Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How Unsecured Creditors Shape M&A Outcomes
Transcript
- Lucas: If you're selling a company, you probably think your biggest negotiating problem is the buyer. But there's a scenario where the buyer is almost irrelevant — and the real power sits with a group you've probably never met: the unsecured creditors. Luna: You mean the people the company owes money to, without collateral backing it up? Trade suppliers, bondholders, that kind of thing? Lucas: Exactly. And in a distressed sale — specifically a sale under Chapter 11 — those creditors can actually veto the deal or force the price up. It's one of the most misunderstood dynamics in M&A, and it played out in a very concrete way last year with the Rite Aid bankruptcy. Luna: Rite Aid. The pharmacy chain that filed for Chapter 11 in 2023, right? I remember it being one of the bigger retail bankruptcies. Lucas: Same company. They filed in October 2023 with about $8.6 billion in debt. And early in 2024, they struck a deal to sell most of their assets to a group of lenders — effectively a debt for equity swap where the secured lenders would take control. But here's the thing: the deal left almost nothing for the unsecured creditors. And those creditors had a say. Luna: How did they have a say? In a typical sale, sellers negotiate with buyers. Creditors are just waiting to get paid — or not. Lucas: In Chapter 11, the bankruptcy court has to approve the sale. And the unsecured creditors are represented by an official committee — the UCC, or unsecured creditors committee. That committee can object to the sale if they think the deal doesn't treat them fairly. And sometimes, their objection can block the deal or force the buyer to pay more. Luna: And that's what happened with Rite Aid? Lucas: It is. The committee argued that the sale to the secured lenders was a 'cramdown' — meaning it forced a plan on creditors who hadn't agreed to it. They said the company was worth more than the lenders were paying, and that a better offer could be found. Eventually, the company agreed to a sweetened deal that included a $170 million fund for unsecured creditors. That's real money. Luna: A hundred and seventy million dollars. That's a tangible win for suppliers who might have otherwise gotten pennies on the dollar. Lucas: And it's a lesson for anyone who's ever thought about buying a distressed company. When you structure a deal in bankruptcy, you're not just negotiating with the seller — you're negotiating with the creditor committee. They have statutory standing, they have access to the company's financials, and they can hire their own lawyers and bankers. If they think you're lowballing, they will fight. Luna: Before we go deeper into the mechanics — I know our listeners are busy operators, and a lot of them have told me these conversations have actually shifted how they think about deal risk. If you've gotten something out of what we do here, a couple of dollars a month is genuinely what keeps these episodes ad-free and coming. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it makes a real difference — and it lets us keep digging into cases like this without any sponsor influence. So, back to the Rite Aid case: the $170 million fund didn't come from the buyers voluntarily. It came because the committee had a legal argument. Luna: What was their argument, specifically? Because 'the deal is unfair' isn't a legal standard. Lucas: The legal standard in Chapter 11 is that the sale must be for the 'highest and best offer' — and that the plan must be 'fair and equitable' to each class of creditors. The committee argued that the sale to insiders — the secured lenders — wasn't truly market-tested, and that the valuation was too low. They pointed to a potential bid from MedMen, a cannabis retailer, that had offered a higher price. The secured lenders said MedMen wasn't qualified, but the committee used it as leverage. Luna: So the unsecured creditors basically forced the buyer to pay more by dangling an alternative bidder — even if that bidder was uncertain. Lucas: Exactly. And that's the playbook. If you're a distressed buyer, you need to assume the committee will push for a higher price. You can try to line up a 'stalking horse' bid that's high enough to deter objections, or you can structure the deal so that the unsecured creditors are clearly getting something meaningful — maybe 20 to 40 percent recovery — so they don't have an incentive to fight. Luna: What about on the seller side? If I'm a struggling company considering a sale, should I proactively engage the unsecured creditors? Lucas: Absolutely. Smart distressed sellers will give the committee a seat at the table early. Let them see the books, let them feel heard. Because if they feel blindsided, they'll hire an investment banker and try to shop the company themselves. And that can delay the sale, increase legal fees, and potentially sink the deal altogether. Luna: So the real takeaway is: in distressed M&A, the unsecured creditor committee is a de facto party to the deal. Treat them like one, or they'll become an obstacle. Lucas: Right. And it's not just Rite Aid. Look at the 2023 bankruptcy of Party City — the committee there fought the sale process and got a $40 million settlement. Or the 2022 bankruptcy of Revlon, where the committee argued that the secured lenders were stripping value from the company. In