Everything Is Wrong With Mandatory Prepayments

0
Everything Is Wrong With Mandatory Prepayments
pasja1000 / Pixabay

Mandatory prepayment provisions purportedly require debtors to prepay creditors under certain circumstances, including upon selling material assets or using excess cash flows at the end of the year. However, the latest versions of these provisions would not only never require any prepayment, but they may actually be used to harm creditors more than they help. In a new report Xtract Research examines mandatory prepayments.

Play Quizzes 4

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q4 2020 hedge fund letters, conferences and more

The Problems With Mandatory Prepayments

Highlights from the report include:

Fund Manager Profile: Zhang Hui Of China’s Southern Asset Management

investHistorically, the Chinese market has been relatively isolated from international investors, but much is changing there now, making China virtually impossible for the diversified investor to ignore. Earlier this year, CNBC pointed to signs that Chinese regulators may start easing up on their scrutiny of companies after months of clamping down on tech firms. That Read More

The Asset Sale Sweep, as the name connotes, requires debtors to use proceeds from certain asset sales to pay down their debt. The most obvious result of the recent changes to the Asset Sale Sweep provisions is that through exceptions, thresholds, and other loopholes, the amount required to be swept is severely decreased.

Historically, many types of asset sales were excluded from the sweep, such as ordinary course sales, sales of obsolete equipment, and sales below a de minimis amount. While the prepayment requirements in bonds have long been limited to sales out of the 75% cash consideration general basket, this narrow application of the sweep is now common in first lien term loans as well.

Typically, immaterial asset sales are excluded from the sweep. However, today’s thresholds are often high and actually grow with EBITDA.

The sweep percentage for asset sales is now typically subject to stepdowns based on delevering from closing date levels. Although lenders have paid attention to and pushed back on this change, it has become increasingly accepted as market, particularly in the loan market.

Neither the Asset Sale Sweep nor the ECF Sweep is likely to require any debt prepayment. Instead, these provisions have been exploited by sponsor technology to increase cash out capacity, including for dividends or investments in unrestricted subsidiaries.

Updated on

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)www.valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
Previous article Withdrawing 401(k) Funds After Retirement Is Not The Problem: Here’s What Is
Next article What If Robinhood Traders Are Not Risk Averse?

No posts to display