An “Envision Blocker” refers to a tripartite lender protection meant to prevent the value leakage and priming maneuver that became the hallmarks of the 2022 Envision LMT.  

In the 2022 deal, Envision Healthcare incurred $2.6 billion of new secured financing (which would have violated the terms of its existing credit facility) by designating its profitable “AmSurg” business as an unrestricted subsidiary, and thereby carving it out from the restricted group. As a result, the AmSurg sub ceased to be subject to the restrictions in the company’s credit agreement and its valuable assets were no longer available to lenders as collateral or indirect credit support. This new debt was then exchanged in an uptier transaction for new priming debt held by a group of required lenders (as defined in the loan document). The exercise combined elements of a drop-down and uptier exchange and left the non-participating creditors with heavily subordinated debt, low recovery prospects and a collateral package stripped of “crown jewel” assets.

The key objective of Envision blocker language is to protect against a company’s ability to invest in and/or otherwise sell or transfer assets to unrestricted subsidiaries, and to hedge against the risks that arise from that ability. Indeed, because Envision made use of several mechanisms, Covenant Review notes, and we agree, that a true “Envision” blocker is an amalgam of (1) a “J. Crew” blocker, (2) Serta protection barring non-pro rata uptier exchanges and (3) limited investments capacity.

A well-drafted blocker will seek to minimize unintentionally generous investments capacity lurking throughout the loan terms. The language should therefore (1) restrict transfers of value to unrestricted subsidiaries (in the form of investments, dispositions, sales or designations) by requiring that such transfers be made exclusively pursuant to an explicit unrestricted subsidiary basket (in lieu of, for instance, allowing a borrower to access general investment capacity for such investments) and (2) set a cap on the total size of unrestricted subsidiaries. The latter could be expressed as a percentage of EBITDA (ideally, less than 1.5x) and/or assets. In this way, rather than being able to aggregate various investments (including restricted payments) baskets, a company must either utilize the unrestricted subsidiary basket exclusively, or comply with an aggregate cap. Drafters need to consider other enhancements, such as whether this limitation should apply at the time any entity is designated as an unrestricted subsidiary or at all times during the life of existing loans, or whether it makes sense, given the parameters of the transaction, to incorporate a pro forma leverage or interest coverage ratio test for the designation of entities as unrestricted subsidiaries.

To address concerns around “reclassifications,” “reallocations” and “rebuilding” from other baskets to the unrestricted subsidiary basket, lenders should pay attention to the netting of debt or returns on transferred assets from the utilization of the applicable investment basket. Lastly, documents will often include a prohibition on such transfers done in contravention of the purpose of the covenants or other restrictions in the loan documentation.

The Envision blocker is a guardrail intended to address key structural concerns arising from holes in covenant terms that contain unhampered investments capacity and allow for uptiering maneuvers. Such were the flaws in Envision’s pre-LMT credit agreement, which famously contained material capacity for investments in, and by implication the capacity to sell, distribute or transfer assets to, unrestricted subsidiaries and only required consent of a simple majority of lenders to subordinate outstanding loans.

To preserve value within the restricted group of a company and mitigate the risk that it might move a profitable business line, segment or entity away from the restricted group, the “J. Crew” limitations prong of the blocker focuses lenders’ attention on the aggregate unrestricted subsidiary capacity in a company’s capital structure.

The “Serta” prong of the blocker is equally important. The absence of heighted lender voting thresholds may lead to a scenario where another lender is granted a lien on relevant assets (or a direct claim against the subsidiary that holds them), granting such lender a senior claim against those assets. A robust Envision blocker shores up this loophole by including an affected lender vote for subordination purposes, thereby preserving creditors’ position in the same capital structure.

It is also important to consider that while J. Crew represents the principle that certain key assets (notably IP) may be transferred to unrestricted subsidiaries, Envision typifies a structure where a borrower has the aggregate capacity to move materially valuable assets (of any type) to the latter.

For further information, please review the LSTA’s “Private Corporate Credit – Representative Liability Management Transaction Protections for Credit Agreements”, which refers to this mechanic in the “General Considerations” section. Please also reference the LSTA’s “Liability Management Transaction: Drafting Fixes” Market Advisory.

Uptiering Mechanics and Serta Protection

What is colloquially referred to as a “Serta blocker” (named for the 2020 Serta Simmons LMT, as previously discussed here) seeks to prevent a non pro rata “uptier transaction”, in which a borrower offers to repurchase its loans from the majority lenders under its credit agreement in exchange for new higher-priority debt, and in connection with an amendment to the agreement.

