(Bloomberg) -- Private equity firms are finding new ways to keep a tighter grip on portfolio companies if they get into financial distress.
They’re adding new provisions to debt documents to curb creditor voting rights, and are also pushing back against so-called cooperation agreements between lenders. These proactive measures by buyout firms come as they strive to maintain the power they’ve been gaining in the past decade as lender protections weakened.
Blackstone Inc. has at least twice added terms in recent debt sales by portfolio companies to limit the voting rights of any single holder in future credit decisions, according to a person familiar with the matter and documents seen by Bloomberg News. The provisions — added to debt issued by software company Ellucian Holdings Inc. and heating and ventilation firm Copeland Lp — cap the rights of individual debtholders at 20%, no matter the size of their stake, while allowing the borrowers to increase that voting cap for specific creditors, the people said.
The result is to give the companies and their private equity owners power to cherry-pick which investors will have a bigger say in future votes. Blackstone declined to comment, while Vista Equity Partners, which is part-owner of Ellucian, didn’t reply to requests seeking comment.
“Once these provisions make their way into some documents, they will quickly spread more widely,” said Jordan Sauer, a senior vice president at Santa Monica, California-based Beach Point Capital Management LP., which manages over $19 billion of assets.
Co-op Agreements
Private equity firms are also pushing back against so-called cooperation agreements — something that has helped creditors in several high-profile debt restructurings. These pacts allow creditors to act as one entity during discussions with distressed borrowers and let them reject restructuring proposals that would crush the value of their debt.
Last year, such agreements empowered creditors to reject the exchange terms underlying a deal for DirecTV to acquire Dish Networks Corp. and to delay an effort by Bausch Health to refinance some of its debt and enable a crucial asset sale. Private equity firms are now trying everything they can to avoid similar situations in the future.
KKR & Co. and the Canada Pension Plan Investment Board in November sought to add a clause to loans funding their spin-off of online job platform StepStone Group that would ban cooperation agreements, according to separate people familiar with the matter, who spoke on the condition of anonymity. This would have effectively prevented investors from negotiating as a bloc in any future talks.
While that gambit failed when debt investors rejected the language, some private equity owners are already seeking the next opportunity to incorporate such restrictions, the people said. KKR declined to comment and CPPIB didn’t respond to requests for comment.
Power Struggle
The fight over such provisions marks the latest salvo in a power struggle between buyout firms and debt investors. Overall, the tide has been in favor of the buyout firms, with creditors ceding power and protections in the rush for high-yielding debt.
As companies experienced the impact of high interest rates and surging costs in recent years, sponsors and creditors often faced each other at the negotiating table to avoid default; there, owners found ways to stay afloat — and in control — using the loopholes that grew common to such bonds and loans.
These strategies, part of a practice known as liability management, have flourished even as they challenge the fundamental rules of capital finance. The future of the moves at the heart of these battles — which include shifting assets in order to secure new financing — is unclear.
Two recent court decisions set conflicting precedents, and both have sponsors tweaking their techniques in real time in order to build the best shields against litigation.
Other existing ways to block or minimize creditors’ power in negotiations include the use of non-disclosure agreements to limit inter-creditor communication, Bloomberg has previously reported. Last year, the German wood-panel maker Pfleiderer, which is backed by investment firm Strategic Value Partners, used non-disclosure agreements to exert control over its debt discussions.
--With assistance from Gowri Gurumurthy.
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