If the first quarter of 2026 was defined by swings in investor sentiment and repricing of risk, the second quarter was characterized by a more disciplined market. Loan market participants (“LMPs”) continued to navigate geopolitical, tariff and interest rate uncertainty and scrutiny of private corporate credit (“PCC”). At the same time, AI continued to drive bifurcation in the software sector as investors distinguished between beneficiaries of AI innovation and those vulnerable to technological disruption. Against this backdrop, M&A activity remained subdued in favor of opportunistic refinancing activity.
The broadly syndicated loan (“BSL”) and PCC markets reflected these themes, with capital flowing to higher-quality credits. and lower-rated issuers or challenged sectors facing demands for sweeter terms. .
Volatility from the first quarter eased in April. The secondary market recovered, new lending activity accelerated and borrower-friendly technicals returned as demand again exceeded supply. Repricings re-emerged following a lull in March, clearing spreads tightened and covenant flex swung back in borrowers’ favor. The improving conditions began to influence documentation trends, but lenders remained vigilant.
In May, secondary trading volume increased, pushing prices higher and spurring new lending activity as well as a subsequent resurgence in CLO issuance as compared to April. with investors noticeably differentiating between stronger and weaker borrowers. As in April, documentation trends reflected the improving technical backdrop.
By June, however, the market was in risk-off mode as continued geopolitical uncertainty pressured market technicals, weighing on software credits and CLO issuance. Several sizeable M&A and LBO financings that could not afford to wait for more favorable market conditions came to the BSL market. Unsurprisingly, repricing activity declined and clearing spreads widened, and with lenders regaining negotiating leverage as and covenant packages tightening.
Defaults remained historically low. However, distressed exchanges and liability management transactions (“LMTs”) remained active, and borrower-friendly terms continued to appear in higher quality deals. Many of the features that have defined modern covenant packages - including expansive EBITDA adjustment provisions, MFN sunsets, pick-your-poison formulations and broad basket capacity – remained embedded in documents. To offset this trend, lenders focused on closing LMT loopholes in specific transactions.
It is perhaps for this reason that cooperation agreements (“Co-ops”) continued to gain traction as lenders increasingly sought to coordinate negotiations, preserve participation rights and enhance collective bargaining leverage (and despite early speculation that the antitrust litigation involving the Optimum and Selecta Co-ops might discourage the use of these). Other 1Q trends stayed the course, including the use of aggressive DQ list practices and investor redemption pressures on BDCs, as these vehicles continued to attract scrutiny even while credit fundamentals remained stable and resilient.
Notwithstanding the borrower-friendly status quo, 2Q represented a modest departure from the long-running trend of steadily weakening covenant protections and Covenant Review’s average documentation scores improved slightly during the quarter, bucking the gradual erosion that has characterized much of the post-pandemic market and reflecting somewhat more conservative primary market conditions. There were other positive growth areas for lenders, including new market opportunities in the form of a burgeoning digital asset space (see below), buttressed by growing regulatory clarity in the area and the incorporation of new Uniform Commercial Code (“UCC”) Article 12 concepts into documentation, as well as strong credit secondary and fund finance markets.
Collectively, these developments underscore a central theme of 2Q26: while the BSL market remained broadly borrower-friendly, both investors and documentation have become increasingly sophisticated, selective and focused on allocating risk to address the next generation of financing and restructuring challenges. Against this backdrop, we examine the quarter’s most salient documentation themes.
