Chewy Language Credit Agreement

Meanwhile, many lenders have heard of the steps taken by J. Crew to remove its valuable intellectual property from the collateral that enables its fixed-term loans and wealth-based credit facilities through a skillful (albeit controversial) use of transactions permitted under the negative covenants contained in the credit agreements that govern these credit facilities (the “baskets”). Some law firms and financial assessment sites have offered credit document revisions to protect creditors from another Chewy incident. While such proposals are well-intentioned (and may prove necessary in some cases), we believe that proposals such as banning dividend and distribution baskets from being used to distribute equity stakes create complications for borrowers and sponsors and, ultimately, are not accepted by sponsors and their credit companies. As a result of this analysis, creditors will have to weigh these concerns against the guarantees contained in the final documentation. For example, mandatory down payment rules may require debt repayment, minority shares in non-full subsidiaries are not charged to consolidated EBITDA and, in the context of ABL, lenders may provide additional consolation that credit risk should not exceed the credit base. While Chewy`s “phantom guarantee” did not attract the same attention as J. Crew`s “trap” (another controversial tactic in which a private borrower was debited of assets by secured creditors), creditors are rightly concerned that this scenario could be replicated in other cancelled loans. Based on a general review of larger credit facilities, guaranteed by sponsors, we believe it is customary for limited payment and investment baskets to be used to encourage a subsidiary to no longer be a 100% subsidiary, either by distributing equity shares of the lending party structure, or by introducing minority stakes in unlimited subsidiaries. . .

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