Limitation on Affiliate Transactions Negative Covenant Clauses
(Credit Agreement)

Summary

These Limitation on Affiliate Transactions Negative Covenant clauses for a credit agreement are used in a syndicated loan transaction. These clauses prohibit the borrower and loan parties from entering into less than favorable transactions with affiliates, with exceptions for carve-outs or baskets. These clauses include practical guidance and drafting notes. This covenant limits the ability of the borrower to make “sweetheart” deals with affiliates that allow value to escape the loan group without a reasonable amount of value being received in return. This is more of a concern in transactions involving private borrowers or borrowers with significant or controlling shareholders that may try to take advantage of their relationship with the borrower’s management at the expense of the lenders. Note that these sample provisions contemplate a financing that includes the following elements: • A syndicated credit facility. • Covenants that generally restrict all of the borrower’s subsidiaries and immediate parent entity (language with respect to the unrestricted/restricted subsidiaries is included in brackets). • A borrower owned by a private equity sponsor (included in brackets). • Intercompany transactions on the closing date in connection with an acquisition (included in brackets). The capitalized terms used in these clauses should be conformed to the defined terms in the relevant credit agreement. These clauses should be read in conjunction with the practice note Negative Covenants in Credit Agreements. For a full listing of key content covering a credit agreement, see Credit Agreement Resource Kit.