| PROVISION | RECENT TRENDS |
|---|---|
| CRYPTO-BACKED CREDIT AGREEMENT - COLLATERAL ISSUES AND KEY PROVISIONS | When President Trump entered the White House in January 2025, he pledged to make the United States the “Crypto Capital of the World.” Over the ensuing eighteen months, the legal and regulatory landscape governing digital assets evolved rapidly. Most notably, Congress enacted the Guiding and Establishing National Innovation for U.S. Stablecoins Act (the “GENIUS Act”), the first major piece of federal legislation establishing a comprehensive regulatory framework for payment stablecoins backed by U.S. dollars and other high-quality liquid assets. Congress also advanced broader digital asset market structure legislation through the Digital Asset Market Clarity Act (the “CLARITY Act”), while federal banking regulators and the SEC continued to issue guidance addressing digital assets and related financial products. At the same time, the adoption of the new Article 12 and related amendments under the UCC have provided legal clarity and new protections for lenders. Collectively, these developments have provided greater regulatory certainty for institutional participants and accelerated the continued maturation of the crypto-backed lending market. Analysts reported that collateralized crypto lending exceeded $70bn in 2025, reflecting increasing participation by both traditional financial institutions and specialized digital asset lenders. Although this figure contracted to $67.42bn by the end of 1Q26 due to idiosyncratic events, markets remain active. Tellingly, the Loan Market Association (the “LMA”) gave a recent market overview presentation on the application of blockchain and distributed ledger technology, while stakeholders have looked to develop codified tools for valuation. As this area of finance has matured, so too has the documentation. Digital asset loan agreements executed over the course of 2025 and into 2026 demonstrate that, although loan terms remain highly negotiated, market participants are beginning to converge around core provisions governing collateral administration, valuation, perfection and enforcement. Recent publicly filed crypto-backed credit agreements—including those entered into by Riot Platforms, Hut 8, CleanSpark, KULR Technology Group, Thumzup Media and Angel Studios—show increasingly consistent approaches to collateral administration and lender protections. Across these transactions, pledged digital assets are typically required to be maintained in designated collateral or securities accounts subject to lender control, with the lender or collateral agent retaining the exclusive right to direct the release or transfer of collateral. Collateral releases are commonly conditioned upon satisfaction of negotiated collateral coverage or loan-to-value (“LTV”) tests. Although many agreements continue to employ UCC Article 8 concepts, namely key definitions and mechanisms involving “securities accounts,” “financial assets” and “securities intermediaries,” market participants are increasingly evaluating Article 12 control concepts as jurisdictions adopt the 2022 amendments to the UCC (the “2022 Amendments”). To this point, collateral valuation remains one of the most heavily negotiated aspects of crypto-backed lending. The growing adoption of Article 12 and the increasing use of Controllable Electronic Record Control Agreements also continue to influence how lenders perfect and maintain security interests in digital assets. Most surveyed agreements require continuous or near-continuous mark-to-market valuation and ongoing LTV monitoring, but valuation methodologies remain bespoke and rely variously on executed transactions, exchange pricing or negotiated spot-rate methodologies. Margin calls are generally triggered by collateral shortfalls or LTV breaches, with short cure periods and lender liquidation rights designed to address the volatility inherent in digital asset collateral. These commercial terms undergird a documentation framework that emphasizes continuous valuation, defined LTV thresholds, rapid margin cure periods and perfected collateral arrangements as fundamental credit protections. Recent agreements also demonstrate increasing consistency in the treatment of priority and enforcement. Lenders generally require first-priority security interests and prohibit borrowers from transferring or otherwise encumbering pledged collateral during the loan term, although approaches to collateral substitution and rehypothecation remain transaction-specific. Likewise, while events of default generally resemble those found in traditional secured lending transactions, crypto-backed facilities increasingly include digital asset-specific defaults tied to margin maintenance, collateral control and custody arrangements. Corresponding remedies commonly include foreclosure, liquidation, setoff and, where digital assets themselves were advanced, the right to purchase replacement digital assets using collateral proceeds. Market concentration is another key trend of 2Q. Coinbase Credit continues to be the most prominent lender in publicly filed corporate transactions, while Two Prime, Galaxy Digital, Kraken/Payward and Matrixport appear in a smaller number of specialized financing structures. Centralized crypto lending platforms—including Nexo, Crypto.com and YouHodler—also continue to play a significant role in the broader crypto lending ecosystem. Although crypto-backed credit agreements remain a relatively new financing product, the continued maturation of crypto-backed lending has been catalyzed by the development of supporting legal infrastructure, recent legislative developments and the continued growth of tokenized real-world assets. Expanding institutional participation and the emergence of increasingly sophisticated documentation also suggests that the market is evolving at a healthy pace. Similarly, the emergence of early digital asset securitization structures underscores the increasing integration of digital assets into traditional financing markets. As additional transactions become publicly available and regulatory frameworks continue to develop, further convergence around market documentation standards is expected, reinforcing digital asset-based lending as an increasingly recognized component of the loan market. View the Appendix. |
