Shearman & Sterling LLP
Issue link: https://digital.shearman.com/i/1494420
Drop-Down Transactions – Issue Spotting and Solutions 24 Issues Solutions Excessive Restricted Payments and Permitted Investments capacity • Reduce aggregate capacity under general baskets (i.e. the build-up basket, the general RP basket, leverage-based RP basket, general and ratio-based Permitted Investment baskets, investments in similar businesses, Unrestricted Subsidiary basket, JV basket and Available Amount basket). Weak Unrestricted Subsidiary designation restrictions, which can facilitate priming and "double dipping" (i.e. on-lending proceeds of priming debt to the restricted group through a secured proceeds loan) • Many sponsor documents have no conditions to Unrestricted Subsidiary designation other than sufficient RP/investments capacity. • A stronger provision would limit Unrestricted Subsidiaries from (1) owning any equity of or holding any lien on assets of the Borrower/Issuer and its subsidiaries or (2) incurring debt that is recourse to the Restricted Group. Large debt baskets and: (i) Corresponding permitted collateral lien capacity leading to collateral dilution (ii) Corresponding permitted lien capacity leading to collateral subordination (iii) Limited or no cap on non-guarantor debt incurrence and/or weak Additional Guarantors covenant leading to structural subordination (i) Reduce large debt baskets, push against Pick-Your-Poison debt capacity and limit the amount of debt which can be secured on the collateral. (ii) Push for modest general Permitted Liens basket, and liens to secure local facilities, securitization debt, or capital lease obligations where discrete pools of assets are allocated to particular lenders. (iii) Push to include caps on non-guarantor debt incurrence, reduce high threshold amounts for guarantees and broaden types of debt captured, and strengthen the guarantee release provisions (i.e. make sure it is not just a majority lender matter and do not limit it to "all or substantially all" the guarantees). Absent or ineffective J. Crew Protections • Push for stronger protections which prevent any unrestricted subsidiary from owning or exclusively licencing any material assets. Ability to release security by way of: (i) Weak asset sales covenant; (ii) Weak Amendments provisions; (iii) Permissive Permitted Reorganization provisions (i) Limit the types of collateral that can be released or require equivalent liens to be granted. (ii) Make release of security a supermajority matter. (iii) Require that value of the collateral be preserved or for substantially equivalent liens to be granted following release. Liability Management and Refinancing Solutions in Europe