Because MFN application results in the repricing of an outstanding facility, borrowers desiring (or needing) to avoid such repricing may be able to do so by structuring the transaction to fall under an exception or limitation to the MFN provision.

Such carve-outs include sunsets, ensuring that MFN protection applies exclusively to debt issued within a certain timeframe (normally, 6 to 24 months) following the issuance of the existing debt, maturity limitations and other exceptions for debt raised for delineated purposes (such as permitted acquisitions).

The oft-cited J.  Crew blocker prohibits a borrower from utilizing capacity under “restricted payments” and “investment” baskets to transfer (or “exclusively license”) material assets to an unrestricted subsidiary or non-guarantor restricted subsidiary, and thus away from the credit group.  The epithet originated with the 2016 financing provided to the J. Crew fashion conglomerate, in which the company famously used a “pass-through trapdoor loophole” to transfer its material IP to an unrestricted subsidiary. Deals containing this feature are also referred to more simply as being vulnerable to “drop down” transactions.

While the blocker most frequently applies to transfers, ownership or licensing of intellectual property assets to or by such subsidiaries, variations do exist. For instance, where IP is not a significant source of revenue for a borrower, the restriction might apply to transfers of any other “crown jewel”, or material asset(s).

“J. Crew” blockers seek to guard against collateral stripping maneuvers by borrowers. Once an asset is owned by an unrestricted subsidiary, it is no longer collateral for that borrower’s secured lenders and such subsidiary is free to incur debt secured by the transferred assets, making it structurally senior to its existing loans and weakening lender recoveries. In such a way, borrowers can make use of a “drop down” technique to manage upcoming maturities or as a way to access liquidity even when they are unable to borrow further under existing facilities.

By plugging the “gap”, the blocker serves to prevent value leakage and ensure that the security package that lenders agree to at the closing of a financing remains available collateral while the facility remains outstanding.

“Double-dip” protection is language which disallows any intercompany debt of a borrower from being secured on a pari-passu basis to the existing debt under its credit facility. It originated as a means for lenders to thwart borrowers seeking
 to put in place a “double-dip” deal structure.  

The “double-dip” maneuver appears in varying iterations, and was notably employed in the May 2023 Home Group, Inc.  restructuring, leading some market participants to name blocker language “At Home” protection.

The classic “double-dip” strategy conforms to the following: (1) the borrower of an existing credit facility (“Borrower 1”) designates a non-guarantor subsidiary or unrestricted subsidiary (“Borrower 2”) as a new borrower under a separate financing provided by a new group of lenders; (2) Borrower 1 then provides a secured guarantee of the new loan; and (3) Borrower 2 makes a secured intercompany loan to Borrower 1 using the new loan proceeds, subsequently pledging the intercompany receivable  to the second set of lenders as collateral (the “second dip”) for the new financing.  This structure provides the new lenders with two separate and distinct claims on the same collateral package: a direct claim on the guarantee under (2) and an indirect claim on the intercompany loan under (3).

The restriction on pari secured intercompany debt achieves protection of existing lenders by neutering the “first dip” and one of the fundamental features of the “double-dip” construct.

The existing market standard is for credit agreements to require subordination of intercompany debt only if that debt is taken out in reliance on a separate intercompany debt basket (but not pursuant to other debt or lien baskets). The consequence is that other intercompany debt incurred using other basket capacity is not subject to the subordination requirement. 

Borrowers have been quick to exploit this hole in their credit documents to pursue value-creating asset-shifting transactions and therefore as a means to supplement other liability management tools, notably the “drop-down”/”J. Crew” structure described above.

The strategy has become controversial as a certain “position enhancement” tool for one group of lenders, because it elevates the latter to a more senior position vis-à-vis a borrower’s existing creditors, disrupting their relative positions in the capital structure, and enhancing their recovery in a bankruptcy or liquidation scenario. 

The “At Home” protection solves for this lacuna by prohibiting any intercompany debt raised using restricted payment and investment capacity from being secured on a pari-passu basis to the borrower’s existing credit facilities. The result is de facto lien subordination of any intercompany debt raised by the borrower and thereby disabling the “Dip 1” feature of the mechanism.

An up-tier or “Serta” blocker is language intended to prevent a borrower from incurring senior priming debt (and, in many cases, executing a concurrent “roll-up” exchange) from a group of its existing creditors under its financing arrangements.   The language requires all affected, or unanimous, lender consent for any amendments which seek to effect payment and/or lien subordination of the existing debt under a credit agreement. Ideally, they also require such consent for any modifications to other key provisions (pro-rata sharing, pro rata treatment and borrower buyback mechanics, among others).

The name of the drafting fix is based on the 2020 restructuring of Serta Simmons Bedding, LLC, which featured this “priming” or “up-tiering” mechanic.

An “up-tiering” transaction facilitates a balance sheet restructuring of a borrower at the expense of the minority lenders under its credit agreement, who do not participate in the new loans and thus suffer poorer recovery rates.

The advantages for the borrower are manifold, including additional liquidity, reduced overall indebtedness (given the existing loans are often exchanged at a discount to par), as well as additional financial covenant flexibility for financial.

While loan agreements may typically require a unanimous lender vote to release all or substantially all of the collateral, absent a Serta blocker, historically there is no such requirement for payment or lien subordination of the existing debt to another class of debt.

By requiring 100% lender consent for subordination in right of payment or collateral, an up-tiering blocker seeks to remove “superiority priming capacity” and strengthen affected lenders’ voting rights.

The “portability of debt” describes the ability of a sponsor to proceed with a sale of its equity interest in a borrower without running afoul of the “change of control” (“CoC”) provision, which ordinarily would include CoC as an event of default, thereby allowing its existing debt to remain in place, notwithstanding the sale to a third party.  

Market-based portability provisions are typically subject to the following conditions:  the sale transaction must occur within delineated time periods, the sale can only be to a limited list of incoming sponsors, the borrower must satisfy a pro forma leverage test and minimum equity condition, and the borrower must pay a fee. Some lenders may also limit the number of times the portability option is exercised over the life of the agreement.

Portability language acts as an exception to the traditional “change of control” regime which provides that a sale of the borrower to a third party (and thus a change of beneficial ownership of more than 50% of the issued voting equity in the parent of that company) will trigger an event of default or mandatory prepayment.

It has become increasingly common for credit documents to include a portability of debt provision so as to allow changes in ownership/management without violating this covenant.  This affords flexibility to the sponsor and company by allowing an incoming purchaser to step into the seller’s shoes in the target’s loan agreements, leaving the target company’s existing capital structure intact and eliminating the need for the purchaser to obtain fresh debt financing. Not only does this minimize transaction costs, but it renders the company a more appealing M&A target when it is difficult to obtain liquidity and lends efficiency to sale transactions when M&A conditions are advantageous.  

Sponsors may also take advantage of portability capability to delay exiting their portfolio company investments where M&A market conditions are not propitious.  Though portability mechanics often includes complex drafting technology, they allow sponsors to adopt portable capital structures and thus plan for future sales.