| 2022 UNIFORM COMMERCIAL CODE AMENDMENTS AND ARTICLE 12 - SECURITY INTERESTS | Although the 2022 Amendments have been under development for several years, market attention accelerated significantly this quarter as implementation reached a critical inflection point. The 2022 Amendments were approved by the American Law Institute and the Uniform Law Commission to modernize the UCC for emerging technologies, including digital assets, distributed ledger technology and other forms of electronic commerce. While more than thirty jurisdictions have adopted the 2022 Amendments over the past several years, New York's enactment through its UCC Revision Act (Senate Bill S1840A) and companion Assembly Bill A3307A (effective as of June 3, 2026) is particularly significant given its role as the governing law of choice for a substantial portion of U.S. credit facilities and other commercial finance transactions. As implementation accelerates, the conversation among lenders and their counsel has shifted from whether credit documentation should address Article 12 to how Article 12 concepts should be operationalized in practice. Market participants are beginning to incorporate new defined terms—including “Controllable Electronic Records,” “Controllable Accounts” and “Controllable Payment Intangibles”—into security agreements and other ancillary collateral documents. In the same vein, transactions involving digital assets increasingly contemplate custody arrangements, wallet structures and emerging forms of CER control agreements alongside more traditional deposit account and securities account control agreements. The amendments are also influencing financing structures beyond cryptocurrency-backed lending. As legal certainty surrounding perfection and priority improves in adopting jurisdictions, market participants are evaluating Article 12 in the context of tokenized receivables, trade finance, supply chain finance and hybrid collateral packages combining traditional Article 9 collateral with digital assets. More broadly, the amendments coincide with continued expansion of such tokenization initiatives, digital payment infrastructure and stablecoin regulation, reinforcing the importance of a consistent commercial law framework for electronically recorded assets. Finally, implementation has also focused on legal opinion and documentation practice. Earlier this year, the TriBar Opinion Committee published its Report on Opinions Under the 2022 Amendments to the Uniform Commercial Code Regarding Emerging Technologies, providing guidance on assumptions, illustrative opinion language and opinion practice relating to transactions governed by Article 12. Together with continuing guidance from industry organizations and evolving market documentation, the Report reflects the broader transition from legislative adoption toward standardization and implementation of the 2022 Amendments across collateral structures. Clearly, the market has moved beyond debating whether a new legal framework for digital assets is necessary to implementing that framework in secured lending transactions and LSTA will continue to monitor this area. View the Appendix. |
| COOPERATION AGREEMENTS AND DISPARATE TREATMENT - INITIAL HOLDERS, "GOLDEN HANDS" AND CARVE OUT PREMIUMS | As borrowers and sponsors increasingly looked to existing creditor groups, rather than new financing sources, to raise liquidity or restructure their capital structures at the end of 2025 and into 2026, Co-ops have remained a common feature of the LMT landscape. Indeed, lenders looked to Co-ops as a mechanism to reduce the risk of being excluded from, subordinated in or otherwise disadvantaged by selective nonpro-rata deals. Over the course of 2025 and into 2026, that approach has steadily given way to more tailored Co-op structures that distinguish among participating creditors and permit different levels of participation in an eventual restructuring. Market observers have noted that Co-ops have progressed from arrangements under which all signatories expected the same treatment to frameworks incorporating steering committee preferences, carve-out premiums and multiple tiers of participation. More recently, differentiated participation has become an expected feature of many Co-ops rather than the exception. The market's evolution is equally evident in the drafting itself. Many recent Co-ops distinguish between Initial Holders and Subsequent Holders, although the mechanics may differ considerably from one transaction to the next. Concomitantly, “Golden Hand” provisions—which generally require participating lenders to share separately negotiated transaction opportunities with other members of the Co-op group—are becoming more tailored, with sharing obligations increasingly limited to Initial Holders rather than extending to all subsequent participants. The shift towards tiered structuring and associated carve-out premiums has likewise become increasingly nuanced and related credit agreement provisions have become key negotiation points for Co-op parties. Earlier Co-ops generally contemplated that steering committee fees or similar premiums would be limited to amounts that were “reasonable” and “customary.” More recent agreements have come to relax—or eliminate—those qualifiers, providing greater flexibility to allocate work fees, commitment fees, backstop compensation and other benefits among selected participants. More significantly, several recent agreements contemplate multiple levels of economic participation or entirely uncapped carve-out premiums for steering committee members, reflecting a broader migration towards bespoke arrangements that permit meaningful variation in the benefits available to different members of lender cohorts. Recent transactions illustrate the range of approaches currently emerging in the market. The Co-op for Medical Solutions contemplated multiple tiers of participation and significant variation in fees, premiums and new-money opportunities among cooperating lenders, while Cornerstone Building Brands distinguished between Initial Holders and Subsequent Holders, preserving the ability of later-joining lenders to participate in the transaction while reserving certain financial benefits for early signatories. Meanwhile, the Co-ops in Foundever and CDK Global attracted considerable market attention by permitting effectively uncapped carve-out premiums for steering committee members, whereas RSA Security retained the more traditional “reasonable and customary” formulation. Collectively, these transactions demonstrate that