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S&P: Few leveraged loans protect against J.Crew-like collateral transfers

The practice of transferring core assets from loan collateral packages without lender consent has sparked significant concern among market participants about the loosening of protections traditionally associated with the asset class. Despite efforts by loan investors to add protective language to credit agreements and mitigate intellectual property leakage, only a modest percentage loan documents executed in the aftermath of J. Crew's high profile IP transfer have specific provisions to address the risk, a study by S&P Global Ratings finds.

The study, covering a sample of more than 120 credit agreements (or about a third) executed and rated by S&P Global Ratings in the U.S. between early 2017 and February 2019, found that just 17% included specific language to restrict the transfer of material intellectual property.

In addition to J. Crew in 2016, notable examples of collateral leakage in the past few years include Neiman Marcus’s 2017 transfer its MyTheresa brand to a subsidiary beyond creditor reach and PetSmart’s 2018 transfer of over a third of its Chewy.com equity to separate entities.

The review focused on sectors that S&P viewed as likely to have a high concentration of core assets in intellectual property. Its search showed that 17% of the retail credit agreements sampled had a form of direct blocking language; 23% of the tech credit agreements sampled had a form of direct blocking language; 13% of the media credit agreements sampled had a form of direct blocking language; and 13% of consumer products credit agreements sampled had a form of direct blocking language—sometimes referred to as "J. Crew Blockers.”

“We believe that the relatively modest percentage of deals with such provisions reflects the limited ability that syndicated loan investors have to materially influence deal terms, which are largely set privately prior to syndication, with limited investor input or ability to demand changes,” lead analyst Timothy Corprew writes.

Given that loan agreements are generally not standardized, provisions to block potential IP collateral leakage have taken different forms and the ultimate effectiveness of the various approaches to mitigate this risk remains to be seen. Furthermore, the risk of collateral leakage can extend beyond IP to other important assets.

The full report, including a summary of provisions uncovered in the analysis can be found in the report titled: “A Look At "J. Crew Blocker" Provisions In Loan Agreements,” (client-only access) on RatingsDirect.

LCD is an offering of S&P Global Market Intelligence. S&P Global Ratings is a separately managed division of S&P Global.

 

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.