Guides & Studies

Blocking the Next "Trap Door": Strengthening Collateral Protection By Limiting Baskets In Credit Agreements

As the volume of high-profile bankruptcies continues to climb, companies are now in the process of seeking to amend and re-negotiate their credit agreements, or find new sources of financing in efforts to avoid bankruptcy.

Within the credit agreements, corporate borrowers are required to pledge collateral in order to secure their, or their guarantors’, obligations under the credit documents, and comply with various covenants on actions that the borrower may not take. However, to provide borrowers with limited flexibility to continue operating in the ordinary course of business, many negative covenants include a basket, or deductible - a maximum dollar amount relating to a specific exception to a negative covenant. This is known as the “trap door”.

In this study, we dive into how retailer J.Crew leveraged three baskets to effectively restructure its debt and access additional funding to avoid bankruptcy by ways of transferring collateral to unrestricted subsidiaries not bound by negative covenants. Other high-profile companies such as Cirque du Soleil, Neiman Marcus, Revlon followed suit with similar transactions.

As a result, lenders and borrowers must take action quickly to analyze their existing and proposed credit facilities, and identify any potential weaknesses in their renegotiated agreements for collateral leakage or breach of obligations.

Download the study to learn more about:

  • How to use Kira’s Smart Fields and Answers & Insights capability to create a series of questions to quickly, and accurately analyze agreements for general baskets
  • The indication of weakness in covenants and potential exposure to the “trap door”
  • The importance of evaluating the risk of collateral leakage and practical steps to mitigate risks for lenders and borrowers

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