Secured lenders have long looked to “Disqualified Stock” provisions in credit documentation to protect them against cash leakage on account of junior ranking instruments. However, lessons from a recent private credit liability management exercise (LME) raised questions regarding the perceived benign nature of permitted junior ranking hybrid instruments.
Key Takeaways
- A recent LME transaction widely discussed in media reports did not exhibit qualities of lender-on-lender gamesmanship, although the transaction does provide a new template for value-shifting transactions.
- A review of a random sampling of credit documents highlights another avenue where stressed borrowers can leverage document terms to shift some value away from credit parties, a matter that is becoming a bigger discussion point in private credit deal negotiations.
- Preferred equity—commonly viewed as nonthreatening to senior lenders—can pull rank if the document allows it, and it appears most…