Loan Market Covenant Trends - 1Q25

April 28, 2025 - The first quarter of the year proved a turbulent period for markets. Hopes for increasing M&A activity, lower interest rates and ongoing economic growth took a disappointing turn later in the quarter, as anxiety around the impending tariff threat, persistent inflation and general economic uncertainty took their toll on capital markets activity. In January, narrowing spreads fueled strong repricing and dividend recapitalization activity, and looser covenant packages reflected prevailing borrower-friendly trends. Borrowers loosened their grip somewhat in February, as spreads rose and covenant protections shifted slightly in favor of lenders (albeit against an overall pro-borrower documentation landscape). Market observers thus noted the increasing frequency of Liability Management Transaction (“LMT”) blocker language, along with a marginal increase in lender flex, as supply waned in the face of stubborn inflationary trends that complicate the Fed’s trajectory. During the final month of the quarter, volatility stemming from these macroeconomic concerns further chilled debt markets, slowing the pace of repricings and dividend activity, and leading to a fall in opportunistic activity. While lenders saw an improvement in price flex earlier in the month, covenants stagnated. More recently, markets screeched to a halt post-Liberation Day, as renewed recessionary concerns caused markets to reprice risk.

Even amidst these market developments, we can discern a few clear trends on the documentation front, including spread compression in private corporate credit (“PCC”) and broadly syndicated loan (“BSL”) transactions. True to form, these markets diverged considerably with respect to covenant strength, which remained stable in the former but continued to deteriorate in the latter. More specifically, LMT blocker language (namely, J Crew, Serta, Chewy and Envision protections) featured more frequently in PCC loans than their BSL counterparts, while covenant-lite structures remained the mainstay of syndicated transactions. Despite this variance, there were a few high points for lenders, including the rejection of “high watermark” language in all three loans in which it appeared (including INEOS Composites), as well as a failed attempt by borrowers to introduce “anti-cooperation” language in a recent deal (as discussed further below). Current market instability (and unpredictability) will likely shift the dynamic increasingly in favor of lenders, and commentators expect rising spreads and tightening of deal terms in 2Q25.

Finally, practitioners should note that the Trump administration’s spate of deregulatory actions have also affected document drafting. Credit agreements may now feature provisions addressing Treasury’s “Outbound Investment” regulations while recent Executive Orders are expected to dampen sustainable finance activity (for further information, please review the LSTA’s “Outbound Investment Regulations” Outbound Investment Regulations – LSTA Market Advisory”).

As lenders and borrowers hold their breath in the face of frenetic market and political developments, we take a moment to delve deeper into the significant documentation trends of 1Q25.

The appendix further details each provision and its importance in the market.