market participants continue to experiment with diverse approaches rather than converging on a single model Co-op. The trend has also influenced lender behavior. For instance, some minority lender groups have chosen not to join Co-ops, preferring to organize independently or preserve flexibility to negotiate directly with sponsors. Others have also observed that broader discretion to provide enhanced consideration to selected participants may encourage lenders to sign Co-ops earlier in the process, limiting the opportunity for competing creditor groups to form. (It is worth noting, however, that while some practitioners have posited that carve-out premiums could further divide creditor groups, others have noted that sponsors and steering committees do not necessarily exercise the full flexibility afforded by the documentation.) This maturation in the collective lender action space demonstrates that Co-ops have evolved well beyond simple coordination agreements. They now play a central role in determining which lenders gain access to enhanced opportunities, how fees, premiums and other benefits are shared among cooperating creditors and whether those advantages remain attached to the debt following a transfer. As LMTs continue to develop, market participants are likely to devote increasing attention to the precise drafting of these agreements, recognizing that relatively modest drafting differences can materially influence both a lender's strategic position and the commercial outcomes ultimately available in a restructuring. View the Appendix. |
| PORTABILITY "REVISITED" | Although portability remains principally a feature of the European leveraged finance market, it resurfaced in selected U.S. sponsor-backed BSL transactions during the second quarter of 2026 as sponsors continue to seek greater flexibility to pursue future exits while preserving existing financing arrangements. According to Covenant Review, four sponsor-backed BSL deals in May included portability provisions, representing approximately 14% of new private equity-backed institutional loans—the highest monthly penetration since January 2026. The Athenahealth refinancing and Modern Aviation financing were among the transactions incorporating such mechanics. Although market observers did not identify portability as a significant trend in either April or June, the May data suggests that sponsors continue to negotiate portability opportunistically where market conditions are supportive, rather than as a standard feature of new U.S. originations. The renewed focus on portability reflects broader developments in the leveraged finance market. As financing conditions improved during the early part of 2Q, sponsors sought to preserve financing obtained on attractive terms while maintaining flexibility to pursue future exits. At the same time, portability has more often been negotiated in connection with refinancings, repricings and amend-and-extend transactions to preserve future strategic flexibility. In June, market conditions proved more challenging in the face heightened macroeconomic uncertainty and LMPs looked to longer private equity holding periods and a slower M&A environment. Portability provisions negotiated earlier in the quarter thereby afforded sponsors’ strategic optionality in a changing market backdrop. The resurgence of portability has also prompted renewed scrutiny from lender groups. In its recent Transferability Series, the European Leveraged Finance Association noted that increasingly expansive portability provisions may dilute certain protections traditionally afforded to lenders under change of control provisions, particularly where lenders are required to remain invested following a sponsor transition without an opportunity to reassess the credit. LSTA has similarly highlighted concerns that expansive portability provisions diminish lenders' ability to evaluate and monitor credit risk following a sponsor transition. Consequently, market negotiations have come to center not on whether portability should be permitted, but on the objective conditions governing its exercise, including qualifying purchaser requirements, leverage and equity tests, KYC obligations, portability fees and limitations on the number of permitted portability events. Although portability remains a relatively selective feature in the U.S. BSL market, its re-emergence during 2Q demonstrates that it continues to be an important negotiating point in sponsor-backed financings. Provided that market conditions prove more accommodating, the principal area of negotiation may shift from the availability of portability itself to the scope of the protections afforded to lenders when the feature is exercised. View the Appendix. |
APPENDIX
CRYPTO-BACKED CREDIT AGREEMENTS - COLLATERAL ISSUES AND KEY PROVISIONS
| WHAT IS IT? | WHY DOES IT MATTER? |
|---|---|
The Facilities Crypto-backed loan agreements are secured credit facilities in which digital assets are pledged as collateral to support an extension of credit, with borrowing availability and ongoing collateral maintenance determined principally by the value of the pledged assets. Depending on the transaction, the lender may advance either fiat currency (such as U.S. dollars), digital assets, or both, while the borrower grants a security interest in specified digital assets to secure its repayment obligations. Although crypto lending initially developed through retail lending platforms and decentralized finance protocols, the market has expanded considerably in recent years and now includes negotiated secured credit facilities entered into by corporate borrowers, including bitcoin treasury companies, digital asset miners and other crypto-native businesses. More broadly, the digital asset lending market encompasses crypto-backed loans, unsecured crypto loans and financings involving other digital assets, including non-fungible tokens (“NFTs”), although this discussion focuses primarily on secured bilateral and, to some extent, institutional crypto-backed credit facilities. Unlike traditional commercial lending, where underwriting principally evaluates a borrower's creditworthiness and cash flow, crypto-backed lending is primarily collateral-driven. Accordingly, these facilities are typically overcollateralized, with borrowing capacity determined by the market value of the pledged digital assets and subject to ongoing LTV maintenance requirements. The legal and regulatory framework applicable to digital asset lending also continues to evolve, including through developments under the UCC and recent federal legislative and regulatory initiatives affecting digital assets, such as the GENIUS Act. Digital Assets Digital assets are digital representations of value or ownership recorded on a cryptographically secured distributed ledger, most commonly a blockchain. For purposes of this type of lending, the principal categories include:
