NEW YORK, May 22 (LPC) – Data service provider Sirius Computer Solutions wants to prevent holders of derivatives from influencing business decisions that benefit their bottom line to the detriment of the borrower.
The wording of the finance package supporting the buyout of Sirius by private equity firm Clayton, Dubilier & Rice (CD&R) prohibits lenders with derivative positions from voting on corporate issues, three sources familiar with the deal say credit. As investor activism increases, the borrower wants to prevent these holders from declaring a default that could be profitable for their covered transactions.
The new provision limits the ability of holders of Credit Default Swaps (CDS) to call a default by removing their right to vote on decisions of creditors. In the future, companies may also consider preventing CDS holders from holding a loan, two other sources said.
Companies are trying to tighten the literature on the US $ 1.2 billion leveraged loan market to prevent aggressive investors from pushing programs that benefit their CDS holdings. The move to include the new, stricter language follows two high-profile U.S. court cases, one involving homebuilder Hovnanian and the other with telecommunications service provider Windstream.
A number of investors are concerned that some proposals, especially the one that completely prevents CDS holders from fully owning the loan, will limit the buyer’s base, making it more difficult to sell the debt, especially in an in-crisis situation. difficulty. But others said they were reassured to know that their fellow union members would not have conflicting loyalties.
Sirius has included the CDS language in its credit agreement for a US $ 940 million financing to support CD&R’s acquisition of the company from Kelso & Co which was announced last month.
A syndicate of banks led by Credit Suisse was seeking commitments on a term loan of $ 750 million on Tuesday. The company is also seeking a $ 190 million revolving line of credit.
The credit agreement was amended on Tuesday to clarify that only the direct lender, such as a secured loan bond, would be banned from voting if it held CDS, according to a sixth source. This CLO would be allowed to vote if the company’s hedge fund held CDSs in the name.
Votes prohibited in the Sirius deal will be deemed to have voted with the majority of holders who do not have CDS positions, according to the sixth source.
E-mails to Sirius spokespersons were not returned, nor was an e-mail to a CD&R spokesperson. A spokesperson for Credit Suisse declined to comment.
CDS effectively provides insurance to investors, who may hold a business loan, bond, or both, by providing protection against a negative credit event, including default or filing for bankruptcy.
If the contract is triggered, the CDS seller will pay the buyer the difference between the par – 100 cents on the dollar – and the determined value of the debt.
Solus Alternative Asset Management filed a lawsuit last year after Blackstone Group’s GSO Capital Partners helped organize a finance package for Hovnanian that would bar the homebuilder from making its next interest payment. This created a “default” credit event that allowed CDS buyers to receive payment for their contracts.
GSO and Solus agreed to settle the case in late May 2018 and Hovnanian made the May 1, 2018 interest payment, according to a press release.
Windstream filed for bankruptcy in February 2019 after a court ruled in favor of Aurelius Capital Management, which alleged that a split of the company’s telecommunications network assets in 2015 violated its agreements with bondholders. (Reporting by Kristen Haunss. Editing by Michelle Sierra and Lynn Adler)