May 22, 2019 / 5:03 PM / 6 months ago

Sirius Computer moves to block derivatives holders from speculation

NEW YORK, May 22 (LPC) - Data services provider Sirius Computer Solutions wants to stop derivatives holders from influencing business decisions to benefit their bottom line at the expense of the borrower.

Language in the financing package backing Sirius’ buyout by private equity firm Clayton, Dubilier & Rice (CD&R) prohibits lenders that own derivative positions from voting on company matters, according to three sources familiar with the loan credit agreement. As investor activism rises, the borrower wants to prevent these holders from declaring a default that could pay off for their hedged trades.

The new provision curbs Credit Default Swaps (CDS) holders’ ability to call a default by removing their right to vote on creditor decisions. In the future, companies may also consider blocking CDS holders from owning a loan altogether, two other sources said.

Companies are trying to tighten documentation in the US$1.2trn leveraged loan market to limit aggressive investors from pushing agendas that benefit their CDS holdings. The move to include the new tougher language follows two highly publicized US court cases, one involving homebuilder Hovnanian and the other telecom services provider Windstream.

A number of investors are concerned that some proposals, especially one that completely blocks CDS holders from owning the loan entirely, could limit the buyer base, making it more difficult to sell the debt, especially in a distressed situation. But others said they took comfort in knowing their fellow syndicate members would not have conflicting loyalties.

Sirius included the CDS language in its credit agreement for a US$940m loan financing to back CD&R’s acquisition of the company from Kelso & Co that was announced last month.

A syndicate of banks led by Credit Suisse was seeking commitments Tuesday for a US$750m term loan. The company is also seeking a US$190m revolving line of credit.

The credit agreement was tweaked Tuesday to clarify that only the direct lender, such as a Collateralized Loan Obligation, would be prohibited from voting if it owned CDS, according to a sixth source. That CLO would be allowed to vote if the firm’s hedge fund owned CDS in the name.

The prohibited votes in the Sirius agreement will be deemed to have voted with the majority of holders that do not have CDS positions, according to the sixth source.

Emails to Sirius spokespeople were not returned, nor was an email to a CD&R spokesperson. A Credit Suisse spokesperson declined to comment.

TRIGGER WARNING

CDS effectively provide insurance for investors, who may own a company’s loan, bond or both, by offering protection against a negative credit event including a default or bankruptcy filing.

If the contract is triggered, the CDS seller will pay the buyer the difference between par – 100 cents on the dollar – and the determined value of the debt.

Solus Alternative Asset Management filed a suit last year after Blackstone Group’s GSO Capital Partners helped to arrange a financing package for Hovnanian that would prohibit the homebuilder from making its next interest payment. This created a ‘failure to pay’ credit event that allowed CDS buyers to receive payment on their contracts.

GSO and Solus agreed to settle the case in late May 2018 and Hovnanian made the May 1, 2018 interest payment it skipped, according to a news release.

Windstream filed for bankruptcy in February 2019 after a court ruled in favor of Aurelius Capital Management, which alleged that a 2015 spinoff of the company’s telecommunications network assets violated its agreements with bondholders. (Reporting by Kristen Haunss. Editing by Michelle Sierra and Lynn Adler)

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