PROVISION	RECENT TRENDS
COOPERATION AGREEMENTS	Over the course of 4Q24 and 1Q25, Co-ops have become the situs for borrower/sponsor and lender confrontation. Indeed, the endurance of the LMT trend has encouraged lenders to resort to more frequent use of Co-ops, with significant variation across documentation terms as well as outcomes for lenders. At the same time, the recent emergence of “anti-Co-op” language in credit agreements has signaled borrowers’ efforts to resist this lender tactic. At the end of last year, an ad hoc group of lenders for Newfold Digital entered into a Co-op which was notable for tight terms including restrictions around membership and the incurrence of new debt. (A minority group engaged counsel shortly thereafter, illustrating that while Co-ops may have emerged to reduce lender-on-lender violence, they may also lead to antagonistic lender negotiations in the future.) In February 2025, a steering committee of Altice International creditors finalized a Co-op in advance of potential negotiations with the company after Altice announced weak performance figures. Unlike the Newfold Co-op, the Altice Co-op group opened participation to external lenders. This activity has prodded borrowers and top-tier sponsors to reciprocate with attempted “anti-Co-op” provisions prohibiting creditors from entering into Co-ops, loyalty pacts, or coordination agreements with respect to a borrower’s debt. Such language first emerged in Europe during the pre-marketing phase of the Stepstone Group’s 2024 cross-border financing. While it was subsequently flexed out of the documents prior to syndication, this did not prevent the language from appearing State-side in the Avalara March 2025 TLB as well as WHP Global’s February M&A/refinancing loan. Importantly, the language was not included in final documentation for either transaction. In Avalara, changes made ahead of syndication included elimination of the anti Co-op language in March; in the latter, lenders also removed it from the company’s transaction documents where it had been included in the boilerplate integration clause. Here, the draft language provided that any Co-op creditor would automatically be deemed a “disqualified lender”. The uptick in Co-ops and sponsor interest in Co-op bans are an interesting gauge of where the market is positioned at the end of 1Q. While borrowers continue to explore LMTs as key restructuring and liquidity tools during a period of heightened market volatility and uncertainty, lenders appear equally determined to find guardrails against such exercises. View the Appendix.
GREEN LOANS – DECLASSIFICATION PROVISIONS	Green Loans made their loan market debut in 2014, when the British supermarket chain Sainsbury closed the first green facility. As global markets continued to confront systemic sustainability challenges, green facilities grew in volume and are now a consistently popular form of financing. As a testament to their growth, loan market trade associations published the Guidance on Green Loan Principles in 2018, as updated in 2023, and, more recently, the LSTA introduced an inaugural Drafting Guidance for Green Loans. During 1Q25, several green “use-of-proceeds” instruments have come to market, including Ares Aspen’s $244mm loan for the acquisition of a renewable energy-focused subsidiary, APLD’s $375mm facility for the financing of data center buildings and infrastructure as well as Getty Realty’s $450mm loan, the proceeds of which were on-lent to the borrower’s tenants for ESG projects. Over the past few years, markets have been clouded by concerns surrounding “greenwashing” situations in which borrowers magnify the sustainability metrics of their facilities. Market observers have thus noted increased discussions around “declassification” clauses in Green Loans and there is currently a wide market and jurisdictional variety in how declassification provisions are drafted. The APLMA Model Provisions, for instance, provide that parties have a 45-day window (as opposed to a 10-day window as in the LMA model language and LSTA language) to cure a Declassification Event, following which the facility is automatically declassified if the parties fail to agree an amendment or implement lender-requested changes. The APLMA model language also includes the option to list a “Material ESG Controversy” (defined as an event determined by the Agent to be a controversy negatively impacting a borrower’s reputation with respect to ESG) as a Declassification Event. The deregulatory agenda that the Trump Administration put into motion at the start of 1Q25 has not left sustainability unscathed. A recent Executive Order, for instance, directs the Attorney General to “identify and act against” state legislation tied to climate change or ESG that may “burden domestic energy production.” (Tellingly, some leading financial institutions chose to leave the United Nation-backed Net Zero Banking Alliance in January.) We agree with the view of Practical Law that it is premature to assess whether this will lead to a decline in Green Loan volumes over the course of 2025. However, we expect that there will continue to be market appetite for green loans as corporates, investors and lenders seek to mitigate risks associated with environmental harm. View the Appendix.
