FundKite CTO Alex Shvarts was recently featured in a Reuters article, “Loan documents deteriorate further following Neiman Marcus lawsuit.” The article discusses how new language in loan documentation protects the borrower so much that lenders and funders would be at a total loss were the deal to go south.
In a borrower favored market, many businesses are able to sneak or blatantly include new language that would hurt the lender if the deal sours. And so begins the debate on who should have more protection in financing businesses, and how is the protection able to be fairly implemented?
The article starts as follows:
“Companies emboldened by a favorable court decision for Neiman Marcus are taking advantage of the outcome to include language in loan documents curbing how corporates allocate the collateral packages of their subsidiaries, making it even harder to recover losses.
“The language, which stops individual creditors from taking legal action without the agreement of a majority of lenders, is a win for borrowers and yet another sign of eroding lender protections since last year as demand for loans has exceeded supply. Typically, a lender only required approval from the administrative agent to proceed with legal action.
““We believe this new language from borrowers is in response to (Neiman Marcus’) litigation,” said Valerie Potenza, a senior covenant analyst at credit research firm Xtract Research.
“Since then, retailer PetSmart has included provisions in loan documentation limiting an individual lenders’ right to sue the borrower, according to a report from Xtract Research.
“The borrower-friendly environment hinders the chance for more balanced credit agreements especially given the term loans’ loose language was drafted in agreements as far back as six years ago, market sources said.
““Once the horse is out of the barn and a mile down the road, (lenders) are stuck with trying to get an agreement based on something that is not quite the collateral you thought you were getting,” said Tyson Benson, an intellectual property attorney with Harness Dickey.
“Without collateral as a form of protection, lenders could be left relying on little other than the performance of a borrower to repay debt, according to Alex Shvarts, the chief technology officer at alternative investor FundKite.
“”If you have limited protections … It’s no longer a leveraged deal, but a roll of the dice,” Shvarts said. “It’s important for investors to tighten up underwriting guidelines and block such transfers from happening.””
The article then continues to discuss how another retailer, PetSmart, was able to convince its lender to sign an agreement saying they would not be able to sue PetSmart over other company and money transfers. You can read the full article by visiting Reuters.
To read more FundKite in the press, click here for our previous article on Forbes.