The covenant I thought we'd lost

I've watched Payments for Consent disappear from the levfin covenant package for years, and I'll admit it broke my heart a little - deal by deal, it was like watching a slow car crash. So the recent New York ruling in the Hunkemöller uptier made my day because I saw the covenant I once loved doing its job.

Judge Anar Patel let the minority noteholders' breach claims proceed against the company, denying the motions to dismiss in part. What survived tells you what protection actually matters - and it isn't the LME checklist that everyone thinks of first.

Even the sacred rights fell. The Section 9.02 claim - 90% consent to reduce principal or release substantially all security - was dismissed, because the sections actually breached weren't enumerated there. Citing Mitel, the court's message was blunt: if you wanted those protections as sacred rights, you should have bargained for them.

What did survive was the indenture's plumbing, the bits most lenders don't read - issuable in series (2.01), cancellation (2.11), transfer and exchange (2.07) - and, my favorite, Section 4.18, Payments for Consent.

Recall the structure. Redwood, the largest holder of Hunkemöller's €272.5m 9% senior secured notes due 2027, put in €50m of super senior money and had its €186m of notes re-issued as senior first-out notes, leaving the €86.5m held by Cheyne, Man GLG, Contrarian and St James's Place second-out. Section 4.18 had been removed by majority consent before the exchange.

That removal always struck me as unfair, and the court was persuaded: Redwood must have been paid consideration for agreeing to delete Section 4.18, because the deal couldn't happen without the deletion and no sophisticated holder gives up that provision for free. In other words: you can't strip the Payments for Consent covenant if stripping it was itself a payment for consent. Cue my broken heart beginning to mend.

Two defences fell away for the same reason - authorization. The no-action clause didn't bar the minority, and the majority-waiver argument failed, because Redwood's counter-direction to the trustee and the subsequent waivers may not have been validly authorized - the counter-direction letter presented a certificate of holdings rather than an authorization.

So what do I want you to take from a covenant I'm unreasonably fond of?

First, Payments for Consent belongs on your LME checklist, next to pro-rata sharing and unrestricted subsidiary capacity. Let’s not let it become a relic.

Second, if you want it to survive an uptier, make it a provision the majority can't amend away - the same discipline you'd apply to any key LME blocker. Hunkemöller's minority is this deep into a fight only because the question of who authorized what is still open.

The market has spent a fair few years treating Payments for Consent as optional, and I know one ruling won't reverse that. But it's a reminder that the covenant still protects a minority when it's drafted so the majority can't remove it without consequence - and that, for me, is enough to mend a heart.

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