King & Spalding
Recent News in the RadioShack Bankruptcy Case: Court Resolves Intercreditor Dispute in Favor of Senior Lenders
By Sarah R. Borders, Jeffrey R. Dutson and Elizabeth Tramm
On May 11, 2016, the Delaware Bankruptcy Court issued an opinion in the RadioShack bankruptcy case addressing an intercreditor dispute between Salus Capital Partners, LLC, the “Last Out” lender in RadioShack’s pre-petition $250 million term loan facility (“Salus”), and the lenders under RadioShack’s pre-petition $585 million ABL facility (the “ABL Lenders”). Salus argued that a pre-petition restructuring of the ABL facility violated the intercreditor agreement between the ABL Lenders and the term loan lenders (including Salus) (the “Intercreditor Agreement”) and resulted in the ABL Lenders losing certain rights under the Intercreditor Agreement. The Court, interpreting the senior-debt-cap provision and the amendments provision of the Intercreditor Agreement, disagreed and held that the restructuring was permissible under the Intercreditor Agreement.
Fourteen months prior to bankruptcy, in December 2013, RadioShack entered into financing arrangements with two groups of lenders.1 One group (the “Original ABL Lenders”) agreed to provide RadioShack with a $585 million ABL facility, consisting of a $535 million revolving credit facility and a $50 million term loan (collectively, the “Original ABL Credit Agreement”). Another group of lenders, made up of Salus and certain other lenders (the “SCP Lenders”), agreed to provide a $250 million term loan.
Pursuant to the Intercreditor Agreement, the Original ABL Lenders were granted liens that were senior to the liens of the SCP Lenders on RadioShack’s inventory and accounts receivable (the “ABL Collateral”) for the aggregate principal amount of the ABL Lenders’ loans up to the “Maximum ABL Facility Amount.”2 The Maximum ABL Facility Amount was defined as “the Aggregate Revolving Loan Commitments minus any permanent reductions in the Revolving Loan Commitments.” The term “Aggregate Revolving Loan Commitments” was defined in the Original ABL Credit Agreement as “the combined Revolving Loan Commitments of the [ABL] Lenders, which shall initially be in the amount of $535,000,000, as such amount may be reduced from time to time pursuant to this Agreement.”3 Thus, reading the Intercreditor Agreement in conjunction with the Original ABL Credit Agreement, the Original ABL Lenders were granted liens senior to the liens of the SCP Lenders on the ABL Collateral for the aggregate principal amount of the ABL Lenders’ loans up to $535 million, as such amount may be reduced from time to time pursuant to the Original ABL Credit Agreement, minus any permanent reduction to the Revolving Loan Commitments.
In October 2014, the Original ABL Lenders sold their interests under the Original ABL Credit Agreement to the ABL Lenders. RadioShack and the ABL Lenders then amended the Original ABL Credit Agreement (the “Amended ABL Credit Agreement”) by restructuring the $535 million revolving credit facility into (i) a $275 million term out revolving loan, (ii) a $120 million letter of credit facility, and (iii) a $140 million revolving credit facility.4
In February 2015, RadioShack filed bankruptcy. During the course of the bankruptcy, the ABL Lenders received over $232 million from proceeds of the ABL Collateral.5
Challenging the ABL Lenders’ entitlement to those proceeds, Salus filed an adversary proceeding asserting that the Amended ABL Credit Agreement made two “permanent reductions” to the Maximum ABL Facility Amount: (1) the Aggregate Revolving Loan Commitments were permanently reduced by $275 million when $275 million of the revolving loans were converted into a $275 million term credit facility; and (2) the Maximum ABL Facility Amount was further reduced by $140 million, because the $140 million revolving credit facility contained in the Amended ABL Credit Agreement was an “illusory commitment” given RadioShack’s financial condition at the time of the agreement.6 The result of those “permanent reductions” was that the amount that the ABL Lenders could receive from the proceeds of the ABL Collateral before the SCP Lenders was greatly reduced.
The ABL Lenders filed motions to dismiss, arguing that the Amended ABL Credit Agreement had not changed the Maximum ABL Facility Amount and that the payments made from the proceeds of the ABL Collateral were consistent with the priority scheme established in the Intercreditor Agreement. First, the conversion of $275 million of revolving loans into a term credit facility did not affect the Maximum ABL Facility Amount because the loans were outstanding revolving loan commitments at the time of the restructuring. Second, the relevant definitions in the ABL Credit Agreement could be amended without the SCP Lenders’ consent. Finally, the ABL Lenders disputed the contention that the $140 million revolving credit facility was an illusory commitment.7
Bankruptcy Court’s Holding
The Court granted the motions to dismiss, ruling that the senior lien rights of the ABL Lenders were not impaired by way of the Amended ABL Credit Agreement.8 The Court determined that the Intercreditor Agreement and the Original ABL Credit Agreement unambiguously permitted the restructuring of the ABL Credit Agreement while preserving the ABL Lenders’ senior lien rights in the ABL Collateral. Specifically, the Intercreditor Agreement provided broad rights to the ABL Lenders to amend any or all of the ABL loan documents and that the narrow restrictions to those rights were not implicated by the amendments to the ABL Credit Agreement. Furthermore, the Court noted that Salus failed to demonstrate that its position was unfairly changed as a result of the restructuring of the ABL Credit Agreement. The obligations upon which the ABL Lenders were paid were already outstanding as of the time of the amendment to the Original ABL Credit Agreement, and those obligations fell within the definition of Maximum ABL Facility Amount. Accordingly, the Court granted the ABL Lenders’ motions to dismiss Salus’s complaint.9
To the extent that parties wish to use an intercreditor agreement to modify the rights of a junior creditor, courts continue to construe such agreements strictly according to their terms. When drafting provisions that purport to limit the rights of creditors, specificity and clarity are critical. Courts are not inclined to enforce broad or ambiguous provisions that leave room for doubt as to the parties’ true intentions.
1 Salus Capital Partners, LLC v. Standard Wireless Inc. (In re RadioShack Corp.), Adv. No. 15-50239, 2016 Bankr. LEXIS 2006, at *3 (Bankr. D. Del. May 11, 2016).
2 Id. at *13.
4 Id. at *9-11.
5 Id. at *4.
6 Id. at *14-16.
7 Id. at *16-21.
8 Id. at *25-26.
9 Id. at 26.