Uptiers hinge on a borrower’s ability to engage in non pro rata purchase transactions by skirting pro rata requirements and contractually subordinating existing obligations. Blocker language will address this loophole by providing that unanimous (or alternatively, affected) lender consent is required for amendments to payment/lien subordinate existing loans to new superpriority debt. The notion here is that if the borrower provides each affected creditor an equal opportunity to participate in the new tranche and the lender refuses the opportunity, that creditor forfeits the right to object. A heightened consent level would also apply to modifications to other key provisions (including, but not limited to, pro rata sharing, pro rata treatment, borrower buyback mechanics, and intercreditor arrangements). The practical effect of this is to render subordination a sacred right and to more clearly delineate the circumstances under which non pro rata offers are permitted.

Serta protections were introduced to debt markets following the 2020 Serta Simmons “uptiering” LMT, in which the company, using the “open market purchase” exception to the ratable treatment requirements of its 2016 credit agreement, subordinated minority lenders’ loans in connection with a non pro rata uptiering transaction approved by required lenders.  

Subordination

Prior to the Serta uptier LMT, many loan agreements also excluded subordination (whether via payment or lien subordination) from the “sacred rights” provisions requiring unanimous or affected lender consent. As a result, a simple majority lender vote would be sufficient to effect amendments subordinating existing loans to new, supersenior debt.

Pro Rata Requirements and Exceptions

Most broadly syndicated loan facilities will require the ratable treatment of lenders vis-à-vis each other and that offers by the borrower (or its sponsor) to purchase debt be bona-fide offers made to all lenders on a pro rata basis. However, typical agreements will except from the pro rata treatment requirement non pro-rata offers by the borrower to repurchase its loans made in connection with (i) “open market purchases,” wherein the borrower contacts individual lenders and negotiates a purchase price, and/or (ii) “Dutch auctions,” in which the agent holds an auction and the loans of all applicable lenders are purchased on a pro rata basis at a final purchase price. While such exemptions are pervasive, the phrase “open market purchase” is not treated as a defined term in most loan agreements, leading to frequent use by borrowers of the exemption to implement uptier exchanges, such as TriMark, Boardriders and Robertshaw, as notable examples.

Open Market Purchase Exception

Such transactions, and the language that facilitates them, are increasingly in focus following the Fifth’s Circuit December 31, 2024 decision, in which the court found that the company’s 2020 LMT was not a permissible “open market purchase” under the terms of its 2016 credit agreement. Notably, the court reasoned that the “open market” qualifying language of the “open market purchase” exception must be construed to refer to the “secondary market for syndicated loans.” (This is in contrast to one-on-one private negotiations as these do not operate within an “open market” and are instead “merely a general context where private parties engage in non-coercive transactions with each other.”) Because the company did not purchase the debt on the secondary market but privately negotiated the buybacks with individual lenders, it did not satisfy the exemption.

Concurrently, the Appellate Division in New York found that the 2022 Mitel Network non pro-rata uptier exchange was permitted under that company’s credit agreement. Importantly, the operative language in the Mitel document differed from the Serta loan because it did not contain an “open market purchase” exception and explicitly allowed the company to make non pro rata “purchases” of loans from individual lenders “at any time.” Given the differing terms, the court determined that the Mitel uptier satisfied the “purchase” exception to the pro rata ratable treatment requirement.

The 2020 Serta uptier demonstrated that, in conjunction with lowered voting thresholds, even carefully negotiated exceptions to buyback provisions permit borrowers to circumvent pro rata treatment requirements and subordinate minority lenders.

Uptiers are advantageous for distressed borrowers looking to access liquidity and engage in out-of-court restructurings. but lead to poor recovery rates for minority lenders who do not participate in the new priming debt and are left with now-subordinated debt that is worth less than before (and in contrast to majority lenders who receive more senior loans frequently at an above-market price).  Serta blockers in the form of heightened voting thresholds work to eviscerate this “superiority priming capacity.”

For these reasons, the 2024 Mitel and Serta decisions are highly consequently for market participants. The Fifth Circuit’s holding that Serta’s “open market purchase” exercise failed to pass muster within the four corners of its loan agreement, as well as its general contention that ‘“open market purchase” exceptions “will often not justify an uptier”, means that borrowers will need to carefully approach the drafting of their agreements.

More generally, the two decisions may have market-wide ramifications for party behavior.  We anticipate that the Serta decision will dissuade borrowers (especially those facing capital constraints) from readily relying on an “open market purchase” exception to engage in non pro rata exchange offers. In the same vein, we expect that it may chill a lender’s willingness to resort to such maneuvers in order to “improve [its] position in a distressed capital structure.”

