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PetSmart’s “Ruff” Amendment Process

April 10, 2019 - Last week, the loan market was roiled by an unusual and aggressive process for a proposed amendment of loans to PetSmart.  By failing to follow published LSTA amendment guidelines, the process resulted in significant uncertainty and disruption.  PetSmart sought to push through an amendment that would increase the coupon on its loan in return for a complete settlement by the lenders of litigation involving the company’s questionable transfer of interests in its Chewy affiliate.  As reported in LevFin Insights, the company gave lenders only 24 hours to consent, far below the 5 days suggested by the LSTA, and offered the significantly higher economics to only the first 51% of lenders to consent.  This “prisoner’s dilemma” put lenders under immense pressure to agree to the proposal, and, indeed, the company reported that within hours it had received the necessary 51% consents.  Remarkably, the amendment process was run by the sponsor instead of the agent and, as a result, for two days lenders did not know whether or not their consents had been accepted among the first 51%.  This lack of transparency effectively shut down the PetSmart secondary market because traders did not know whether they owned consenting or non-consenting loans (which were priced 3 to 5 points lower).  Under pressure, the company utimately backed down and honored the consents of all of the 90% of the lenders received prior to the deadline but not before being sued by a non-consenting lender and receiving protests from an ad hoc group of consenting lenders.  As the LSTA has noted to commentators, the PetSmart amendment process was inconsistent with the LSTA’s mission of promoting a fair, orderly and efficient loan market and specifically did not comply with its published Standard Amendment Procedures. Instead, the process seemed rushed and chaotic and led to significant market disruption. Lenders need a sufficient amount time to consider the implications of amendments and clear and transparent instructions to properly respond.

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