In the litigation, the applicants argued that the recapitalization transaction violated the “sacred rights” of non-exchangeable lenders, i.e. rights that cannot be cancelled or changed without the 100% agreement of the group of lenders. The sacred rights in question can be categorized into two categories: the proportional sharing provisions and the prohibition on the release of all lenders` guarantees. Serta is the latest tranche of a number of high-level lenders/borrowers, including J. Crew, Petsmart and Travelport. These disputes generally result in borrowers being provided with flexible terms in their credit contracts in order to transfer value guarantees beyond the reach of their secured creditors. Serta`s situation is unique in that it did not involve a transfer of lenders` guarantees, but rather the subordination of the lenders` right to repay (without the agreement of all lenders whose obligations were subordinated). Finally, the documents allow borrowers to “cure” EoDs. In other words, when a borrower violates a contract, the owners (usually private equity firms) are allowed to inflect the borrower`s fresh equity. This new capital injection is added to real EBITDA and treated as if the borrower had actually earned it through normal business operations. While the borrower has failed to generate adequate EBITDA to maintain commitments, the equity contribution clears the EoD, allowing high-level lenders to report to DPDs that there has been no EoD. LPs should therefore inquire about the impact of EoDs, leniency agreements and action cures.
In response to the release of new private credit strategies and new managers, Cambridge Associates has developed a number of benchmarks that will help limited partnerships assess the performance of new fund managers (general partners). Read more ” Joanne De Silva: In essence, a proportional sharing system defines how lenders allocate a borrower`s different payments as part of a given credit facility. Lenders generally expect to receive a portion of the amortization and planned advances, both mandatory and voluntary, corresponding to their share of the facility. For example, if a lender represents 20% of a long-term credit facility, it would be entitled to 20% of the borrower`s payments for that facility. This provision is generally included in credit contracts and sometimes in security agreements. In some loan contracts, the amendable provisions do not contain proportional sharing provisions as “sacred rights,” meaning that they can be amended by a direct majority. Therefore, if the borrower accepts an exchange transaction from the majority of lenders, the same majority may agree that the transaction is only offered to the approval group. Even the strictest proportional allocation does not provide reasonable protection to minority lenders if it can ultimately be changed by a majority decision, since the borrower only has to obtain a majority. So what can individual lenders do to protect themselves? Certainly, for every transaction in which a lender is not the only “necessary lender,” or at least have a right to vote, if, to include “necessary lenders”2, the discussion at the level of the credit committee should focus on whether, in addition to the default restrictions on the proportional allocation of amendments, it should be required that the section of the amendment include a provision prohibiting any subordination of claims or pledges granted to lenders without the consent of any lender, or a super-majority (66 2/3 per cent) of lenders.