Aurora Capital Group has included a provision in K&F Industries' new credit facility that gives the sponsor the ability to restrict two investors from being able to participate in the credit, regardless of whether the company is in default. Market participants said usually in a credit agreement the company has a right to consent to any assignments. But the language in the K&F deal gives Aurora the ability to prevent trades to go through to particular lenders even if the credit is in default. Typically, when a company is in default, there is no consent required on the trade.
"We do have the ability to affect which banks participate," said Gerald Parksy, chairman of Aurora. He declined to comment on which lenders might be barred from participating and why this was done. John Mapes, a partner at Aurora, denied that any such language was in the agreement.
One banker said it is a very limited provision since very few loans actually go into default. But some investors are opposed to the principle and think blocking lenders hinders liquidity, especially if the credit becomes distressed. "I can understand why sponsors in particular want to do it and even borrowers after the last cycle downturn, but it's a really bad direction for our evolving market," a buyside trader said.
The credit was put in place to back Aurora's $1.06 billion acquisition of the aviation company. Lehman Brothers and J.P. Morgan lead the credit which comprises a $50 million revolver and $430 million "B" loan. Goldman Sachs and Citigroup had roles in the financing as well. The credit allocated two weeks ago and was trading above par, market participants noted. A J.P. Morgan spokesman referred calls to Lehman officials who declined comment.
While blocking investors is rare, there have been notable exceptions. In 1998, Nextel Communications prohibited its bank group from selling paper in the secondary market to 11 past relationship lenders that did not join the company's new credit facility (LMW, 3/16/98). The list of banks was known as "Shindler's list" because Steve Shindler was cfo of the company at that time. Some investors are reported to have been blocked out of deals because of disagreements with sponsors (3/22). Another scenario in which a lender can be blocked is if the bank also owns a company that is a competitor. Finally, there can be concerns when the company is involved in military or defense contracts. K&F manufactures aircraft brake products and fuel tanks for commercial, general aviation and military aircraft. It could not be determined if any of those reasons apply to the K&F deal.
From the K&F credit agreement Notwithstanding any provision of this Section, the consent of the Borrower shall not be required for any assignment that occurs at any time when any Event of Default shall have occurred and be continuing, provided that, after the occurrence and during the continuation of an Event of Default, the Borrower may identify, by written notice to the Administrative Agent (and the Administrative Agent shall promptly notify the Lenders), up to two banks, Financial institutions or other entities who shall not be permitted to be an Assignee hereunder during the continuation of such Event of Default.
