Late last week, Blackstone-backed Ancestry.com launched a new US high yield deal that includes novel and controversial voting provisions. The language is the latest innovation in favour of issuers and can trace its lineage back to 'Net Short' language first used in 2019. Given the tendency for covenant innovations to cross the Atlantic we're publishing a quick note with the key takeaways.
Make PE Great Again
The new drafting can be found in the "Amendment, Supplement and Waiver" section of the Description of Notes. We've included the full language with analysis in our piece on 9fin.com - but in a nutshell the provision serves to caps the votes of any single Holder to a maximum of 20% of the Notes.
This is significant because the vast majority of the Event of Default triggers in the documentation require Holders of at least 30% of the Notes in order to instruct the Trustee to take action with regards to any Default or Event of Default.
In effect, that means no single fund would be able to enforce their contractual covenant protections under the Notes, even in a scenario where there had been an Event of Default.
It is still possible for multiple holders to take action or form a blocking group (e.g. a 20% Holder and a 10% Holder), but these new provisions shift the balance of power back towards Private Equity firms. For this Issuer at least, distressed debt fund activism can no longer be a solitary pursuit.
In the event the ‘Voting Cap’ is exceeded, the drafting also permits the Issuer to cherry pick votes that it counts. While the default position is that Notes held in excess of the Voting Cap are "deemed to not be outstanding", the Issuer may, in its sole discretion, "consent to an increase of the Voting Cap for any individual Holder from time to time."
As if the new language wasn't noteworthy enough - the deal also includes Net Short provisions and permits holdings by any "Debt Fund Affiliates" (i.e. Blackstone) up to 49.9% to count towards the "Required Holders" for any vote.
Distressed funds are sure to be pouring over the new language looking for any weaknesses. Conceding defeat isn't in vogue this year.