Crypto lending generally utilizes a centralized finance model, under which the lender or a third-party custodian maintains possession or control of the pledged collateral throughout the life of the loan. This contrasts with decentralized finance, which relies on blockchain-based smart contracts to automate funding, collateral management and liquidation without a centralized intermediary. Because this piece focuses on bilateral crypto credit documentation, the discussion below is limited principally to centralized lending structures. Structure of Crypto-Backed Credit Agreements Although crypto-backed facilities resemble traditional secured loans in many respects, the loan agreements differ from both BSL documentation and bespoke PCC facilities. Many deals are documented through a Master Loan Agreement, which establishes the parties' ongoing legal relationship, together with transaction-specific confirmations or schedules setting forth the commercial terms applicable to each borrowing. Unlike traditional secured lending, where borrowing capacity generally remains fixed absent an event of default, declines in the value of pledged digital assets may increase the applicable LTV ratio and trigger margin calls requiring the borrower to post additional collateral or partially repay the loan within prescribed time periods. Given the collateral-driven nature of these facilities, negotiated provisions typically focus on the administration of the pledged digital assets, including:
Security Interests and Related Considerations As with other secured financings, the attachment, perfection and priority of security interests in digital assets are governed by the UCC, as adopted by the applicable state. The 2022 Amendments, including new Article 12, established a more comprehensive framework for qualifying digital assets and introduced new rules governing perfection by control (a more detailed discussion of the UCC framework is included below). Crypto-backed lending also frequently involves specialized third-party service providers responsible for safeguarding and administering pledged collateral. These include custodians, which maintain possession or control of digital assets, and lending service providers, which perform broader administrative functions, such as maintaining collateral accounts and facilitating collateral transfers throughout the life of the facility. The legal and regulatory framework applicable to digital asset lending continues to evolve, including through developments under the UCC and recent federal legislative and regulatory initiatives affecting digital assets, such as the GENIUS Act (see above). | For creditors, crypto-backed lending presents an opportunity to capitalize on new financing opportunities that involve lending against a new and increasingly accepted asset class. At the same time, these facilities present a distinct set of legal and operational considerations that differ from traditional secured financings. Rather than relying principally on the borrower’s cash flow or enterprise value, lenders look primarily to the value and enforceability of the pledged digital assets as their source of repayment. As a result, lenders place particular emphasis on ensuring that they obtain a first-priority perfected security interest in the collateral and that the loan documents provide sufficient protections against fluctuations in collateral value while also preserving the lender's ability to realize on that collateral promptly following a default. Beyond traditional credit considerations, lenders must also address issues unique to digital assets. These include determining whether, and to what extent, pledged digital assets may be rehypothecated or otherwise utilized during the term of the facility; establishing appropriate custody arrangements, digital wallet administration and private key management procedures; and addressing blockchain-specific events, such as forks, token swaps and protocol upgrades, that could affect the collateral. The parties must also determine the mechanics for funding and repayment, whether in fiat currency, digital assets or a combination of both, and consider how the legal and regulatory characterization of the pledged digital assets, together with any applicable tax, transfer or other regulatory considerations, may affect the structure, administration and enforcement of a deal. From a borrower's perspective, crypto-backed lending provides an alternative source of financing and has the added benefit of enabling the borrower to retain ownership of its digital asset holdings rather than liquidating them. Because borrowing availability is tied directly to the value of the pledged collateral, borrowers are principally concerned with preserving asset value and maintaining sufficient flexibility to manage their position throughout the loan term. Borrowers should also consider the operational and counterparty risks associated with the custody and administration of pledged digital assets. Unlike traditional bank deposits, digital asset collateral generally is not insured by the Federal Deposit Insurance Corporation, making the selection of custodians and other service providers, as well as the contractual protections governing custody arrangements, an important consideration in structuring these transactions. For further information, please review LSTA’s “Digital Assets and Crypto-Based Credit Agreement 101”, Practical Law’s – “Glossary of Blockchain Terms (2023)”, LSTA’s “Digital Asset Financing – Market Update Presentation” and LSTA’s “Blockchain and Digital Asset Trends Presentation.” |
2022 UNIFORM COMMERCIAL CODE AMENDMENTS AND ARTICLE 12 - SECURITY INTERESTS
| WHAT IS IT? | WHY DOES IT MATTER? |
|---|---|
