Face value means face value

The Serta Simmons litigation produced its most consequential document-level ruling on July 7th, and the number that came out the other end - $400m and change - is worth the attention of anyone who structures or advises on leveraged loans.

The recap: remember that morning in June 2020 when a group of first lien lenders exchanged into new superpriority paper, leaving other first lien lenders to discover they’d been primed over their morning coffee. The transaction was structured to fit the credit agreement’s open market purchase exception to the pro-rata sharing provision. After a long and winding judicial road, in late 2024 the Fifth Circuit rejected that reading unanimously and remanded with a focused question: did the participating lenders owe the excluded lenders, and if so, how much?

Judge Lopez answered on July 7th. The pro-rata sharing provision required any lender receiving a greater proportion of its loans than others in the same class to purchase participations in those lenders’ loans - "for cash at face value. "Not at market, and not at the roughly 25 cents the loans traded at when the LME closed. With the exception already off the table, the provision applied in full. The equitable defences - unclean hands (the excluded lenders had run their own competing LME) and failure to mitigate - were dismissed as irrelevant to a breach of contract claim governed by the agreement’s plain language.

On damages, the court calculated what the excluded lenders should have received in the exchange - roughly $348m of consideration, plus the market value of the loans they’d have retained (about $546.8m of unexchanged first lien loans at 25 cents) - and subtracted what they actually held. Base damages: approximately $261m. Then the court applied New York’s prejudgment interest statute, which runs at 9% per annum from the date of breach. The breach was the June 22, 2020 closing. Six years later, total liability passed $400m, allocated among the participating lenders on a non-joint basis.

The court’s framing was blunt: sophisticated parties accepted the litigation risk that came with structuring around the provision.

Three things to check in your documents.

• First, the remedial language in the pro-rata sharing provision - if it says "for cash at face value", as most leveraged loan agreements do, that’s the damages exposure if the carve-out fails, and modelling the economics at market price leaves that scenario out.
• Second, the interest clock: 9% per annum under New York law, running from breach rather than judgment, is a distinct line item that on these facts added a sum rivalling the base damages.
• Third, the equitable fallback isn’t available - the court found the parties knew the exception might not hold and accepted thatrisk, so worst case is face value plus statutory interest from the breach date.

An appeal is likely, but the ruling as written is a template future courts can reach for: the exception failed, the provision applied, and the provision says face value.

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