Office Properties Income Trust’s chapter 11 case has turned into an intercreditor brawl, as a consortium of 2027 secured bondholders challenge the structure of a proposed $125mn DIP facility provided by September 2029 secured noteholders. The September 2029 bondholder group led by Helix and Redwood, which together hold just over 50% of the bond, negotiated the RSA and structured the DIP loan. The facility is set to be syndicated among the remaining September 2029 noteholders according to their pro rata share of the $610mn issue.
That means the other $1.143bn of prepetition secured creditors, along with $491mn of unsecured noteholders, will be excluded from the opportunity to participate in the financing, which comes with a 12% cash interest rate, a smattering of fees and the possibility of full equitization at the conclusion of the bankruptcy case.
In heated testimony at Monday’s first day hearing, Milbank, as counsel to the rival 2027 secured notes, referred to the proposed DIP facility as “structured mischief,” alleging the facility’s structure minimizes guarantors to the 2027 secured notes. The proposed DIP financing does not have broad consensus among creditor groups, Milbank said.
OPI filed for chapter 11 in Houston last week with an RSA signed by 80% of September 2029 noteholders, which also agreed to backstop the DIP facility. That leaves $121mn of the September 2029s not yet signed on to the deal, along with $1.8bn of non-RSA parties across the rest of the capital structure.
Judge Lopez in Houston granted interim approval of the DIP loan on Monday, allowing the debtors to access an initial $10mn draw, and ordered mediation with 2027 secured noteholders. The court scheduled a final hearing on the DIP financing for Dec. 3.
DIP Terms
The proposed DIP loan is unconventional in that it is not a super-priority facility, but instead comes with a split lien across various pools of OPI collateral. As currently structured, it has a first lien on 25 unencumbered properties, a second lien on 2027 secured notes collateral, a second lien on March 2029 secured notes collateral, and a third lien on collateral backing the company’s September 2029 secured notes. Latham as counsel to the debtor emphasized at the first day hearing that the DIP facility is a junior lien instrument with priority only on a pool of unencumbered assets.
At the same time, the terms of the proposed facility are generous to RSA parties—namely September 2029 noteholders—in the form of DIP fees and the potential for full equitization. The $125mn new money instrument comes with a 12% cash interest rate, 10% commitment fee, 2.25% PIK upfront fee, and 5.75% exit fee, for an effective annualized rate of 30%. While interest is payable only in cash, the loan principal and assorted fees are payable in equity at the debtor’s option, lowering the cash barrier to emergence.
Another sweetener for DIP lenders comes in the form of a steep discount on equitization. The $125mn DIP loan together with the 2.25% PIK upfront fee—totaling $127.8mn—comes with the option to convert to equity at a 37% discount to plan value. For purposes of the transaction, plan equity value is stated in the RSA as the difference between enterprise value of $1.7bn and the reorganized debt load, or $378mn. That means DIP lenders would convert to equity at a valuation of just $238mn.
Secured 2027 bondholders also proposed a DIP loan at a lower interest rate, according to first day filings, though it was rejected by the debtor because it was not payable in equity, requiring the company to generate additional liquidity in bankruptcy to repay the loan. OPI filed with just $29mn of cash on the petition date, while the market for any additional office property sales remains weak.
OID Litigation
Within days of the bankruptcy filing, OPI commenced an adversary proceeding against UMB Bank, as indenture trustee for the 2027 notes, challenging any claim to OID as disallowed under §502(b)(2) of the Bankruptcy Code. Holders of the 2027 notes, which were the product of a December 2024 exchange struck at a 31% premium, will no doubt seek an allowed claim for unamortized OID of around $76mn.
Some have suggested that an OID generated from an exchange offer is not considered unmatured interest in bankruptcy. Dan Kamensky, Founder of the Creditor Rights Coalition, indicated in a webinar with Covenant Review and CreditSights this week (available here) that every court that has addressed the issue in the context of an exchange offer has rejected the application of § 502(b)(2) to OID. In the case of secured debt, however, an overcollateralized claim may be fully allowed in either case due to a separate provision of the Bankruptcy Code giving secured creditors additional protections. The issue is similar to how unsecured make-whole claims are treated in bankruptcy, where the Fifth Circuit and Third Circuits in Ultra Petroleum and Hertz, respectively, have ruled that such claims are the economic equivalent of unmatured interest.
The OID litigation is likely targeted at expediting the chapter 11 case, with 2027 noteholders incentivized to drag out the dispute. Treatment under the RSA would provide illiquid property collateral up to the value of allowed 2027 secured claims—or $342mn before accounting for the $76mn OID—with the remainder deemed unsecured and converted to equity. That means 2027 noteholders have time on their side: running up professional fees would reduce the value of the estate that September 2029 bondholders are set to inherit under the RSA.
Source and uses for the December 2024 exchange transaction that created the 2027 secured notes are shown below. In that deal, original holders of OPI’s unsecured notes due 2025 ultimately exchanged $282mn of unsecured 2025 notes and $58mn cash into the backstopped deal—totaling $340mn—for $445mn of 2027 secured notes. The $135mn OID and $76mn unamortized amount are calculated according to tax treatment in the exchange agreement, plaintiffs argue.
RSA Treatment
The proposed transaction under the RSA would deleverage OPI’s balance sheet by up to $1.1bn largely through equitization of prepetition debt. While mortgage debt is unaffected by the agreement, $425mn of secured credit facility debt across the revolver and term loan is set to be reinstated. The March 2029 secured notes would also be reinstated into an equivalent amount of new March 2029 secured notes.
The 2027 secured notes—the subject of the OID litigation—would receive property collateral and/or a combination of cash and take-back debt up to the value of their allowed secured claim. The September 2029 secured noteholders that negotiated the RSA would receive $420mn of take-back debt in the form of new five-year 10% secured notes plus around 26% of reorganized equity on account of their notes. All $491mn of prepetition unsecured debt including the priority guaranteed notes is set to be equitized.
The restructuring stands to reduce OPI’s leverage by more than four turns, from 9.6x on a prepetition basis to 5.2x pro forma for the transaction. In the event the DIP is fully equitized, the RSA would put September 2029 noteholders led by Helix and Redwood firmly in control of the reorganized company, leaving a small 2% MIP equity allocation to manager RMR.
Evan DuFaux
evan.dufaux@levfininsights.com
+1 917 654 0333