The 2022 UCC amendments establish a comprehensive legal framework governing the ownership, transfer and use of certain digital assets, including the creation, perfection and enforcement of security interests therein. The amendments introduce new Article 12, which governs a new category of digital property known as controllable electronic records (“CERs”), while corresponding amendments to Article 9 integrate CERs into the existing secured transactions regime by establishing rules governing the attachment, perfection and priority of security interests in CERs and certain related collateral. Article 12 adopts a technology-neutral approach. A CER is an electronic record that can be subjected to control, rather than a defined category of technology or asset. CERs include many forms of digital assets, such as cryptocurrencies, NFTs, tokenized payment rights, electronic promissory notes and other transferable electronic records capable of being uniquely associated with a person or entity. Certain assets, however, are expressly excluded from the definition of a CER. These encompass electronic copies of records evidencing chattel paper, electronic documents of title, investment property and transferable records governed by the Uniform Electronic Transactions Act or the federal Electronic Signatures in Global and National Commerce Act, each of which remains subject to separate provisions of the UCC or other applicable law. Likewise, electronic money is governed under a separate statutory framework. The amendments also preserve the ability of market participants to “opt in” to Article 8 by holding eligible digital assets through a securities intermediary as a financial asset credited to a securities account. In addition, Article 9 introduces two related collateral categories—controllable accounts and controllable payment intangibles—which generally consist of accounts or payment intangibles evidenced by a CER where the obligor has agreed to pay the person having control of that CER. As evidence from the above, a central feature of the new framework is the concept of control, which functions as the digital analogue of possession. Under Article 12, a person has control of a CER if the electronic record, a record attached to or logically associated with it, or the system in which it is recorded gives that person (i) the power to avail itself of substantially all of the benefits of the CER, (ii) the exclusive power to prevent others from availing themselves of substantially all of those benefits, and (iii) the exclusive power to transfer control of the CER to another person. The person must also be readily identifiable as having these powers. Control may be established directly or through another person acting on the secured party's behalf, and the exclusivity requirement is generally not defeated by the use of multi-signature arrangements or smart contracts operating pursuant to the governing protocol. Because CERs constitute general intangibles under Article 9, a security interest in a CER may be perfected by filing a financing statement. The 2022 UCC Amendments, however, introduce perfection by control as an alternative method and a security interest perfected by control generally has priority over a competing security interest perfected solely by filing. Finally, Article 12 also establishes rules governing transfers of CERs. While a purchaser generally acquires the rights that the transferor had, or had the power to transfer, a “qualifying purchaser”—namely, a purchaser that obtains control of a CER for value, in good faith and without notice of a competing property claim—takes the CER free of such competing property claims under Article 12's “take-free” rule. Comparable perfection, priority and transfer rules apply to controllable accounts and controllable payment intangibles. | The 2022 UCC Amendments significantly modernize the law governing secured transactions that involve digital assets. They do so by replacing a framework that often required lenders to fit emerging forms of collateral into UCC concepts developed long before the advent of blockchain technology and tokenized assets. Prior to Article 12, cryptocurrencies and many other digital assets generally were treated as general intangibles, leaving lenders to rely primarily on filing-based perfection rules that were not designed to address the unique characteristics of digital assets. The result was considerable uncertainty regarding ownership, perfection, priority and enforcement. Therefore, by establishing uniform commercial law rules specifically tailored to digital assets and related electronic payment rights, the amendments provide substantially greater certainty to secured parties, purchasers and other market participants. Perhaps the most significant development is the introduction of a comprehensive control regime for digital assets. Similar to the role that possession plays with respect to tangible collateral—and that control already plays for deposit accounts, securities accounts and investment property—Article 12 elevates control to the preferred method of perfecting security interests in CERs and related collateral. This innovation fundamentally changes the perfection and priority analysis for these assets. As a practical matter, this also shifts the focus of secured lending from simply filing financing statements to ensuring that collateral arrangements, custody structures and transaction mechanics establish and preserve control throughout the life of the transaction. Beyond digital asset-backed lending, the amendments establish a more predictable commercial law framework for receivables finance, trade finance, tokenized payment rights and other financing transactions involving electronically recorded assets. By reducing uncertainty surrounding transfer, perfection and priority, Article 12 is expected to lower transaction costs, promote greater institutional participation and facilitate broader use of digital assets and other electronic payment rights within secured lending markets. For further information, please review LSTA’s webcast “2022 Uniform Commercial Code Amendments Addressing Emerging Technologies: Don’t Forget – Transition, Choice of Law, and Legal Opinions”, The Uniform Law Commission’s Summary of the 2022 Amendments to the Uniform Commercial Code and Practical Law’s “Proposed 2022 Amendments to the UCC Toolkit.” |
COOPERATION AGREEMENTS AND DISPARATE TREATMENT - INITIAL HOLDERS, "GOLDEN HANDS" AND CARVE OUT PREMIUMS
| WHAT IS IT? | WHY DOES IT MATTER? |
|---|---|
