Tropicana is a famous old breakfast brand whose status has taken a battering of late. Many of its lenders are about to share the same fate.
The juice maker has been crushed by climate change, blighted crops and evolving tastes, and its private equity owners have been locked in bruising talks with creditors to cut its interest costs. It’s becoming a familiar saga as a host of overindebted PE-backed companies hits the skids — and is only likely to become more so as
But it reveals something new, too, something that’s blowing up a foundational debt-market rule. And which is losing creditors tens of billions of dollars.
For decades buyout firms largely stuck by the maxim that lenders got looked after first when one of their businesses was in trouble. Tropicana’s talks, and others like them, show those days are over. Far from priority, or even equal, treatment, many creditors are getting shoved ever further back in the line.
The inside group is in line to swap most of its existing debt for so-called first-out and second-out loans, putting them at the front of the repayment queue, and they’re being priced respectively at 95-97 cents on the dollar and 61-63 cents. Other lenders are braced for a hefty portion of third-out debt valued at just 28.5-31.5 cents. Owning supposedly safe first-lien loans won’t save them.
Similar cases abound.
“There’s definitely disparate treatment because of economic efforts to create tiers for large holders who tend to drive the transactions,” says
This all comes at a perilous moment for the riskier midsized companies that often drive economic growth, many of them backed by private equity.
Hedge fund founder
There were at least 33 companies with debt of $500 million or more that did such transactions in the US last year, a record number, according to a Bloomberg analysis. Private equity owners and aggressive creditors, including gatecrashing hedge funds, have been able to exploit lax legal wording on loan terms signed when money was cheap. In exchange for promising to lend more cash, inside groups get the best deals on swapping their existing debt.
Others do worse. Distressed-loan exchanges — where a company gets its lenders to take valuation haircuts — totaled $42.7 billion last year, a 150% jump from 2023, according to
Relations between all sides have become so bad that some lenders are refusing to sign up for new LMEs, hanging on instead for a Chapter 11. Buyout firms are beginning to worry about the harm to their reputation in credit markets, while pointing out that these brawls are frequently started by powerful debtholders.
The fear for any business seeking new loans is that borrowing costs will shoot up as lenders price in the added risk, and doubts spread about private equity’s ability to run and improve companies. That’s another drag on investment in an economy already fighting for life amid Trump’s trade chaos.
This story is based on conversations with dozens of restructuring specialists, many of whom didn’t want to be named discussing sensitive negotiations. Representatives for Blackstone, Carlyle, Pimco, Clearlake, Siris and CVC declined to comment on LME talks. PAI didn’t respond to requests for comment.
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Big Dog Rules
Some advisers, who make fortunes advising on restructuring, say tiering is a good-faith effort to address lender fury. It lets most of them take part when reworking debt, they argue, unlike the winner-takes-all battles of the past where a single creditor group struck a deal and cut everyone else out.
There is also a sense that it’s fair for asset management’s big beasts to get upper-class status when they regularly have the largest debt holdings.
“They’re the first call because they have the most risk on the table,” says
Scott Greenberg
Photographer: Elias Williams/Bloomberg
Carlyle, for one, is a top lender to PE-backed companies via its collateralized-loan obligation division, which buys up slices of corporate debt, and that gives it more of a voice. The firm has also assembled a six-person team dedicated to LMEs and restructuring,
“Size matters and size helps,” she said. “You have to make sure you have the right expertise and you’re forcing your way into the right group.”
Still, buyout firms can’t afford to alienate the broader credit community. The danger for serial refinancers is ending up as pariahs, locked out of leveraged-loan markets when they want to fund new ventures.
Clearlake, criticized by some lenders for its chunky management fees and dogged defense of its own equity’s value, has been involved in multiple grueling LMEs. It has spent time this year in one-to-one creditor meetings to offer a mea culpa of sorts, according to people familiar with the matter, acknowledging gripes while stressing its need to protect its interests. The firm wants to improve lender communication, a person with direct knowledge says.
