Structuring Anti-Net Short Provisions in Syndicated Credit Facilities

The term "net short lender" refers to a lender or participant in a syndicated credit facility that stands to benefit economically, through a credit default swap or similar derivative instrument, from the borrower’s default or even bankruptcy. A lender in this position has a financial incentive to become “net short debt activist” investors and utilize its position as a creditor to identify and act upon historical or technical defaults (often referred to by market commentators as “manufactured defaults”) for the purpose of triggering a payout under its CDS or other credit derivative position.

In an effort to protect borrowers from this threat of value destruction, credit agreements are increasingly containing so-called “anti-net short provisions” that subject net short lenders to several adverse effects, including ineligibility as a lender or participant, limitations on access to information, voting and notice restrictions and, in some deals, forced divestment. These new and technically detailed terms present their own challenges for transaction parties and their counsel, who must draft the provisions carefully to avoid scaring away conventional lenders or triggering other unintended consequences.

Listen as our authoritative panel examines net short positions and how net short lenders can negatively impact a deal. The panel will also discuss the provisions which have evolved since the Windstream bankruptcy to address net short lenders.

1. How a net short position arises
   1. Introduction to credit default swaps: a bet against the borrower
   2. Net short determination: benefit of CDS gain exceeds loan loss
2. Net short provisions
   1. Lender disqualification provisions
   2. Limitations on voting rights and access to information
   3. Forced divestment or prepayment
3. Accounting for lender affiliates: unrestricted lenders

The panel will review these and other essential issues:

• Typical structure of a credit default swap, and at what point an investor’s CDS position tips the scales into a net short position on a particular loan or borrower?
• Scope of provisions available for credit agreements to address the “threat” of net short lenders? Is forced divestment necessary, or just reduced voting rights?
• Should positions held by a lender’s affiliates count in the net short calculation? What factors should be taken into account when evaluating the affiliates question?