After last month’s surprise court ruling that let certain Revlon creditors keep $500 million of the mistaken transfer, banks began inserting new language into loan deals that would require investors to return the money if such an error occurred again. The provisions, which were in the works before the decision, aim to strengthen the hand of administrative agents that oversee interest distributions and repayment schedules.
At least four leveraged loan issuers came to market with deals that included “Revlon clawback language” in credit documents in recent weeks. Banks including Citigroup, Barclays Plc and Jefferies Financial Group Inc. have led offerings with the provisions, according to people with knowledge of the matter who asked not to be identified discussing private transactions. The exact wording can vary, but they generally grant the agent bank the “sole” power to determine when a lender payment is a mistake and set procedures to recoup the funds, according to Xtract Research.
“Finders can’t be keepers,” Xtract covenant analyst Jenny Warshafsky said in an interview.
Representatives for Citigroup and Barclays declined to comment. A representative for Jefferies didn’t immediately return a request for comment.
Being a loan agent, which involves administrative tasks like collecting and distributing interest payments, managing amortization schedules, and providing other housekeeping services, isn’t high-fee work for a bank, but is seen as necessary to gain more lucrative underwriting and advising mandates.
After Citigroup inadvertently wired its own funds to Revlon lenders while serving as an agent and lost its fight to recover some of the money, it was forced to restate earnings after writing down the part of the loan it now owns. Reducing such risks for future deals makes sense, said Justin Forlenza, a senior covenant analyst at Covenant Review.
“It’s a logical response,” Forlenza said. “It shook them up that they could lose this much money on a mistake.”
For leveraged loan buyers who have spent years complaining about weakening investor safeguards in a fast-growing market, the clawback language is yet another sign of worsening protection for lenders. Even though loan-market activity slowed last year amid the Covid-19 pandemic, covenants remained weak, according to Moody’s Investors Service. The credit grader predicts protections will further deteriorate in 2021 as the market heats back up.
“If I was a lender, this is not one of the things I would push back on, Warshafsky said. “There are so many other things to worry about that are more likely to come up,” but it “is adding insult to injury in such an aggressive market.”