SACRED RIGHTS	Sacred Rights provisions (and expressly permitted exceptions to them) have been in the spotlight given the recent focus on “uptiering” LMTs in the wake of the *Serta* and *Mitel* decisions of late 2024 (discussed here) and lender concern regarding the inclusion of “Serta” blockers requiring heightened consent levels. Particularly, attention has centered on the drafting of negotiated exceptions to the pro rata sharing Sacred Right. While market participants could have reasonably expected the Fifth Circuit’s rejection of the Serta uptier to chill this LMT maneuver, Covenant Review has found that uptiers represented a majority of LMT activity over the course of 1Q25. Similarly, expectations for changes to the drafting of the “open market purchase” exception[1] and its variants (such as the Mitel formulation allowing the borrower to purchase loans “at any time” as an exception to the non-pro rata prohibition) have not necessarily come to fruition. Recent legal analysis, however, has highlighted that changes to any exceptions to the pro rata sharing requirements are not explicitly included in Sacred Rights provisions, and consequently amendments to them may be feasible with only a simple majority vote. Given the continued pursuit of non-pro rata exchanges by borrowers, it would be reasonable to expect lender counsel to plug this loophole by making carve-out provisions part of the list of Sacred Rights which mandate heightened lender consent to modify. A full quarter following the overturning of Serta, however, it is rare for documents to take this approach; it remains to be seen how this drafting point will evolve. Other themes have included the role for Sacred Rights language in the efficacy of LMT blocker language, given the nascent trend of “new wave” LMT blockers. This includes “omni blocker” provisions (i.e., language barring borrowers from entering into an LMT unless it is offered pro rata to all lenders) which indirectly implicate Sacred Rights as well as “Effect of” language (i.e., a provision requiring affected lender consent for both modifications of the protected rights as well as for amendments that have “the effect of modifying such rights”) which directly implicates Sacred Rights. While it is acknowledged that such “next generation” LME blockers are becoming standard in post-LMT loan agreements, it remains uncommon in BSL documents (with one cited example in the primary market including Peloton’s $1 billion term loan). Similarly, Covenant Review has commented that tighter credit agreements have featured broad “backstop LMT” protective language, which provides that a change to a blocker provision must be regarded as a Sacred Right. Here too, however, they note the infrequency of this drafting approach in new transactions. Finally, the growing trend of amending loan documents to incorporate Paid-in-Kind (“PIK”) provisions has prompted some practitioners to question the implications of PIK for Sacred Rights. In its related model language, Practical Law has commented that a credit agreement may operate to require affected lender consent for a borrower to exercise its PIK option, because the option involves the making of interest payments (traditionally included in Sacred Rights provisions).While documented negotiations have not played host to discussions around this point, it remains to be seen whether this will become a sticking point in deals as the borrower penchant for PIK continues to grow (for further discussion, please reference “Episode 1: PIK in Practice” of the LSTA’s “Lending Continuum Podcast Series”). Currently, Sacred Rights provisions vary considerably across the market and are subject to the bespoke nature of transactions and the circumstances of the negotiation process. (For instance, pro rata sharing and waterfall sacred rights are more prevalent in private credit deals, reflecting a pro-minority lender approach, but feature less consistently in documents drafted with less robust minority lender protections.) Despite this wide spectrum, it is clear that the finetuning of amendments language by counsel will play a meaning role in the evolution of Sacred Rights language. [1] Readers will recall that the Mitel document differed from the Serta loan because it did not contain an “open market purchase” exception and explicitly allowed the company to make non pro rata “purchases” of loans from individual lenders “at any time.” View the Appendix.

