USA Law and Practice Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
3.9 Call Protection Private credit providers continue to seek broader call protection than that typically offered in the syndicated market. But while private credit pro - viders continue to seek 103/102/101 or 102/101 “hard call” formulation these protections have been diluted by various carve-outs not histori - cally included in “hard call” formulations. Exclusions Recent private credit transactions generally include some combination of the following exclusions: • internally generated cash; • a qualified IPO; • sale of all or substantially all of the applicable • some sort of “transformative transaction” or “enterprise transformative event” (typically defined as: (x) an acquisition or disposition of significant size; (y) a transaction that is not permitted by the existing debt documents; and/or (z) a transaction that if consummated would not leave the borrower sufficient flex - ibility under the existing debt documents). borrower’s assets; • change of control; • dividend recapitalisations; and Of course, many transactions will include some subset of this list and there is certainly room for negotiation around underlying definitions like “internally generated cash” and “transformative In a traditional 102/101 “hard call” formulation, any prepayment made in year one (if not eligible for an exclusion/carve-out), would be accom - panied by a 2.00% premium. In the most recent matters, sponsors have sought interim step- downs such that the prepayment premium would transaction”. Step-Downs
words, after year two (or, in some cases, year three), all interest payments must be made fully in cash. Amount of PIK When available, a PIK option will allow for some portion of the “applicable margin” due on a term loan facility to be paid-in-kind. The amount of “applicable margin” that may be paid-in-kind is typically capped at 50% although this is nego - tiated between the parties. Moreover, where a term loan facility includes a pricing step-down (or series of step-downs), private credit provid - ers may expect a “minimum cash pay” construct which prevents the amount of cash margin paid from dipping below a certain level (eg, a 2.50% “minimum cash pay”). PIK Premium Where a PIK option is available, private credit providers expect to be paid a premium when the PIK option is exercised. This premium may be hardwired at 50 bps so that any usage of the PIK option produces a 50 bps premium. Alter - natively, some formulations will allow the bor- rower to only use a portion of the PIK option and only pay a portion of the PIK premium (eg, only convert half of the allowable 50% of the margin into PIK (ie, 25% PIK) and only pay half of the premium (ie, 25 bps). Amortisation Private credit transactions that include a PIK option often include some level of amortisa - tion holiday. A common formulation would be to forgo amortisation in any quarter in which a PIK election is made. That said, there are some private credit deals in the market without any amortisation at all for the life of the loan.
332 CHAMBERS.COM
Powered by FlippingBook