Conversely, the Mitel holding may not chill the use of uptiering transactions writ-large, but simply alter their structure and enabling language. The decision is expected to encourage aggressive sponsors and borrowers to take a proactive approach by negotiating credit agreement language which expressly permits “privately negotiated transactions” and debt for debt exchanges. Similarly, parties may opt to do away with “open market” qualifiers in their documents so that they match the terms of the Mitel document.

Market participants have also commented on the limits of these decisions when it comes to improving lenders’ negotiating power, given they are not dispositive on other U.S. courts and may not implicate the private credit space (given the absence of a “secondary market” for private credit loans). More generally, they may simply encourage borrowers to engage in other LMT structures even as the tide of uptiering abates.

For further information, please review the LSTA’s “Private Corporate Credit – Representative Liability Management Transaction Protections for Credit Agreements”, the LSTA’s “Liability Management Transaction: Drafting Fixes” Market Advisory and “The LSTA’s Complete Credit Agreement Guide, Second Edition.”

An “incremental” or “accordion” facility is a mechanism for augmenting the amounts available under a credit facility, traditionally only for a revolver, but increasingly to enable the borrower to incur additional term loan debt. While initially uncommitted, such an “upsize” enables a borrower to increase commitments under its outstanding facility, subject to an agreed-upon cap, where new lenders agree to provide these, or where existing lenders agree to increase their standing commitments. Because incremental loans are uncommitted, incremental lenders must agree to the loan terms upon closing of the upsize.

Standard credit agreements will require that the key provisions of an incremental loan, such as the interest rate, maturity and other material terms, be on substantially the same terms as the outstanding facility. Consequently, incremental loans cannot contain covenants that are more favorable to the incremental lenders (often measured “in all material respects”) than the terms in the original credit facilities without agent or lender consent. However, many modern loan agreements allow for this flexibility if the more conservative terms (i) are also provided for the benefit of the existing lenders, (ii) only apply after the initial maturity date and/or (iii) reflect “market terms”.

Incremental facilities are typically used to finance acquisitions, investments or dividend payments. Consequently, sponsor-friendly loan agreements often contain limited conditionality for incremental debt raised for the purposes of M&A activity.

One of the most important areas of focus for lenders in accordion financings is the structure and sizing of baskets governing incremental debt capacity. In market-standard loan agreements, the relevant baskets will provide that an incremental debt tranche may be incurred up to a specified “free-and-clear” amount (or “freebie” basket) plus any ratio debt baskets (i.e., unlimited debt subject to pro forma compliance with a maximum leverage ratio). As indicated in the moniker, “free-and-clear” capacity is not subject to a leverage test, and will be drafted as a “starter” basket based on the greater of a (i) dollar amount and (ii) percentage of pro forma EBITDA (i.e., an EBITDA-based “grower prong” on top of the fixed amount), and which frequently adds the amount of specified voluntary debt prepayments.

 Aggressive deal documents may also provide for additional flexibility for the reclassification of free and clear incremental debt as ratio-based debt.

Incremental loans, and by extension the baskets that govern them, are key tools for borrowers to obtain additional liquidity in an efficient and cost-effective way. They are an attractive avenue for borrowers, given that deal parties do not need to renegotiate existing terms. For this reason, incremental “upsizing” presents an opportunity for borrowers to secure financing with lower transaction expenses, as compared to embarking upon a new debt issuance.

In addition, overall incremental capacity is a key focus for lenders when crafting the incremental provisions of a credit agreement, as capacious “free-and-clear” baskets afford a borrower the opportunity to incur debt and effect changes in its capital structure.

Indeed, the amount of new debt a borrower is permitted to incur may materially affect a creditor’s recovery.  While lenders do not pre-commit to extend incremental debt, by agreeing to the terms governing this they are pre-approving the incremental leverage and consenting to share collateral with additional lenders. This creates the risk that the incremental could rank ahead of existing creditors, making “freebie”, ratio debt and incremental terms a focus of junior debt holders.

The terms applicable to the incremental provisions will also raise drafting considerations elsewhere in credit documentation, implicating MFN provisions (i.e., to provide that if the incremental facility is priced more richly than the existing loans, the margin on the existing loans is automatically increased as discussed here), the identity of the incremental lenders, amortization adjustments and the allowance and terms of any delayed draw term loans. Variations exist as to the ability to grow the “free-and-clear” amount through certain voluntary debt prepayments, permanent revolver commitment reductions and loan buybacks.  

Lenders will also prioritize the parity of deal terms applicable to the accordion and existing tranches in incremental raises, given that asymmetry of terms may raise enforcement issues. From an economic standpoint, where the terms are more favorable to the incremental lenders than the terms of the existing loans, then the existing loans may lose value as lenders trade out of the existing credit facilities and into the incremental facility.

For further information, please review “The LSTA’s Complete Credit Agreement Guide, Second Edition” .