In the world of finance, a familiar dynamic is playing out: the very firms that profited from aggressive dealmaking in distressed debt are now lamenting a culture of “creditor-on-creditor violence.” The irony isn’t lost on observers, as a legal battle between billionaire Patrick Drahi’s Optimum Communications and a group of leading credit investors – Apollo Global Management, Ares Management and Oaktree Capital Management – highlights the inherent tensions within the private credit market.
Optimum Communications initiated the dispute in November, alleging that a pre-negotiation agreement among bondholders and lenders to restructure its $26 billion debt constitutes an “illegal cartel.” The creditors swiftly rejected the claim, arguing that a unified approach offers the most competitive outcome. However, their response also revealed a discomfort with the increasingly common practice of lenders pursuing individual deals that disadvantage others – a tactic they themselves have frequently employed.
The core of the issue lies in the pursuit of returns in a market where opportunities are often scarce and competition is fierce. As asset managers like Apollo and Oaktree have grown in size and influence, they’ve inevitably found themselves on opposing sides of negotiating tables. Managing these conflicts is a constant challenge, but the current dispute underscores a deeper hypocrisy: these firms, having pioneered aggressive strategies in the equity markets, now decry similar tactics when applied to debt.
The history of these firms reveals a pattern of behavior that contradicts their current stance. Apollo, for instance, previously lobbied Congress to weaken a creditor protection law, aiming to facilitate the imposition of unfavorable terms on minority bondholder groups. Ares, while backing department store Neiman Marcus, strategically moved a valuable e-commerce asset beyond the reach of creditors. And Oaktree faced a lawsuit from Boardriders lenders over a refinancing deal that excluded certain funds.
This “creditor-on-creditor violence,” while seemingly detrimental to the overall creditor base, can paradoxically benefit the distressed companies themselves. By fostering competition among lenders, borrowers can potentially secure more favorable funding terms than they would in a collaborative environment. The practice essentially pits creditors against each other, driving down the cost of capital for the struggling company.
The legal question of whether co-operation pacts among creditors are genuinely anti-competitive remains to be decided by the courts. However, the situation is prompting borrowers to proactively protect themselves. Companies are now incorporating contractual provisions into debt agreements that prevent creditors from forming such alliances, effectively shielding themselves from the Drahi predicament.
The fallout from First Brands Group’s recent bankruptcy, with over $10 billion in liabilities, provides a stark example of the risks inherent in private credit. As Bloomberg Law reported, the company’s debt has plummeted to around 36 cents on the dollar, leaving investors facing substantial losses. The situation highlights the opacity and potential for off-balance-sheet maneuvers that can exacerbate financial distress.
The case of Chewy, however, offers a contrasting narrative. As reported by the Financial Times, a similar restructuring maneuver allowed Chewy to avoid creditor reach, ultimately leading to a successful public offering and a market capitalization of $40 billion. This, in turn, enabled the full repayment of PetSmart’s broader debt at par – a rare outcome demonstrating the potential benefits of a carefully executed restructuring.
the dispute between Optimum Communications and its creditors serves as a cautionary tale about the complexities of the private credit market. While the asset managers involved may express dismay over the “dog-eat-dog” culture, their own past actions suggest a degree of complicity. The current situation is likely to lead to increased scrutiny of creditor behavior and a renewed focus on contractual protections for borrowers, but the fundamental tension between maximizing individual returns and fostering a more collaborative environment will likely persist.
