Trends to Watch in the Loan Market - June 2021

Following a surprisingly brief pause during the height of the economic turbulence of the COVID-19 pandemic, the loan markets quickly returned to robust volumes and documentation trends began evolving at an accelerated pace. Highlighted below are five “need to know” trends surfacing in loan documentation today.

 

1. Portability Features

Typically credit facilities with portability features have been easy to spot, in some cases even defined as a “Permitted Change of Control” in the related credit agreement. These provisions usually allow the existing majority owner to sell its interest in the borrower to a new private equity sponsor and are usually subject to a number of conditions. Recently there has been a notable uptick in provisions that may allow portability even in the absence of such express terms. Credit documentation may instead provide that certain specified transactions (which potentially change the ownership and / or corporate structure of the borrower) do not constitute a “Change of Control” or may otherwise permit similar transactions in the negative covenants. One of the most common versions, on the rise following the continued special purpose acquisition company (SPAC) IPO boom, permits SPAC IPOs or other SPAC transactions. Outside of the SPAC context, such portability features may permit certain specified mergers, IPOs or other transactions involving a new holdco or similar entity that has a new majority owner.

2. Permitting Additional Non-Lender Secured Parties Providing Cash Management or Hedging Products

Permitting non-lender entities to benefit from the collateral securing a credit facility for their cash management and/or hedge obligations is becoming increasingly common in syndicated credit facilities - including credit facilities led by banks who typically can and do provide cash management services and hedging products. These provisions allow the non-lender entities to have the benefit of the collateral for these obligations regardless of whether they (or their affiliates) were ever or will ever be a lender in the credit facility. In some cases, these provisions limit additional secured parties based on contract type or ratings requirements, but these limitations are becoming increasingly rare. The secured obligations of these non-lender entities are often pari passu with the loan principal in the waterfall and thus could be dilutive of the lenders’ position vis a vis the collateral.

3. Trends in Serta Provisions

Following the Serta litigation last year (and similar cases and transactions such as Boardriders and Trimark), so-called lender “sacred rights”, those requiring all or affected (i.e., enhanced) lender consent, were expanded in many credit facilities, ostensibly to require lender consent for similar types of priming transactions.

The most commonly requested Serta protection is inclusion of lien subordination and payment subordination as lender sacred rights. However, there has been a recent uptick in carve-outs to these provisions when included in the sacred rights, including:

• Occurrence of a bankruptcy event of default.
• If a lender has been offered a bona fide opportunity to fund or otherwise purchase their pro rata share of the new (typically priming) credit facility. This carve-out often applies whether or not the lender is unable to participate in the new deal because of fund, yield, leverage or compliance requirements.

4. Unlimited Investments in Non-Loan Parties and Immaterial / Excluded Subsidiaries

Unlimited investment capacity in “Immaterial” or “Excluded Subsidiaries” continues to appear with some regularity in credit facilities of varying sizes, both for corporate credits and sponsored issuers. In most cases such provisions are subject to default / event of default blockers and leverage tests. Additional requirements, such as liquidity or availability, have typically been limited to ABLs. However, some recent cash flow deals have included similar additional conditions before borrowers can tap this unlimited investment capacity such as (1) no revolving loans outstanding and / or (2) minimum liquidity. Conversely, other deals have started to permit uncapped investments in non-loan party subsidiaries that are “Restricted Subsidiaries” so long as they are done in the ordinary course of business, which is not defined.

5. Chewy Provisions

After the PetSmart spinoff of Chewy in 2018, there has been a rise in so-called “Chewy provisions”. These terms are intended to limit the use of combined negative covenant baskets to effect multi-step transactions that move equity interests outside of the loan parties and into unrestricted subsidiaries. Such transactions may allow for creation of a non-wholly owned subsidiary of a loan party who is then required by the terms of the credit agreement to be automatically released as a guarantor.

Typically, Chewy provisions appear in the automatic collateral release terms and require that transfers of equity interests must be done for legitimate business purposes and not in contemplation of adversely impacting the secured parties’ interest in the guarantees and collateral. Most such provisions do not expressly prohibit transfers of partial equity to an affiliate nor do they prevent the agent from releasing the liens on such transferred equity. Although a handful of Chewy provisions have provided that a subsidiary would not become an excluded subsidiary (or similar) as a result of a partial equity transfer to an affiliate, to date, such “partial equity transfer” variations remain relatively rare in the loan market.