PROVISION

RECENT TRENDS

COOPERATION AGREEMENTS

Over the course of 4Q24 and 1Q25, Co-ops have become the situs for borrower/sponsor and lender confrontation. Indeed, the endurance of the LMT trend has encouraged lenders to resort to more frequent use of Co-ops, with significant variation across documentation terms as well as outcomes for lenders. At the same time, the recent emergence of “anti-Co-op” language in credit agreements has signaled borrowers’ efforts to resist this lender tactic.

At the end of last year, an ad hoc group of lenders for Newfold Digital entered into a Co-op which was notable for tight terms including restrictions around membership and the incurrence of new debt. (A minority group engaged counsel shortly thereafter, illustrating that while Co-ops may have emerged to reduce lender-on-lender violence, they may also lead to antagonistic lender negotiations in the future.) In February 2025, a steering committee of Altice International creditors finalized a Co-op in advance of potential negotiations with the company after Altice announced weak performance figures. Unlike the Newfold Co-op, the Altice Co-op group opened participation to external lenders.

This activity has prodded borrowers and top-tier sponsors to reciprocate with attempted “anti-Co-op” provisions prohibiting creditors from entering into Co-ops, loyalty pacts, or coordination agreements with respect to a borrower’s debt. Such language first emerged in Europe during the pre-marketing phase of the Stepstone Group’s 2024 cross-border financing. While it was subsequently flexed out of the documents prior to syndication, this did not prevent the language from appearing State-side in the Avalara March 2025 TLB as well as WHP Global’s February M&A/refinancing loan. Importantly, the language was not included in final documentation for either transaction. In Avalara, changes made ahead of syndication included elimination of the anti Co-op language in March; in the latter, lenders also removed it from the company’s transaction documents where it had been included in the boilerplate integration clause. Here, the draft language provided that any Co-op creditor would automatically be deemed a “disqualified lender”. The uptick in Co-ops and sponsor interest in Co-op bans are an interesting gauge of where the market is positioned at the end of 1Q. While borrowers continue to explore LMTs as key restructuring and liquidity tools during a period of heightened market volatility and uncertainty, lenders appear equally determined to find guardrails against such exercises.

View the Appendix.

GREEN LOANS – DECLASSIFICATION PROVISIONS

Green Loans made their loan market debut in 2014, when the British supermarket chain Sainsbury closed the first green facility. As global markets continued to confront systemic sustainability challenges, green facilities grew in volume and are now a consistently popular form of financing. As a testament to their growth, loan market trade associations published the Guidance on Green Loan Principles in 2018, as updated in 2023, and, more recently, the LSTA introduced an inaugural Drafting Guidance for Green Loans. During 1Q25, several green “use-of-proceeds” instruments have come to market, including Ares Aspen’s $244mm loan for the acquisition of a renewable energy-focused subsidiary, APLD’s $375mm facility for the financing of data center buildings and infrastructure as well as Getty Realty’s $450mm loan, the proceeds of which were on-lent to the borrower’s tenants for ESG projects.

Over the past few years, markets have been clouded by concerns surrounding “greenwashing” situations in which borrowers magnify the sustainability metrics of their facilities. Market observers have thus noted increased discussions around “declassification” clauses in Green Loans and there is currently a wide market and jurisdictional variety in how declassification provisions are drafted. The APLMA Model Provisions, for instance, provide that parties have a 45-day window (as opposed to a 10-day window as in the LMA model language and LSTA language) to cure a Declassification Event, following which the facility is automatically declassified if the parties fail to agree an amendment or implement lender-requested changes. The APLMA model language also includes the option to list a “Material ESG Controversy” (defined as an event determined by the Agent to be a controversy negatively impacting a borrower’s reputation with respect to ESG) as a Declassification Event.

The deregulatory agenda that the Trump Administration put into motion at the start of 1Q25 has not left sustainability unscathed. A recent Executive Order, for instance, directs the Attorney General to “identify and act against” state legislation tied to climate change or ESG that may “burden domestic energy production.” (Tellingly, some leading financial institutions chose to leave the United Nation-backed Net Zero Banking Alliance in January.)

We agree with the view of Practical Law that it is premature to assess whether this will lead to a decline in Green Loan volumes over the course of 2025. However, we expect that there will continue to be market appetite for green loans as corporates, investors and lenders seek to mitigate risks associated with environmental harm.

View the Appendix.

SACRED RIGHTS

Sacred Rights provisions (and expressly permitted exceptions to them) have been in the spotlight given the recent focus on “uptiering” LMTs in the wake of the Serta and Mitel decisions of late 2024 (discussed here) and lender concern regarding the inclusion of “Serta” blockers requiring heightened consent levels. Particularly, attention has centered on the drafting of negotiated exceptions to the pro rata sharing Sacred Right.

