This week we continue our conversation with Derek Gluckman, a vice president and senior covenant officer at Moody’s. Derek is responsible for research on the Covenants team. He’s been at Moody’s since 2015. Prior to that he was a corporate attorney at Orrick, Herrington & Sutcliffe. Second of two parts – View part one.
The Lead Left: What else has been catching your attention on documentation concerns?
Derek Gluckman: We look at things like incremental facilities, which almost uniformly now have both fixed dollar and ratio-based capacities. Increasingly, it’s common to have a sub-limit of the incremental that permits earlier maturity dates than the loans. That’s fairly unusual, or had been until recently.
Also, we see more backdating of builder baskets. In the refinancing-heavy universe we’ve been in, we have seen lots of builder baskets that don’t bring down the builder basket start date. Builder baskets allow the accumulation of excess cash flow or consolidated net income which is set aside to make restricted payments, investments or prepayments of junior debt and the amounts remain available for the life of the loan. In the documents we see, the average builder basket start date precedes the (amended) document date by over two years, but that average masks a wide range. The problem with not resetting the start date is that if the loan is refinanced multiple times and the date isn’t reset, there could be many years of accumulation which adds up to a lot of capacity over time. Lenders may wake up and be shocked. I don’t see any commentary on this issue.