Petsmart Credit Agreement

Some law firms and leveraged finance review sites have proposed credit document revisions to protect creditors from another Chewy incident. While such proposals are well-intentioned (and may be necessary in some cases), we believe that proposals such as banning dividend and distribution baskets for distribution of equity create complications for borrowers and sponsors and, ultimately, are not accepted by sponsors and their holding companies. However, a glimmer of money for creditors is that such a measure has consequences for the borrower. If a subsidiary is no longer fully owned and is no longer guarantor, the borrower would in future face stricter restrictions both for investments in such a subsidiary and for the general execution of intra-company transactions with such a subsidiary. EBITDA is also expected to decrease from the amount attributable to the minority stakes of a subsidiary that is not 100%. As PetSmart first demonstrated by keeping Chewy as guarantor in its ABL facility, holding a subsidiary as a guarantor will significantly affect a borrower`s borrowing capacity under its ABL facilities, since a subsidiary, as a borrower or guarantor, is required to obtain a basic credit for the assets of that subsidiary. PetSmart continued to fight financially, which led to the exchange of its priority debt and unsecured debt at a declared level of 80 cents and 50 cents respectively on the dollar. Nevertheless, with the steady increase in market share, revenue growth and business valuation, Chewy`s guarantee and assets have given lenders a sense of comfort. However, due to a series of transactions related to chewy holdings authorized by PetSmart under the terms of the PetSmart debt contracts, lenders were quick to note that the comfort level had significantly eroded. A general review of large credit facilities financed by sponsors shows that it is customary for limited payment and investment baskets to be used to induce a subsidiary to no longer be a 100% subsidiary, either by distributing stakes in the credit portion structure or by contributing to minority stakes in unrestricted subsidiaries. As a result, under the credit agreement, such a subsidiary would no longer be « fully owned » by the borrower.