every case, the committee has real power. Luna: What about the cramdown itself? That term comes up a lot in bankruptcy M&A — can you break down what it means for a deal? Lucas: Sure. A cramdown is when a bankruptcy court confirms a plan over the objection of a class of creditors. The condition is that the plan must be 'fair and equitable' — which, for unsecured creditors, means they must get at least as much as they would in a liquidation, and no junior class can get anything unless they're paid in full. In practice, courts rarely cram down a plan over the objection of a large unsecured class unless the debtor can prove the plan is truly the best available. Luna: So the cramdown threat is the committee's biggest weapon. They can say, 'If you don't pay us more, we'll force a court to decide — and you might lose.' Lucas: Exactly. And that's why in many distressed sales, the buyer agrees to set aside a pool of equity or cash for unsecured creditors before the plan is even filed. It's cheaper than fighting. For example, in the 2020 bankruptcy of J.C. Penney, the buyer — Simon and Brookfield — agreed to create a $500 million recovery fund for unsecured creditors as part of the deal. That smoothed the path. Luna: Five hundred million. So it's not just a nuisance — it's a material cost of doing the deal. Lucas: It is. And I think operators who are considering buying a distressed company should budget for a creditor recovery pool upfront. Assume 10 to 20 percent of the purchase price might need to go to unsecured creditors, depending on the size of the debt. If you ignore it, you'll end up paying more in legal fees and delays. Luna: What about the timeline? How long does this creditor negotiation typically take? Lucas: The bankruptcy code sets a timeline — the committee is formed within a few weeks of the filing, and then the debtor has 120 days of exclusive period to propose a plan. But in practice, the creditor negotiation happens in the first 60 to 90 days. If the committee objects, the court can extend the timeline, but that costs everyone money. So most deals get resolved in the first couple of months. Luna: So if you're a buyer, you want to start talking to the committee as soon as it's formed. Not wait for them to come to you. Lucas: Exactly. And the best buyers already have a relationship with key creditors before the filing. They know who the big unsecured lenders are — often bondholders or trade creditors — and they've sounded them out on what a fair recovery would look like. It's the same principle as any negotiation: know your counterparty's BATNA. Luna: BATNA — best alternative to a negotiated agreement. In this case, the committee's alternative is to fight in court, which can be costly and uncertain. Lucas: Right. And the buyer's BATNA is to wait for a different target or to let the company liquidate. But if the buyer really wants the assets, the negotiation is about finding a number that's better for the creditors than litigation but better for the buyer than a bidding war. Luna: One thing I'm wondering — are there situations where the unsecured creditors are actually aligned with the buyer? For example, if the buyer is offering a high price that also benefits creditors? Lucas: Absolutely. If the buyer is a strategic acquirer willing to pay a premium — say, a competitor who can realize synergies — the creditors are often happy to support the deal because it means a higher recovery. The conflict arises when the buyer is an insider, like the secured lenders, who are trying to buy the assets at a discount that leaves nothing for the unsecured class. Luna: So the classic conflict is when the buyer is also a creditor. That's the Rite Aid scenario. Lucas: That's the classic conflict. And it's becoming more common because of the rise of 'loan to own' strategies — where a hedge fund buys distressed debt intending to take control of the company through the bankruptcy process. Those funds are both creditor and buyer, and the unsecured committee is naturally suspicious. Luna: For an operator who's not a distressed-debt specialist, is there any way to protect against this? Say you're a small business owner whose company is struggling. Can you choose your creditors to avoid this dynamic? Lucas: To some extent. If you know you might need to restructure, you can try to keep your debt structure simple — fewer creditors, ideally all secured or all unsecured. But the reality is that most small businesses don't have that luxury. They have trade credit, a bank loan, maybe some equipment financing. The best protection is to communicate early with your creditors and with any potential buyer. Transparency reduces the chance of a nasty surprise. Luna: That makes sense. And I suppose that's the overarching lesson from the Rite Aid case: in distressed M&A, the creditors are not passive. They have a voice, and they'll use it if they feel left out. Lucas: And the smart dealmakers account for that from day one. Because the alternative — a courtroom battle that delays the sale, burns cash on legal fees, and potentially kills the deal — is worse for everyone except the lawyers. Luna: Always a good reminder. Thanks, Lucas — this was a really practical look at an often-ignored part of the process. Lucas: Thanks, Luna. And if you're listening and you're in the middle of a distressed deal, I hope this gives you a clearer picture of who's really at the table. Until next time.