While market participants could have reasonably expected the Fifth Circuit’s rejection of the Serta uptier to chill this LMT maneuver, Covenant Review has found that uptiers represented a majority of LMT activity over the course of 1Q25. Similarly, expectations for changes to the drafting of the “open market purchase” exception[1] and its variants (such as the Mitel formulation allowing the borrower to purchase loans “at any time” as an exception to the non-pro rata prohibition) have not necessarily come to fruition. Recent legal analysis, however, has highlighted that changes to any exceptions to the pro rata sharing requirements are not explicitly included in Sacred Rights provisions, and consequently amendments to them may be feasible with only a simple majority vote. Given the continued pursuit of non-pro rata exchanges by borrowers, it would be reasonable to expect lender counsel to plug this loophole by making carve-out provisions part of the list of Sacred Rights which mandate heightened lender consent to modify. A full quarter following the overturning of Serta, however, it is rare for documents to take this approach; it remains to be seen how this drafting point will evolve.

Other themes have included the role for Sacred Rights language in the efficacy of LMT blocker language, given the nascent trend of “new wave” LMT blockers. This includes “omni blocker” provisions (i.e., language barring borrowers from entering into an LMT unless it is offered pro rata to all lenders) which indirectly implicate Sacred Rights as well as “Effect of” language (i.e., a provision requiring affected lender consent for both modifications of the protected rights as well as for amendments that have “the effect of modifying such rights”) which directly implicates Sacred Rights. While it is acknowledged that such “next generation” LME blockers are becoming standard in post-LMT loan agreements, it remains uncommon in BSL documents (with one cited example in the primary market including Peloton’s $1 billion term loan). Similarly, Covenant Review has commented that tighter credit agreements have featured broad “backstop LMT” protective language, which provides that a change to a blocker provision must be regarded as a Sacred Right. Here too, however, they note the infrequency of this drafting approach in new transactions.

Finally, the growing trend of amending loan documents to incorporate Paid-in-Kind (“PIK”) provisions has prompted some practitioners to question the implications of PIK for Sacred Rights. In its related model language, Practical Law has commented that a credit agreement may operate to require affected lender consent for a borrower to exercise its PIK option, because the option involves the making of interest payments (traditionally included in Sacred Rights provisions).While documented negotiations have not played host to discussions around this point, it remains to be seen whether this will become a sticking point in deals as the borrower penchant for PIK continues to grow (for further discussion, please reference “Episode 1: PIK in Practice” of the LSTA’s “Lending Continuum Podcast Series”).

Currently, Sacred Rights provisions vary considerably across the market and are subject to the bespoke nature of transactions and the circumstances of the negotiation process. (For instance, pro rata sharing and waterfall sacred rights are more prevalent in private credit deals, reflecting a pro-minority lender approach, but feature less consistently in documents drafted with less robust minority lender protections.) Despite this wide spectrum, it is clear that the finetuning of amendments language by counsel will play a meaning role in the evolution of Sacred Rights language.

[1] Readers will recall that the Mitel document differed from the Serta loan because it did not contain an “open market purchase” exception and explicitly allowed the company to make non pro rata “purchases” of loans from individual lenders “at any time.”

View the Appendix.

