Collateral Priming: Is this the new norm in restructuring?
Recent transactions have highlighted the use of collateral priming in the loan market. Collateral priming occurs when a borrower shifts previously pledged collateral and assets from one credit facility to a new senior facility, resulting in the original loan potentially being subordinated. SRS Acquiom launched this survey in October to obtain a pulse on certain aspects of collateral priming.
Over half of our Barometer respondents (53%) reported a recent collateral priming event within their respective portfolios. Respondents indicated 21% of the priming events were the result of a borrower taking advantage of a loophole in the loan agreement. Another 53% of respondents reported the priming occurred through an amendment to the loan agreement.
Sixty-one percent of respondents are very/somewhat concerned about priming to more senior tranches of debt compared to only 25% who are very/somewhat unconcerned with the practice. Overall, 81% believe that the practice will not fade as the market rebounds from the current restructuring cycle.
Steps to Mitigate
The vast majority of Barometer respondents (86%) are taking action to mitigate the risk of a collateral priming event. Fifty-one percent are monitoring certain at risk loans within their portfolio. Additional actions they are taking include:
- 63% are reviewing existing loan documents to identify loopholes.
- 43% are adding language and enhancing document standards for new loans.
- 23% are amending loan documents to close possible loopholes.
To get a sense of how busy finance professionals have been since the start of the pandemic, we asked our panelists how many consecutive days of vacation or PTO they have taken. None of our respondents reported taking 5 or more days off and 28% said they have taken no days off since the pandemic started. The majority of respondents (72%), have taken between 1 to 5 consecutive days off.
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Complete Survey Data
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Have you or your firm had a collateral priming event occur on a loan in your portfolio in the past year?
How did the collateral priming occur on the loan?
What, if any, is your level of concern regarding the increase of collateral and asset priming to more senior tranches of debt?
Do you believe collateral priming will disappear once the market emerges from the current recycling cycle?
Which, if any, of the following list of actions is your firm or your client(s) taking to mitigate or prevent possible priming situations?
(Multiple responses allowed)
What’s the longest break for vacation or PTO you have taken since the start of the pandemic?
SRS Acquiom October Barometer survey has a sample size of 36 representing direct lenders, investment bankers, advisors and attorneys and was fielded October 14-28, 2020. Results should be viewed as qualitative and directional.
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