NEW YORK, April 24 (LPC) – Businesses emboldened by a court ruling in favor of Neiman Marcus are taking advantage of the outcome to include language in loan documents limiting how businesses allocate collateral from their subsidiaries, making it even more difficult more difficult to recover losses.

The language, which prevents individual creditors from taking legal action without the consent of the majority of lenders, is a victory for borrowers and another sign of the erosion of lender protections since last year, the demand for loans exceeded supply. Typically, a lender only needed the approval of the administrative agent to take legal action.

“We believe this new borrower language is a response to (Neiman Marcus) litigation,” said Valerie Potenza, senior covenants analyst at credit research firm Xtract Research.

The troubled fund Marble Ridge case, which followed the luxury retailer’s decision to transfer MyTheresa’s assets from the subsidiary to the parent company, was dismissed last month due to lack of standing . In December, the holder of the loan and bond claimed that Neiman Marcus’ decision to reallocate his profitable MyTheresa e-commerce unit deprived the company of a senior claim on the subsidiary’s guarantees and was fraudulent.

Since then, retailer PetSmart has included provisions in loan documents restricting an individual lender’s right to sue the borrower, according to an Xtract Research report.

The favorable environment for borrowers is hampering the possibility of more balanced credit agreements, especially since the vague language of term loans was written into agreements six years ago, market sources said.

“Once the horse is out of the barn and a mile and a half down the road, (the lenders) are forced to try and get a deal based on something that is not quite the guarantee. that you thought you would get, “said Tyson Benson, an intellectual property manager. lawyer with Harness Dickey.

Without collateral as a form of protection, lenders could settle for little more than a borrower’s performance to repay debt, according to Alex Shvarts, chief technology officer at alternative investor FundKite.

“If you have limited protections… It’s not a leveraged deal anymore, it’s a roll of the dice,” Shvarts said. “It is important that investors tighten underwriting guidelines and prevent such transfers from happening. “


As long as investor demand exceeds the supply of loans, lenders are likely to meet borrower demands, especially regarding the documentation and language of term loans, in return, hopefully, for a higher interest rate.

PetSmart this month secured the consent of more than 51% of its term loan holders to pass a loan amendment that limits the rights of lenders to sue the company for its transfer of the online Chewy business. com, thus putting the affiliate out of their reach.

The amendment included language that each lender would “waive their right to sue the parties to the loan” in actions related to the borrower’s guarantee without the consent of the lenders required, according to Xtract.

Similar to Neiman Marcus, the pet retailer decided to transfer a 20% stake in at the parent company level and an additional 16.5% to an unrestricted subsidiary, a move deemed fraudulent by the lenders.

PetSmart’s efforts to modify its loan were initially met with reluctance from investors. PetSmart then revised the offer with softer terms that got the majority support, according to sources familiar with the proceedings.

“Subsidiaries are not regulated by debt documents, which leaves plenty of room for corporate abuse,” Potenza said. “Companies can transfer assets into these (subsidiaries) and once they’re there, they disappear. “

While PetSmart secured majority consent to modify the term loan, sources said some creditors should still fight against the company’s transfer of, the $ 3.35 billion acquisition of PetSmart in May 2017.

PetSmart did not respond to a request for comment. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Lynn Adler.)