US creditors push back against some creative funding trades, Moody's says

By Shankar Ramakrishnan

(Reuters) - Lenders are starting to ask for extra protection in junk-rated corporate loans to damp down on a growing practice among some stressed companies to engage in a creative financing technique that allowed them to raise new money, said a Moody’s report on Thursday.

Over the past year, many junk-rated companies like At Home Group and Trinseo have engaged in liability-management transactions, called "double dip," to raise new liquidity to pay back maturing debt or in some cases to remain solvent, said Moody's.

Under a double-dip, debt is issued by a financing subsidiary, with guarantees from the parent and other subsidiaries. The subsidiary then gives a loan to the parent which then becomes collateral for the new debt.

"Double-dips allow borrowers to attract new money by offering some lenders a bigger share of any recovery pie” said Derek Gluckman, a Vice President with Moody’s Private Credit team.

These transactions gave some lenders a distinct advantage over others in existing credit agreements as they could claim two times the value of a bankruptcy claim in what is also called “creditor-on-creditor violence”.

Lenders were now starting to fight back against the practice as existing documentation did not prevent companies from doing more such transactions, said Moody’s in the report.

In the documentation of a new proposed term loan sought by Thryv and two other borrowers currently seeking lenders, the borrower has been asked to include a clause that prohibits it from taking an intercompany loan that was secured on its assets and one that will be paid at the same time as the new loan, said the report.

The clause, called At Home provision that referenced the double-dip restructuring by At Home in May 2023, would ensure than an intercompany loan would only be paid after existing lenders, preserving the undiluted claims among senior creditors.

These protections will proliferate – even as other covenants (structural safeguards in loan documentation) weaken, said the report.

"Lenders will insist on these features even where they are accommodating elsewhere – threats to a lender’s position in the capital structure are simply too powerful to ignore," it said.

(Reporting by Shankar Ramakrishnan; Editing by Chizu Nomiyama)