As previously discussed here, a Co-op is a contractual arrangement among lenders under the same credit agreement (typically comprising a majority of those lenders). In the current market, they provide a framework for coordinating negotiations and participation with respect to potential LMTs. Traditionally, these agreements sought to ensure that participating lenders acted collectively and were afforded substantially equivalent treatment in any approved transaction. More recent Co-ops, however, frequently distinguish among different categories of participating lenders by reserving certain rights, opportunities or economics for a smaller group of signatories. As a result, while an underlying restructuring transaction may remain available to all participating lenders, certain benefits—such as new-money opportunities, backstop commitments, commitment fees or other transaction-related compensation—may be allocated only to specified participants rather than shared across the entire Co-op group. Initial Holders Many Co-ops include the concept of “Initial Holders” (alternatively referred to as “Initial Parties”), which generally consists of lenders that execute the agreement upon its effectiveness or within a specified period thereafter. These provisions are intended to encourage early participation by rewarding lenders that commit to the Co-op at the outset. In contrast, lenders that join after the prescribed period are typically treated as Subsequent Holders/Parties and may receive a narrower package of rights. Initial Holders commonly receive both the benefit of pro rata participation in the underlying restructuring transaction and the opportunity to participate in related new-money financings, backstop commitments and associated fees or premiums. Subsequent Parties, by comparison, may be entitled only to participate in the underlying transaction itself, without access to the additional economic upside reserved for Initial Holders. Co-ops frequently require lenders to join within a relatively short period—sometimes only a few business days following the agreement's effectiveness—in order to qualify for Initial Holder treatment. “Golden Hands” Co-ops also differ in how they treat the transferability of Initial Holder rights, commonly referred to as “Golden Hands.” Under one approach, the enhanced rights associated with Initial Holder status remain personal to the Initial Holder. Accordingly, if an Initial Holder transfers its debt to a Subsequent Party or a lender that later joins the Co-op, the transferred debt loses its Initial Holder status and the associated rights to participate in enhanced economics. Other agreements adopt the opposite approach by permitting those enhanced rights to transfer with the debt, allowing the transferee to succeed to the Initial Holder’s rights. Still others employ a “non-grower" construct, under which only debt subject to the Co-op as of the effective date receives the agreement's benefits. Under this formulation, debt acquired from a non-party after the effective date does not become entitled to enhanced treatment simply because it is later held by a cooperating lender. Carve-out Premiums A growing number of Co-ops also include carve-out premium provisions, sometimes implemented through a steering committee or other preferred lender construct. These provisions operate as exceptions to the general expectation of equal treatment among cooperating lenders by permitting specified participants to retain better money terms. The additional consideration may take the form of work fees, commitment fees, backstop compensation or other transaction-related premiums that are not required to be shared pro rata with all participating lenders. In effect, carve-out premiums allow Co-ops to distinguish between participation in an underlying financing transaction itself and participation in certain enhanced economic opportunities. These concepts frequently overlap in practice. For example, an Initial Holder may also serve on the steering committee and therefore benefit from both the enhanced rights associated with Initial Holder status and any additional economics available through a carve-out premium. Accordingly, a single Co-op may distinguish among lenders in multiple ways, including based on the timing of their participation, the transferability of their rights and the allocation of transaction-related economics. | Co-ops have become an increasingly significant feature of LMTs because they can influence not only which lenders participate in a transaction, but also the economic upside available to different members of the co-op group. As Co-ops have evolved from relatively straightforward coordination arrangements into more sophisticated contractual frameworks, lenders must evaluate not only whether to join a Co-op, but also when to join, what rights they may receive and whether those rights will remain attached to the debt if it is subsequently traded. These provisions therefore have meaningful implications for transaction execution, lender incentives and recoveries and secondary market liquidity. Initial Holders The distinction between Initial Holders and Subsequent Parties creates a strong incentive for lenders to make an early decision regarding participation in a Co-op. Lenders that delay execution may remain eligible to participate in the underlying LMT but may forfeit the opportunity to participate in related new-money commitments, backstop facilities or other exclusive rights reserved for Initial Holders. As a practical matter, these provisions can compress negotiation timelines by encouraging lenders to commit before all transaction details have been finalized. From a borrower's and sponsor's perspective, differentiating between Initial and Subsequent Parties can facilitate transaction certainty by rewarding lenders that commit capital and support the transaction at an early stage. For lenders, however, these provisions require balancing the benefit of preserving optionality against the risk of losing access to valuable financial and commercial benefits. Golden Hands Golden Hand provisions may also influence secondary market liquidity by affecting the value of debt subject to a Co-op. Where enhanced participation rights remain personal to the Initial Holder and do not transfer with the debt, purchasers may be unwilling to pay the same price for debt that no longer carries those rights. Conversely, where the enhanced rights travel with the debt, the instrument may retain greater value and remain more readily tradable in the secondary market. Market participants therefore increasingly need to evaluate not only whether debt is subject to a Co-op, but also the