Borrower and Sponsor Loan Buybacks Clauses
(Credit Agreement)

Summary

These standard borrower and sponsor loan buyback clauses should be included in the assignments and participations section of a credit agreement in a syndicated loan transaction. These clauses include practical guidance and drafting notes. The concept of debt buybacks came to prominence after the 2007 credit crisis at a time when leveraged loans were trading at a discount to par (below face value). Borrowers and their private equity sponsor owners became interested in purchasing back their own loans on the secondary market and retiring the debt at par (or in the case of sponsors and their affiliates, holding such loans as an investment). This allows borrowers to purchase their debt at a cheaper price than repaying the loans pro rata among lenders. This concept is generally included in private equity sponsor-style transactions and may face pushback from lenders in transactions with borrowers with weaker credit profiles. Debt buybacks have returned to prominence for their role in facilitating liability management transactions (LMTs). In these transactions, debtors move assets out of the collateral pool or subordinate existing liens or obligations to facilitate a new financing. This is accomplished either by creating a new subsidiary not subject to the credit agreement (an unrestricted subsidiary or an excluded subsidiary) and moving previously granted assets to that subsidiary. The liens are then automatically released. This has been referred to as a dropdown financing. The other approach has been referred to as an uptier transaction, in which the debtors contractually subordinate the liens and/or other obligations that were entered into to benefit existing lenders. Open market repurchases (buybacks) could be a key component in these transactions by allowing for a refinancing or a swap of debt to favor cooperating lenders (and effectively punish those that do not cooperate). Lenders can protect themselves from such transactions by requiring all borrower buybacks to be pro-rata and limiting the availability of open market transactions so that they cannot be used in LMTs. See First Analysis: Debt Buyback and Liability Management Considerations. Note that these sample provisions contemplate a financing that includes the following elements: • A senior secured credit facility consisting of one or more term loan facilities and a revolving loan facility. • A borrower owned by a private equity sponsor. • Credit support from the borrower's subsidiaries and immediate parent entity. • Assignment provisions permitting non-debt fund affiliates of the borrower's private equity sponsor to purchase the borrower's term loans. • Assignment provisions permitting the borrower to directly repurchase and retire its term loans through Dutch auction procedures (see the optional language to clause (a) with respect to a credit agreement that permits the borrower to make open-market non-pro rata repurchases of term loans). The capitalized terms used in these sample provisions should be conformed to the defined terms in the relevant credit agreement. For an example of an alternate formulation of the borrower loan buyback provisions that are included in the prepayments section of a credit agreement, see Borrower Loan Buybacks Clauses (Discounted Voluntary Prepayments) (Credit Agreement). See also Market Trends 2022/23: Borrower and Affiliate Loan Buybacks and Loan Buyback Provisions in Credit Agreements. For a full listing of key content covering a credit agreement, see Credit Agreement Resource Kit.