Cedacri: Lenders Won a List of Changes – Neither Blocker Was on It

Lenders pushed back on Cedacri S.p.A.'s €980 million senior secured notes due 2031, and the revised terms make a substantial list of changes to the preliminary offering memorandum dated November 9th. The credit facility basket was halved, the cost savings add-back was capped at 35% of EBITDA, the portability test was tightened from 2.5x to 2x, and any Event of Default now blocks dividends. It was encouraging to see lenders win these concessions.

The J.Crew blocker and the Serta blocker weren't changed. Cedacri provides core banking software, and for a software company the key value is in the IP. A blocker protects lenders only when the restriction, the definitions and the amendment threshold all work together, and on Cedacri they don't.

The J.Crew Blocker – Of What?

No Material Intellectual Property may be transferred to an Unrestricted Subsidiary, other than licenses of IP Rights in the ordinary course of business. The license exception isn't limited to non-exclusive licenses, and an exclusive license is economically equivalent to a transfer.

IP is "Material" only if failing to own or license it would have a Material Adverse Effect as defined in the Revolving Credit Facility Agreement. The offering memorandum doesn't set out that definition, so the blocker's strength is governed by a document noteholders can't see.

The revised terms halve the basket for Investments in Unrestricted Subsidiaries and limit the baskets that can be used to designate one. Those changes reduce how much value can move. They don't change which IP the blocker applies to.

A majority of the notes can also amend or delete the blocker, and consents obtained in a tender or exchange offer count. The noteholders who agree to a transaction can remove the protection for the noteholders who don't.

A strong J.Crew blocker provides that no Unrestricted Subsidiary may own or exclusively license Material IP, and that no subsidiary that owns Material IP may be designated as unrestricted. It defines Material IP by an objective, quantitative standard, and a majority can't amend it.

The Serta Blocker – When Is a Vote Required?

The "Amendments and Waivers" section requires the consent of 75% of the affected notes to subordinate the notes in right of payment, or to subordinate the liens on all or substantially all of the Collateral, to other borrowed money (clause (10)). No consent is required for debt the indenture already permits to rank senior, for a debtor in possession facility, or for any other debt if each affected holder is offered its pro-rata share.

A participation right keeps a lender's relative position only if the lender puts in new money, and the offer has to stay open for just three Business Days.

The 75% is a contractual increase over the 50% that the Italian Civil Code requires (Article 2415). The Risk Factors state that the increase may not be upheld if challenged. If it isn't, a simple majority can subordinate the minority, which is what happened in Serta.

A strong Serta blocker requires the consent of each affected holder for any amendment that subordinates, or has the effect of subordinating, the notes in right of payment or the liens on any Collateral.

The questions for your own book:

1. Where is "material" defined, and is the definition in a document you have access to?

2. What vote amends or removes your J.Crew blocker?

3. Which senior debt can be added without your consent?

4. Does your voting threshold depend on local law?

5. When lenders push back on terms, are the blockers on the list?

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