Asset Sale Covenants: When “Liquidity Solutions” Become Structural Credit Risk

Asset Sale covenants are viewed as protective: if a borrower sells assets, lenders expect either reinvestment in the business or debt repayment. In theory, these provisions preserve credit quality by preventing value leakage. In practice, however, modern drafting frequently gives borrowers far more flexibility than investors appreciate – especially in stressed situations.

Pfleiderer’s recent transaction provides a useful case study for examining how the Asset Sale covenant can operate as liquidity tool rather than lender protection, and why bondholders may have limited practical remedies even when outcomes feel economically aggressive.

What Happened?

Pfleiderer sold a 90% stake in its specialty chemicals subsidiary, Silekol, to Maple Group, a newly created wholly owned unrestricted subsidiary. The transaction was structured as an asset sale (likely due to limited remaining investment capacity under its tightened bond documentation following the amend-and-extend consent solicitation).  

The sale was financed through a €110 million third‑party loan to Maple and a €25 million shareholder loan from sponsor SVP, generating up to €135 million of gross cash proceeds for the restricted group before fees and any cash retained within Silekol.

Context Matters: Asset Sales in Distress Are Different

The starting point for any covenant analysis are the parties’ motivations.

When a borrower undertakes an Asset Sale late in the credit cycle, the transaction is rarely about portfolio optimization. More often, it reflects a pressing need for liquidity. In those circumstances, sponsors and management are incentivized to maximize flexibility, even if that means pushing documentation to its limits.

This is particularly relevant where:

• The business has few remaining unencumbered assets.

• EBITDA is deteriorating.

• Incremental financing options are limited.

• A restructuring appears increasingly likely regardless of short‑term actions.

Under those circumstances, Asset Sales become less about long‑term strategy and more about buying time.

Valuation Is the First (and Often Only) Battleground

Most high‑yield Asset Sale covenants impose two core requirements on transactions:

1. The asset must be sold for *fair market value*.

2. At least 75% of the consideration must be cash or cash equivalents.

On paper, this might look robust. In reality, “fair market value” is notoriously difficult to challenge.

If an asset is sold to a third party, valuation disputes are hard but manageable. If it is sold into a structure involving affiliates or newly created entities – particularly unrestricted subsidiaries – the issue becomes far more opaque.

Bondholders typically face several problems:

• They do not receive the valuation work supporting the transaction.

• There is no obligation to disclose internal assumptions or multiples.

• Even if external advisers have previously marketed the asset at higher valuations, issuers can argue that those figures were aspirational or outdated.

As a result, valuation often becomes a theoretical concern rather than an enforceable protection, unless investors are prepared to litigate.

Debt Proceeds vs. Equity Value: The Missing Piece

One red flag in Asset Sale transactions is a mismatch between:

• The implied enterprise value of the asset sold, and

• The amount of cash actually received by the restricted group.

Where sale proceeds are funded largely by new debt raised at the level of the buyer (for example, an unrestricted subsidiary), questions naturally arise:

• Where is the equity value in the transaction?

• Who is capturing it?

• Is value effectively being shifted outside the restricted group?

From a covenant perspective, this is difficult to police. Asset Sale covenants focus on cash consideration, not on whether the seller received full economic value in a broader sense (outside of the FMV requirement).

This creates a structural vulnerability: a transaction can be technically compliant while still economically harmful to creditors.

Application of Proceeds: Remember, Cash is Fungible

Even where the cash consideration test is satisfied, there remains real risk of value loss in the (now very weak) application of proceeds provisions.

In addition to debt repayment, the current vintage of Asset Sale covenants typically allow proceeds to be used for:

• Reinvestment in “additional assets” (which can include capex) or “similar businesses”

• Capital expenditures

• Acquisitions

• Restricted Payments or Permitted Investments

Importantly:

• Borrowers are often given 365 days (or more) to apply proceeds.

• There is no requirement to pre‑identify specific investments.

• Definitions of “additional assets” are broad and inclusive.

In many documents, capital expenditures on existing businesses are expressly deemed to qualify as reinvestment.

This matters because cash is fungible.

If a borrower uses Asset Sale proceeds to fund capex it would have incurred anyway, that same amount of internally generated cash is freed up for other purposes – potentially including transactions that creditors would find far more controversial.

The covenant may be complied with in form, while its economic intent is bypassed in substance.

The Illusion of Enforcement Optionality

When investors perceive an Asset Sale as aggressive, the instinctive response is: Can we challenge this?

In practice, options are limited.

Bondholders can:

• Request information via the trustee.

• Ask for valuation materials.

• Seek clarification on intended use of proceeds.

But issuers are often under no obligation to provide meaningful detail.

Litigation is theoretically possible, but it presents its own problems:

• The process is slow and expensive.

• The primary remedy would likely be unwinding the transaction.

• Unwinding a liquidity transaction in a distressed credit often accelerates a restructuring rather than preventing it.

As a result, bondholders may find themselves in a paradoxical position: the transaction harms them, but stopping it may harm them even more.

Asset Sales Covenants as Liquidity Tools, Not Guardrails

This case study highlights a broader trend.

In stressed situations, Asset Sales covenants increasingly function as:

• A liquidity bridge, not a deleveraging mechanism.

• A way to reshuffle value within the group rather than preserve it.

• A source of optionality for borrowers, not certainty for lenders.

Even where drafting has been “tightened” in prior amendments, broad reinvestment definitions and long application periods can significantly dilute investor protections.

Takeaways for Investors

When analyzing the Asset Sale covenant, especially in distressed credits, investors should focus less on headline restrictions and more on:

• Valuation mechanics: Who determines fair market value, and with what scrutiny?

• Source of proceeds: Is value funded by third‑party equity or recycled leverage?

• Application flexibility: How broad are reinvestment and capex definitions?

• Timing: How long can proceeds sit unallocated?

• Practical remedies: What leverage, if any, exists short of litigation?

Asset Sale covenants may look familiar, but their real-world impact is highly context‑dependent. In late‑cycle scenarios, they often offer far less protection than investors expect.

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