Collateral Priming: Steps Lenders Can Take Against Predatory Practices

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With financial stress, a company will look for additional liquidity to shore up its finances to avoid covenant defaults under its existing debt. But if a company is already overleveraged, it may need to find creative ways under its existing debt agreements to allow for a new loan using its existing collateral as security. Lenders in the new loan will likely require a senior priority lien on the company’s collateral. As a result, all existing loans are “primed” when their liens against the collateral are surpassed by the new loan. Most collateral priming transactions tend to fall under two mechanisms—loopholes or amendments. Under the first, a company uses a loophole within the terms of their loan document to allow it to take on additional senior debt secured by collateral already pledged under a separate credit facility. With an amendment, the company works with requisite lenders to amend the existing loan documents to allow for a new senior loan facility and often “priming” the existing facility as a result.

Regardless of which path is taken, the outcome often puts majority and minority lenders at odds, creates tension with the company, and may result in legal action. While collateral priming disputes are not new, the loan market has seen an uptick during 2020 as more companies struggle during the worldwide COVID-19 pandemic and subsequent economic upheaval.

We will review each of these priming scenarios and look at recent disputes under both. In addition, we will highlight what lenders can do to mitigate being on the wrong side of a collateral priming event.

Topics in the white paper include:

  • Collateral Priming Loopholes
  • Collateral Priming Amendments
  • Protecting Lenders from Predatory Priming
  • Predatory Priming: Likely Here to Stay

Renee Kuhl

Managing Director, Loan Agency tel:612-509-2323

Renee is the managing director for the Loan Agency Group for SRS Acquiom. As an accomplished financial industry professional, she leads the loan agency product.

Before joining SRS Acquiom, Renee served as an administrative vice president at Wilmington Trust, N.A., most recently leading the loan agency and restructuring products. In addition to her 10 years at Wilmington Trust, she also worked for Wells Fargo Bank, N.A. in the corporate trust and shareholder services departments.

Renee has a Juris Doctorate from Mitchell Hamline School of Law in Minnesota, and a B.A. in political science and history from Azusa Pacific University in Azusa, California.

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