Private credit lenders are increasingly negotiating securitization limits into credit agreements to guard against the kind of runaway off-balance sheet financings that led to the bankruptcies of First Brands and Tricolor, according to 9fin sources.
One such provision recently cleared the market in the $3.5bn refinancing that direct lenders arranged for veterinary technology platform Covetrus, sources said.
When the company and its sponsor, CD&R, turned to private credit lenders led by Blue Owl to refinance its syndicated debt and upsize its facility to fund its acquisition of MWI Health, lenders took the opportunity to introduce protections that cap the amount a business can raise through accounts receivable factoring or securitization, sources said.
Ultimately, such a clause would limit a borrower's ability to raise some forms off-balance-sheet financing that went largely undetected and led to the demise of companies like First Brands.
Blue Owl and Covetrus declined to comment. CD&R did not respond to requests for comment.
Covetrus is among a growing number of private credit-backed deals with these types of guardrails, sources told 9fin, noting that lenders in the broadly syndicated loan market are also pushing to include similar provisions in their credit documents.
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