US creditors push back against some creative funding trades, Moody's says
18/04/2024 20:23
By Shankar Ramakrishnan
April 18 (Reuters) - Lenders are starting to ask for
extra protection in junk-rated corporate loans to damp down on a
growing practice among some stressed companies to engage in a
creative financing technique that allowed them to raise new
money, said a Moody’s report on Thursday.
Over the past year, many junk-rated companies like At Home
Group ATHC.UL and Trinseo TSE.N have engaged in
liability-management transactions, called "double dip," to raise
new liquidity to pay back maturing debt or in some cases to
remain solvent, said Moody's.
Under a double-dip, debt is issued by a financing
subsidiary, with guarantees from the parent and other
subsidiaries. The subsidiary then gives a loan to the parent
which then becomes collateral for the new debt.
"Double-dips allow borrowers to attract new money by
offering some lenders a bigger share of any recovery pie” said
Derek Gluckman, a Vice President with Moody’s Private Credit
team.
These transactions gave some lenders a distinct advantage
over others in existing credit agreements as they could claim
two times the value of a bankruptcy claim in what is also called
“creditor-on-creditor violence”.
Lenders were now starting to fight back against the practice
as existing documentation did not prevent companies from doing
more such transactions, said Moody’s in the report.
In the documentation of a new proposed term loan sought by
Thryv THRY.O and two other borrowers currently seeking
lenders, the borrower has been asked to include a clause that
prohibits it from taking an intercompany loan that was secured
on its assets and one that will be paid at the same time as the
new loan, said the report.
The clause, called At Home provision that referenced the
double-dip restructuring by At Home in May 2023, would ensure
than an intercompany loan would only be paid after existing
lenders, preserving the undiluted claims among senior creditors.
These protections will proliferate – even as other covenants
(structural safeguards in loan documentation) weaken, said the
report.
"Lenders will insist on these features even where they are
accommodating elsewhere – threats to a lender’s position in the
capital structure are simply too powerful to ignore," it said.
(Reporting by Shankar Ramakrishnan; Editing by Chizu Nomiyama)
((Shankar.Ramakrishnan@thomsonreuters.com; +1 2017590156;))