Big debt investors dealt blow in mattress maker bankruptcy ruling

A US judge has dealt a blow to Apollo Global Management, Angelo Gordon and other big creditors in the bankruptcy of mattress maker Serta Simmons Bedding, in a ruling that could settle a fierce dispute on Wall Street.

Federal bankruptcy judge David Jones in Houston dismissed arguments by Apollo and Angelo Gordon that they had been unfairly frozen out of a controversial $875mn loan refinancing Serta Simmons executed in 2020.

The slim majority of lenders that participated in the deal were able to swap their debt into more senior loans, giving them higher standing in the bankruptcy, while Apollo and Angelo Gordon were not. The so-called uptier exchange included $200mn of new cash lent to Serta to keep it afloat during the coronavirus pandemic.

Apollo and Angelo Gordon are institutional investors known for their market savvy. Jones said from the bench that the excluded lenders knew or should have known by studying the loan contract that they could be on the wrong side of such an exchange.

“I sit with these matters every single day,” Jones said in his oral ruling. “Sophisticated parties know what words they want to choose . . . this is very easy for me.”

The excluded lenders had been challenging the 2020 transaction since it was announced, in cases that had been winding through state and federal courts in New York.

Serta Simmons had filed for bankruptcy protection in January and had immediately asked the Texas-based court to rule that refinancing was permissible in order to allow it to emerge from bankruptcy later this year.

The Serta case had been closely followed on Wall Street as a series of distressed companies in recent years had raised fresh capital and refinanced debt in deals where lenders in the same class of debt competed against each other to provide a new financing package.

Litigation around such transactions, known in the industry as “creditor-on-creditor violence”, had yielded few final verdicts. This makes Tuesday’s Serta decision a milestone.

The disagreement between Serta and the losing group of lenders focused on an esoteric dispute over the meaning of the term “open market purchase”.

Apollo and Angelo Gordon along with LCM Asset Management had insisted that the phrase required Serta to allow all lenders, rather than simply a smaller handpicked majority, the chance to swap older debt into the new, more senior issue.

Serta told the court that the company was evaluating multiple financing offers and that it simply rejected a similar deal that Angelo Gordon and Apollo had provided in favour of what it thought were better terms from the majority group, which includes asset manager Eaton Vance.

“For the nature of what was being transacted, this fits within [the definition] of an open market purchase,” Jones said.

Jones, however, allowed a claim to proceed that said the 2020 transaction violated the so-called covenant of good faith and fair dealing, a doctrine that says a contract that may violate market norms can be invalidated even if there is no official breach of explicit terms.

The holders of the new debt tranche created in 2020 are now set to take control of the reorganised Serta with the deprived group only to get a modest recovery.

The reorganisation plan, if approved by the court, will eliminate much of Serta’s $1.9bn in debt with the bulk of the equity in the reorganised stock going to the lenders which participated in the 2020 refinancing.

Apollo declined to comment. Serta and Angelo Gordon did not immediately respond to requests for comment.