Aggressive Terms Spotlight: Net Short Lender Provisions Feature in 75% of US Bonds in July

High-yield bond offerings reviewed by Americas Covenants in July showed an increase in deals with a net short holder provision. Present in just over half (54%) of high yield documentation in the last four quarter period, this provision increased to account for 75% of July bonds, including Cinemark, Garda World, Kraken Oil & Gas and Calderys, to name a few.

This provision can limit the ability of bondholders with a net short position in the company to exercise certain rights, such as voting on amendments, waivers, or acceleration of the bonds. The argument for this is that it serves to shield the company and other creditors from noteholders with a conflict of interest, who would gain from the company’s default rather than success. However, this provision can be seen as aggressive as it restricts noteholders rights and can impose stricter standards on bondholders’ motivations, including broader hedging strategies.

Deals reviewed by Americas Covenants in July also showed an increase in deals with market cap based dividends, rising to 67% compared with the last four quarter market average of 48%.

This provision can be considered aggressive because it bases dividend capacity on the company’s market capitalization, a metric that can be volatile, rather than on more traditional measures like earnings or cash flow. Unlike earnings-based dividends, which are tied directly to a company’s financial performance, market cap-based dividends may not accurately reflect the company’s underlying health. If the company is struggling, this approach could lead to value leakage and ultimately harming noteholders.

July deals that featured market cap based dividends included Venture Global and Wilsonart. Cornerstone Building Brands went one step further in its new senior secured notes due 2028, which featured a market-based cap that extended beyond dividends, as is typical, to allow for restricted payments more broadly.

A summary of the frequency of material aggressive terms present in U.S. high-yield documentation in deals reviewed by Americas Covenants in July is presented below. The data is based on the offering memoranda terms of deals announced in June, with certain exclusions, such as deals lacking full covenant packages. The data reflects amended terms where applicable, based on the most updated documentation received by Reorg.