Thoma Bravo, Credit Insurance and a New Playbook for Lender Protection

For most of the last ten years, lenders have been losing the documentation battle one provision at a time.

Debt capacity got bigger. Investment baskets got looser. EBITDA definitions got longer. Maintenance covenants disappeared. Liability management exercises then showed everyone what could actually happen when all of that flexibility was used together.

The recent Thoma Bravo negotiations around Proofpoint tell a very different story.

According to Bloomberg, lenders extracted around 40 creditor-friendly changes to the documents in exchange for extending most of a roughly $5 billion loan by two years. The changes reportedly included tighter restrictions on additional borrowing, investments and asset transfers, new protections against liability management exercises, an omni blocker, Pluralsight and Xerox protections and mandatory quarterly calls with management.

They also got paid for it. Bloomberg reported that the extension adds around $60 million of annual interest.

Forty changes is an extraordinary number.

But the interesting part is that the lenders had negotiating power again, and they used it.

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Have Your List Ready

I say this to lenders all the time.

When the borrower comes back asking you for something, have your list ready.

If they need an amendment, what do you want?

If they need another two years before maturity, what protections would make you more comfortable holding the credit for those additional two years?

If the document was negotiated when the sponsor had all of the leverage, which of those concessions do you now want back?

This is one of the few points in the lifecycle of a credit when the negotiating dynamic can completely change.

The borrower needs something from you. Use it.

That appears to be exactly what happened with Proofpoint.

Lenders tightened borrowing capacity. They restricted investments and asset transfers. They added LME blockers. They also negotiated something I think is at least as important as some of those protections: quarterly calls.

And the distinction between these two in particular is worth double-clicking on.

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A Blocker and an Information Right Do Different Things

A blocker restricts what a borrower can do.

An information right helps you understand what the borrower is doing.

You need both.

One of the reasons maintenance covenants are such useful lender protections is not simply that a breach creates a default - it’s that they force everyone to look.

The company has to run the calculation. Management - and the sponsor - is focused on the number. If performance starts deteriorating and the covenant gets tight, the lender gets an opportunity to ask questions, request information and potentially negotiate from a position of power.

Proofpoint reportedly remains covenant-lite, so let's not get carried away and say that the old lender-protective model has suddenly returned. It hasn’t.

But lenders did reportedly get mandatory quarterly calls, and that matters because you can have the strongest blocker in the world, but if you have no visibility on the underlying business you may still find out about the problem far too late.

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Then I was Reminded of a Conversation in Singapore

Back in June, I was running a Covenant Exchange roundtable in Singapore when Angela Chang of Texel Asia started talking about credit insurance.

I knew what credit insurance was - at least I thought I did.

Then I asked her:

Can you insure your way out of weak documentation?

And I basically spent the next fifteen minutes peppering her with questions.

That conversation opened up for me a completely different way of thinking about lender protection, and then the Thoma Bravo / Proofpoint deal landed with forty creditor-friendly changes to one set of documents. It’s a very clear example of lenders using contractual leverage when the opportunity arises.

But Angela's comments had made me think about the other side of the problem: what happens when even better documents are not enough?

And that, my friends, is where the two stories connect.

Credit insurance is not simply something you buy because you think a borrower might default.

Lenders use it to manage counterparty exposure and concentration risk. It can allow a lender to maintain a relationship with a borrower while transferring part of the credit risk. And in some cases the insurance market is involved before the financing is even mandated.

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A lender can effectively ask: is there insurance capacity for this name before we underwrite it?

That is a very different way of thinking about the product.

It turns insurance from something you consider after the deal into something that can form part of the origination and underwriting process itself.

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But You’ve Just Added Another Contract

And this is where it gets really interesting for me.

A loan agreement might be hundreds of pages long, but Angela said an insurance policy might be twenty or thirty pages.

That sounds refreshingly simple, but now you now have another contract sitting alongside the financing documents, with its own conditions, obligations and interpretation risk.

So now there are two questions:

1. What can the borrower do under the financing documents?

2. What does the lender need to do under the insurance policy to make sure the protection actually works?

Those two contracts have to operate together, and once the credit becomes stressed, the questions multiply very quickly.

That was the point in the conversation when I realized I had been thinking about lender protection too narrowly.

Strong documentation is crucial, and better information is too. But neither of those things eliminates the underlying credit risk.

Credit insurance sits in that third space.

It does not replace good documentation, but it potentially changes how much of the economic risk the lender ultimately chooses to keep.

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Here Is the Bottom Line

The Thoma Bravo deal shows what can happen when lenders get negotiating power back.

Forty changes tells you that they had a very long list.

But lender protection is not just about adding more blockers to that list.

It is also about understanding how the credit will be monitored, what happens if the borrower gets into trouble and whether there are risks the lender might choose to transfer rather than simply document around.

And that is the part I want to understand better.

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So on September 9, Angela Chang and Jamie Stork of Texel Asia are joining me for the next Knowledge Series to take us through how credit insurance actually works in private credit, from underwriting and documentation through to what happens when the credit becomes stressed.

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Credit Insurance & Private Credit

Wednesday, September 9

12pm UK / 7pm Singapore

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REGISTER: https://us06web.zoom.us/webinar/register/WN_Vh3r-FZZSr6aERVF6KuNaw