Some law firms and leveraged finance review sites have proposed credit document revisions to protect creditors from another Chewy incident. While such proposals are well-intentioned (and may be necessary in some cases), we believe that proposals such as banning dividend and distribution baskets for distribution of equity create complications for borrowers and sponsors and, ultimately, are not accepted by sponsors and their holding companies. Given that the lenders probably accepted the transfers and the process barrier was crossed, the IPO was ready to trigger the IPO, leading to an IPO of Chewy on the NYSE in June 2019. At the end of the day, PetSmart`s creditors received a payment on PetSmart`s ipo revenues (approximately 15% of the term loans were repaid) and PetSmart`s credit rating was revalued (from CCC to B- from S-P and from Caa1 to B3 from Moody`s). Our advice to lenders and investors in the debt lending market consists of familiarizing ourselves with the details of how PetSmart, J. Crew and other miscellaneous baskets, guarantees and guarantees and unlocking rules have been used, and paying attention to similar provisions in their own credit facilities. In the post-J. Crew and Chewy World, lenders must use this cutting-edge knowledge to think critically and creatively across all the different baskets presented in each new credit. In recent years, secured lenders have seen their value deteriorate. The examples of J.Crew, Claire`s and finally PetSmart draw attention to the provisions allowing the removal of potentially valuable guarantees.
As a result, lenders have processed the relevant provisions in the debt documentation for new transactions. PetSmart`s transfer of approximately 36.5% of Chewy is the latest example of security loss. Issuers are generally able to make these transfers with a combination of investment baskets. First, issuers use a basket that allows them to transfer the assets of subsidiaries of limited loan parties to limited non-lender subsidiaries. Sometimes this capacity is capped, as in the case of J.Crew and Hilton; in other cases, there is no limit (for example. B to Revlon). Second, issuers use a basket that allows restricted, loan-free subsidiaries to invest in unlimited subsidiaries, effectively putting guarantees out of reach of secured lenders.