Banks are bracing for a potential financial storm, as evidenced by their increasingly stringent legal terms for debt-laden companies. This trend is exemplified by JPMorgan's recent deal with Coherent Corp, where a new clause, dubbed the 'J.Crew blocker,' made headlines.
In 2017, J.Crew executed a controversial move, shifting $250 million worth of trademarks to a Cayman Islands entity, effectively shielding them from creditors in case of bankruptcy. This 'trap door' maneuver left older creditors in the lurch, unable to access the assets they were owed. Fast forward to September, and JPMorgan's deal with Coherent included a similar clause, preventing such asset transfers.
But here's where it gets controversial: this J.Crew blocker is becoming increasingly popular. In just one year, its inclusion in private credit deals has soared from 26% to 45%, according to Noetica, a private credit deal advisory firm. Noetica's AI-powered contract analysis reveals a growing trend of lenders fortifying their positions.
The data suggests lenders are anticipating future turmoil. Dan Wertman, Noetica's CEO, interprets this as lenders' anxiety about the credit market's future. They are not just being cautious; they are actively preparing for potential distress.
One indicator of this is the rise of 'anti-Petsmart' clauses, a response to a 2018 incident where Petsmart moved a significant portion of its Chewy stake to an unrestricted subsidiary, frustrating creditors. Another trend is the increasing demand for unanimous creditor consent for new debt or changes in repayment terms, ensuring lenders' interests are protected.
Interestingly, lenders are also becoming more flexible in how borrowers spend money, with more lenient terms for investments and dividend payments. However, leverage ratios are declining, indicating lenders are becoming more conservative in their lending practices.
While there are no major red flags yet, small cracks are appearing in the credit market. Covenant defaults and PIK deals are on the rise, suggesting some companies are struggling to meet loan terms. Kroll Bond Rating Agency predicts a 5% default peak, indicating a potential wave of financial distress.
So, is this a sign of a looming financial crisis, or are lenders simply being prudent? The data suggests a cautious approach, but the reasons behind it remain a topic of debate. What do you think? Are these measures justified, or is the financial sector overreacting?