On a recent earnings call for digital marketer
Private-markets titan
Brutal Haircuts
Regardless of any nerves about pushing creditors too far, the LME boom shows little sign of abating. This year’s off to a flyer, despite lenders scrambling to stiffen up loan terms and enforce favorable legal rulings. Trump’s tariffs have led to a slight pause as everyone tries to guess the impact, but that uncertainty will inevitably propel more companies to the brink.
“I think lenders will let the markets settle out a bit before rushing in with new capital,” says Greenberg.
Even those who emerge least scathed after LMEs can come unstuck later. The first-out loan for struggling beermaker
Sometimes the winners also endure brutal haircuts. Tropicana’s inside group may be doing far better than those outside the tent, but it still had to agree to swap the vast majority of its loans for much lower-valued second-out paper, people with knowledge of the situation say.
Moody’s Ratings reckons
For lenders outside the charmed circle, the ordeal can be doubly savage.
Those who end up with third or fourth-out paper, or even further back, are having to crystallize heavy losses and may find it impossible to sell. What were often meant to be first-lien loans are downgraded into little more than a Hail Mary pass on whether a company recovers, an uncommon outcome.
“There may not be liquidity post the LME transaction” for such lower-ranked debt, says
While participation rates in restructuring deals are soaring as the tiered model emerges as the go-to strategy, that’s largely because the alternative for those down the pecking order might be getting nothing at all. A key problem for lenders trying to navigate the new landscape is the tangled math needed to price their first-lien debt when it may end up sliced, diced and devalued.
“The waterfalls in recent LMEs have become much more complicated with participating lenders having to consider different mixes,” says
PE owners like third and fourth tiers because they open the door to buying back dirt-cheap debt, another restructuring veteran says. Businesses with such baroque capital structures will be a nightmare to ever refinance again, he adds.
Legal and other fees increase the company’s burden. Buyout firm
There’s a deeper danger here for businesses, too, and by extension the economy. In calmer times, creditors didn’t have to panic if a loan’s value fell to 80-odd cents on the dollar, giving breathing room to decent companies in a bad patch. Now it’s a self-fulfilling prophecy: a signal to armor up, and team up for the inevitable lender bust-up ahead.
Creditors to
“Before, you’d be able to have a really good call on the asset and say, ‘well it’s trading at 75 and I believe in the management team, they’re gonna turn the company around,’” Carlyle’s Basmadjian said. “There’s now this uncertainty.”
Fighting Back
On New Year’s Eve, the Fifth Circuit Appeals Court in the US offered a
The wish was this might finally curb a standard modus operandi in LMEs, where some lenders hand fresh cash to a company and then get the chance to swap their old loans for new debt that gets priority over other creditors.
Any celebrations by the left-behind have been short lived. Better Health Group and
Another route for outsider creditors is to form minority groups to try to force their way into the picture during refinancing talks. Law firm
Tropicana boxes inside a freight container.
Photographer: Eve Edelheit/Bloomberg
And yet the likeliest outcome so far in such situations, as seen in Oregon Tool’s case, is that the company’s advisers pick off lenders in the minority group and give them better terms than for those they leave behind.
More of a threat comes from early signs that creditors en masse have grown sick of the LME merry-go-round and are becoming more willing to stare down private equity sponsors. In talks around ailing software group RSA, several lenders refused to accept Clearlake’s proposal of a double-digit haircut, and its reluctance to put in more cash. They say they’d rather wait it out and own the company if it eventually runs out of road.
The sheer amount of money sloshing around the private markets makes this a brave gambit. Clearlake, for instance, has built strong relations with many direct-lending funds — a ready alternative to traditional syndicated loans.
In essence, the same force that pushes creditors to swallow lax legal terms when first lending money still holds when they’re trying to defend themselves in LMEs: The wall of dry powder that rival investors are desperate to deploy.
“Competitive tension has become a key factor in LMEs — the threat is that if you don’t do a deal with us, we always have an alternative,” says Im at Akin. “And that’s where the private credit market steps in.”
–With assistance from
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