers alike.”

The creditors are asking Judge Jeannette Vargas to toss the case, as she probably should. Optimum seeks “to use antitrust law to rewrite their credit contracts,” S&C wrote. “But the Sherman Act does not protect a debtor’s preferred bargaining position against its own creditors or require creditors to help a debtor renegotiate on more favorable terms.” I have no idea what will happen here, of course, and it will probably be months before Judge Vargas rules on the motion to dismiss, although there is a pretrial conference on February 19 to discuss it.

Already, there are repercussions in the marketplace. In January, Thoma Bravo, the private equity powerhouse, issued a $1.2 billion loan in connection to its portfolio company Majesco’s acquisition of Vitech Systems Group. The loan contained the extremely unusual provision requiring an individual creditor to tell the company within three days if it joined any kind of collective bargaining arrangement or cooperative—or even if it was approached about participating in one. Worse, if you’re approached and don’t snitch, and that approach later comes to light, then your voting rights can be revoked.

You’d think that kind of provision would be a nonstarter for potential creditors, especially since the debt contained a provision, known as a PIK toggle, that allows the borrower to pay interest in more debt instead of in cash. But, of course, the loan blew out in the marketplace, and at pretty skimpy pricing of 450 basis points over the benchmark Secured Overnight Financing Rate. Will creditors ever learn?

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