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Anti-net short provisions in syndicated credit facilities

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Todd Koretzky


New York

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03 September 2019

Following Windstream Holdings Inc.’s court battle with one of its bondholders, and its subsequent bankruptcy filing, new credit agreement terms have begun to appear in the U.S. syndicated loan market.

Referred to as “Windstream Provisions,” these cutting edge terms reflect an effort by borrowers (and their financial sponsors) to address a perceived threat from lenders who hold an overall “net short” position in respect of a borrower or its debt, as was reportedly the case with the agitating Windstream bondholder. 

Through the purchase of credit default swaps (“CDS”) or equivalent derivative instruments, such lenders — referred to as “Net Short Lenders” — would stand to benefit economically from the distress or demise of the borrower. 

Moreover, a Net Short Lender may have a financial incentive to become “net short debt activist” investor and utilize its position as a creditor to identify and act upon historical or technical defaults (often referred to by market commentators as “manufactured defaults”) for the purpose of triggering a payout under its CDS or other credit derivative position.

In this way, Net Short Lenders upend certain fundamental assumptions around creditors’ motivations, to the dismay of borrowers, financial sponsors and even other lenders.

Given that the Windstream Provisions apply to certain fundamental sections of loan documentation (e.g., voting, transferability and remedial rights), it is important that all participants in the syndicated loan market are aware of their scope and impact, and are equipped to assess the nuanced issues presented by their inclusion in a credit facility.

Our new white paper, authored by Todd Koretzky, an A&O partner and member of our New York Leveraged Finance team, summarizes the fundamental aspects of the Windstream Provisions, including the most commonly-proposed Net Short Restrictions, and presents our conclusions and observations on this rapidly evolving development in the syndicated loan market.