In Next Pandemic, Buyout Firms Want Reprieve in Debt Deals

Private equity is already positioning for the next deadly virus.

Some buyout firms are seeking new terms in loan agreements to help their companies avoid defaults if earnings drop in a future pandemic, according to lawyers with knowledge of the discussions. They’re getting resistance from banks concerned the proposals allow borrowers too much flexibility and would scare away investors.

Fights over the fine print in credit agreements became particularly bitter during the Covid-19 outbreak, with companies strapped for cash as business withered. Those tensions are making creditors wary of giving away any bargaining power.

Proposed terms vary, but the most aggressive version would allow a company to exclude the effect of a future pandemic from the calculation of earnings used to determine whether it’s in compliance with creditor covenants. The covenants typically rely on earnings-based financial metrics to determine whether a company can take on additional debt, sell assets or distribute dividends.

“Nobody is going to give you carte blanche to add back lost profits without having any context,” said attorney Richard Farley, chair of the leveraged finance group at Kramer Levin Naftalis & Frankel, who advises investment banks on underwriting and has seen a handful of such requests from private equity firms.

More-flexible covenants may make sense “for an airline, but not for your roll-up of pool installation companies,” said Jake Mincemoyer, head of the U.S. leveraged finance group at Allen & Overy, a lawyer who has also reviewed similar requests. A roll-up is the practice, common among private equity firms, of buying several companies in the same industry and merging them.


Many existing credit agreements already allow companies to treat expenses they incurred as a result of Covid-19, such as providing their employees with protective equipment, as non-recurring and to add them back to earnings. Buyout firms propose going further, allowing companies to make up for revenue lost in a pandemic by using their own estimates of how they would have performed without it.

Investors like David Knutson, head of credit research for the Americas at Schroders Plc, are concerned that pandemic-related adjustments could be a Trojan horse that could lead to exceptions for other natural disasters or even fluctuations in the business cycle.

“It’s an attempt to find a crack in an indenture and pry it further open,” Knutson said in an interview. “We’re gonna look back at some of this stuff and laugh at how silly it was.”

The concept is reminiscent of the coronavirus-adjusted earnings -- or Ebitdac for earnings before interest, taxes, depreciation, amortization and coronavirus -- that some firms adopted in 2020 and that was met with mockery across Wall Street and social media.

In the last year, creditors agreed to give companies more flexibility in how they calculate earnings or temporarily waived covenant requirements to avoid a wave of defaults. But such flexibility was typically the result of negotiations and required companies to pay fees or additional interest.

According to Farley, lenders may become more amenable in the future, especially if demand for risky debt continues to outpace supply.

“Many terms that are now customary started out as proposals that most thought of as outrageous,” he said.

©2021 Bloomberg L.P.

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