US Insight: The opaque side of BDCs, private credit’s most transparent market

Dive into the intriguing complexities and valuation challenges within the most transparent segment of the private credit market: the Business Development Companies (BDCs).

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US Private Credit Quarterly Insight: Q3 brings private credit client base, BDC valuations, BSL repricings into focus

Explore the latest trends and insights from Q3 in the private credit market, including the expansion of the private credit client base, BDC valuation complexities, and notable BSL repricings.

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• On August 15, 2024, the U.S. Court of Appeals for the Third Circuit ruled that Pennsylvania state-law failure-to-warn claims are preempted by the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) and its associated EPA regulations.
• This ruling contrasts with prior decisions from the Ninth and Eleventh Circuits, which held that similar claims are not preempted.
• The Third Circuit’s decision creates a potential circuit split that Monsanto has been aiming for, potentially prompting Supreme Court review.
• If the Supreme Court were to review the case, it would give Monsanto the opportunity to argue for a nationwide rule that FIFRA preempts state-law failure-to-warn claims.
• We view this decision as a positive credit event for Monsanto and, by extension, parent company Bayer. We are maintaining our Outperform.

Relative Value

Bayer’s focus on debt reduction in the coming years continues to be a positive for bondholders. With spreads trading wide to peers, we see value in the name. The recent wins at the PCB appellate level and the win on preemption in the Third Circuit have given the credit some much-needed positive news in 2024. We are maintaining our Outperform recommendation and will continue to monitor the evolving and dynamic litigation aspect of the story.

Discussion

We have issued a series of notes over the last year discussing Bayer (Baa2/BBB/BBB+) and Monsanto and their litigation challenges involving polychlorinated biphenyls (PCBs) and glyphosate (the active ingredient in Roundup). Although we assume general familiarity with that litigation, we encourage our readers to review our prior analysis in our notes entitled and .

To recap, Monsanto’s so-called “Roundup” litigation involves claims that glyphosate—the active ingredient in Monsanto’s widely used herbicide Roundup—causes cancer (primarily non-Hodgkin’s lymphoma), and that Monsanto failed to warn users of its potentially dangerous carcinogenic risks. These are sometimes referred to as “failure to warn” claims and are brought under state law. One of Monsanto’s legal strategies to overcome these claims is to argue that they are “preempted” by the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), which is a federal law that governs the registration, sale, distribution, and use of pesticides throughout the United States.

Preemption is a legal concept meaning that a higher legal authority (such as federal law) displaces lower legal authority (such as state law). Monsanto has argued that FIFRA—and the Environmental Protection Agency’s (EPA) registration of Roundup in accordance with FIFRA without a specified warning label—supersedes state-law labeling requirements. This would mean that state-law failure to warn claims are preempted by federal law and cannot be asserted.

Monsanto made this preemption argument to the U.S. Courts of Appeals for the Ninth, Eleventh, and Third Circuits, which are federal appellate courts with jurisdiction over different states. The Ninth and Eleventh Circuits rejected Monsanto’s arguments in Hardeman v. Monsanto Co. (click ) and Carson v. Monsanto (click ), respectively. In broad strokes, those courts held that FIFRA’s requirement that a product not be misbranded is consistent with a state’s common law duty to warn and, therefore, the state-law failure-to-warn claims are not preempted and could be asserted.

On August 15, 2024, the Third Circuit held in Schaffner v. Monsanto that FIFRA preempts state-law failure-to-warn claims (click ). This decision stands in contrast to the Ninth and Eleventh rulings in Hardeman and Carson, respectively, and the Schaffner Court recognized this divergence. In Schaffner, the Third Circuit reasoned that the EPA’s regulations issued under FIFRA require pesticide labels to match the label approved by the EPA during registration. For Roundup, the EPA approved labels without a cancer warning after a thorough scientific review. Thus, any state-law duty to include a cancer warning on Roundup’s label is different from FIFRA requirements (and the implementing EPA regulations) and is therefore preempted by FIFRA, meaning the state-law claims cannot be asserted.

We are still digesting this ruling and what it ultimately means for the company. However, we are confident that the victory is significant, at least in the near term. This is because the decision, at least in Monsanto’s view, creates a “circuit split,” which is a situation where different federal appellate courts in the United States interpret the same law differently. This is important because a “circuit split” is one of the factors that often prompts the U.S. Supreme Court to review a case. If the Court were to hear the case, it would give Monsanto the opportunity to argue that the Third Circuit’s approach is the correct one. If the Court were to agree, it could effectively result in a nationwide rule that FIFRA preempts state-law failure-to-warn claims, which encompass a large number of outstanding lawsuits against Monsanto.

Admittedly, we initially viewed the success of this strategy as a long shot, particularly given the decisions from the Ninth and Eleventh Circuits. However, this outcome is a positive for Monsanto, and by extension, parent company Bayer, and is likely seen as a favorable credit event across the capital structure (though it likely will not affect previously litigated cases that resulted in final and non-appealable judgments). It remains unclear how this case might reach the Supreme Court, if at all, since Monsanto won, and typically the losing party seeks U.S. Supreme Court review. Therefore, it would likely fall to Schaffner to pursue further Supreme Court review. Nonetheless, we anticipate that Monsanto will be motivated to continue litigating glyphosate cases and to highlight this case and issue in future litigation, potentially prompting future Supreme Court review for a nationwide rule.

Mark Lightner, Esq.
Head of Special Situations Legal Research
mlightner@creditsights.com |
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Andrew Brady
Head of Basics
abrady@creditsights.com |
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Patrick Drahi yesterday (August 12) announced the sale of his 24.5% stake in BT to Bharti. The stake is estimated to be worth £3.18bn (€3.72bn) according to Bloomberg, which would represent a loss of around €1.2bn for Drahi.

While regulatory constraints may have played a role in the decision to exit BT, Drahi is above all being forced to reduce Altice’s €60bn debt pile. While the first maturities are not until 2025, the group will then have to repay €1.65bn, followed by €1.33bn in 2026, with the pressure mounting in 2027 when €5.49bn is due, then €9.4bn in 2028 and €6.3bn in 2029.

Drahi has carried out several asset sales in recent months to give himself more breathing space. The BT transaction follows the divestment of Altice Media in June for €1.55bn to Rodolphe Saade, and the sale of Teads to Outbrain for $1bn, as well as a minority stake in Sotheby’s to the Abu Dhabi sovereign wealth fund for a similar amount.

But it is not certain that the proceeds of these actions will be used solely to repay debt. Drahi announced that Altice Media and the data centres, which he had sold in November 2023, would be put in a holding company above Altice France – in other words, out of reach of his creditors. The latter, in response, had threatened to take control of Altice France by exchanging the debt for shares. The standoff is set to last.

, August 13, 2024 – Francois Vaneeckhoutte.

LFI reporters

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