transferability of the rights associated with that agreement. These provisions can therefore become an important consideration during both primary negotiations and subsequent trading activity. Carve-out Premiums Carve-out premium provisions reflect the growing recognition that participating lenders may contribute differently to the execution of an LMT. Sponsors and negotiating lender groups often view these provisions as an appropriate mechanism for compensating the lenders that devote significant time, resources and capital to structuring, negotiating and implementing a complex transaction, including arranging new-money commitments or providing backstop financing. In that view, enhanced money terms serve as compensation for assuming additional responsibilities and execution risk. Other lenders, however, may view expansive carve-out premium provisions as eroding the traditional expectation of pro rata treatment. As carve-out premiums become more flexible—and in some cases are no longer subject to fixed percentage limitations—the economic disparity between preferred participants and other creditors may become increasingly significant. Lenders evaluating whether to join a Co-op should carefully assess the potential consequences of signing early or later in the process, whether enhanced rights remain transferable with the debt and how the agreement allocates fees, premiums and other deal economics. For further information, please review, LSTA’s “Liability Management Transaction: Drafting Fixes Market Advisory”, “Cooperation Agreements 101: Building Blocks, Fundamental Issues & Latest Trends” and LSTA’s “Market Advisory – Cooperation Agreements in BSL Transactions, including Exhibit A.” |
PORTABILITY "REVISITED"
| WHAT IS IT? | WHY DOES IT MATTER? |
|---|---|
The “portability of debt” describes the ability of a sponsor to consummate a sale of its equity interest in a borrower without triggering an event of default or mandatory prepayment under the customary change of control provisions in a credit agreement, thereby allowing the borrower’s existing debt to remain in place following the acquisition by a qualifying third-party sponsor. Market-based portability provisions remain highly negotiated and are typically subject to several conditions, including: (i) consummation of the sale within a specified period; (ii) acquisition by a qualifying or approved sponsor (or one satisfying specified assets-under-management, ratings or other creditworthiness thresholds); (iii) completion of customary know-your-customer and other administrative requirements; (iv) satisfaction of a pro forma leverage test; (v) a minimum equity contribution or equity-to-capitalization requirement; (vi) the absence of any continuing event of default; (vii) payment of a portability fee; and (viii) limitations on the number of times the portability feature may be exercised during the life of the credit agreement. Certain agreements also provide for related economic adjustments, such as the resetting of call protection or baskets tied to sponsor equity contributions following the exercise of portability.
| Portability provisions represent a significant departure from the traditional change of control regime, under which a sale of the borrower (or its parent) to a third party would ordinarily trigger an event of default or mandatory prepayment, requiring the borrower to refinance its existing debt. By permitting a qualifying change in ownership without requiring a refinancing, portability reallocates many of the commercial risks and benefits traditionally associated with a change of control. From a lender's perspective, portability offers certain commercial advantages by increasing confidence that an agreed sale can proceed without financing-related disruption and allowing existing lending relationships to continue following a sponsor sale. It may also create opportunities to deepen relationships with incoming sponsors or provide incremental financing in connection with an acquisition. These benefits, however, are balanced against the loss of a traditional exit right upon a change of control. Rather than being repaid and afforded the opportunity to reassess the credit or renegotiate financing terms, lenders may instead remain committed to financing the borrower under new ownership, notwithstanding potentially different investment objectives, operating strategies or risk tolerances. Consequently, portability may reduce lenders' visibility into ownership transitions and limit their ability to exit an investment or reassess pricing and other terms following a sponsor sale. For borrowers and their sponsors, portability provides greater flexibility in planning an exit by allowing an attractive financing package to remain in place following a change in ownership. Eliminating the need to arrange replacement debt financing can streamline the sale process, reduce financing and transaction costs and remove a significant closing contingency, particularly during periods of constrained credit availability or elevated borrowing costs. Portability also allows sponsors to market a business with committed financing already in place, potentially broadening the universe of prospective purchasers and increasing the likelihood of a successful sale. In a slower M&A environment, sponsors may also elect to retain an investment for a longer period while preserving a capital structure that can facilitate a future disposition when market conditions become more favorable. For target companies, portability reduces the disruption associated with a change in ownership by allowing the existing capital structure to remain intact rather than requiring a refinancing at closing. Buyers similarly benefit from the ability to acquire a business without simultaneously arranging replacement financing, which can shorten transaction timelines, simplify the acquisition process and reduce financing costs. At the same time, portability provides flexibility rather than an obligation; an incoming purchaser may nevertheless determine that refinancing the existing debt is preferable if a different capital structure or financing package better aligns with its investment strategy or post-acquisition objectives. For further information, please review LSTA’s “Legal Perspectives on 2025 Loan Market Trends,“ Practical Law ‘s “Expert Q&A on Borrower and Lender Perspectives in H1 2025 Private Credit“ and LSTA’s “Loan Market Covenant Trends – 2Q24 – “Portability”. |