APPENDIX

COOPERATION AGREEMENTS (“CO-OPS”) AND ANTI CO-OP LANGUAGE

WHAT IS IT?	WHY DOES IT MATTER?
A cooperation agreement (a “Co-op”) is an agreement among an ad-hoc group of lenders, typically the majority of lenders under the same credit agreement, to a set of contractual terms related to common holdings of the debt of a company. Typically, a Co-op will not become effective until the Co-op lenders holding a majority of the principal amount of relevant debt tranches under the loan agreement (with thresholds reaching 75% in some instances) have joined. A Co-op is not limited to Day 1 lenders, but provides for a joinder mechanism whereby additional lenders become party to the agreement after the effective date (and in some instances a lender’s affiliates may also be bound). Importantly, the borrower is not a party to the Co-op, and therefore no term sheet is agreed between it and lenders as to any potential restructuring. By signing onto the Co-op, the lenders agree for a predetermined “effective” period to not transact with the borrower, or enter into a transaction concerning the borrower’s indebtedness, separate from the group unless it is an “Approved Transaction” in which the Co-op group participates. The Co-op typically provides for pro-rata treatment on the underlying “Approved Transaction” amongst those lenders that do participate in their respective tranches or facilities. The Co-op parties also have some flexibility in that the Co-op will not mandate that they participate in any particular transaction and will provide that the signatory parties will not consent to a transaction unless a specified threshold of lenders (typically 66.67%) elects to support it. Co-ops are drafted so that the obligations thereunder terminate upon the occurrence of key events, including (i) the consummation of an “Approved Transaction”, (ii) delivery of a termination notice by the requisite number of lenders, (iii) the borrower’s filing for bankruptcy under Chapter 11, or (iv) the occurrence of an “Outside Date” (generally defined to last from three to 18 months (subject to extension rights). Co-ops may also typically distinguish between Day 1 Co-op lenders, or the “Initial Parties” (each, an “Initial Party”) that receive pro-rata treatment with respect to the underlying deal documents, new money financings, backstop and related premium and fees, and post-closing joining lenders, or “Subsequent Parties”, which benefit exclusively from pro-rata treatment with respect to the underlying transaction terms. Another nuance is the existence of “Golden Hands” language, the most common form of which provides that any debt acquired by an Initial Party automatically receives such benefits on the condition that it remain with the Initial Party. Other key language includes the definition of “Required Holders”, which sets a threshold for approval of a subject transaction, transfer provisions, which generally require transfers of Co-op debt to satisfy certain conditions, standard representations and warranties, amendments clauses and confidentiality provisions.	The goal of a lender in entering a Co-op is to obtain a favorable outcome in the event a borrower under a credit agreement becomes distressed. (Tellingly, these agreements frequently feature as a predecessor step to to a transaction support agreement or an in-court restructuring support agreement.) Co-ops emerged as an integral collective action tool for lending syndicate members seeking to defend themselves against the onslaught of non-pro-rata liability management transactions that occurred at the outset of the 2020 pandemic (and which have continued to predominate). The consequence of an LMT transaction is disparate treatment of minority and majority lenders, and a concomitant disparity in recovery rates for such lenders. By positioning signatory parties to negotiate directly with a borrower, a Co-op provides an advantage to those lenders included in the group, allowing them to organize collectively to address their respective capital structures. Parties should recognize that Co-ops are not a failproof safeguard against an LMT, given they function to prevent transactions requiring lender consent (such as uptiering and priming transactions), but may not prove useful in preventing dropdown transactions where this is not the case (i.e. transfers of collateral to unrestricted subsidiaries or non-guarantor restricted subsidiaries). It is equally important to recognize that while there are certain benefits a lender may receive by signing onto a Co-op, namely, minimizing the risk of being left behind as an excluded lender and increasing one’s chances of a better recovery on the subject debt, the Co-op may also hamstring a lender by limiting its rights once it becomes bound by the terms of the agreement. For instance, a Co-op lender may be prohibited from participating in another lender group, or from working unilaterally with a company where it is advantageous to do so. In addition, it may receive worse economics where it is a “Subsequent Party.” The decision to enter into such an agreement will involve a careful consideration of the costs and benefits of purchasing Co-op debt. For further information, please review the LSTA’s “Cooperation Agreements, TSAs, RSAs and other Ad Hoc Group Agreements Market Advisory” and the LSTA/Practical Law “Glossary of Loan Market Terms (2025).” Please also reference the LSTA/Alston & Bird Bird presentation and webinar “Cooperation Agreements 101: Building Blocks, Fundamental Issues and Latest Trends.”

WHAT IS IT?

WHY DOES IT MATTER?

A cooperation agreement (a “Co-op”) is an agreement among an ad-hoc group of lenders, typically the majority of lenders under the same credit agreement, to a set of contractual terms related to common holdings of the debt of a company. Typically, a Co-op will not become effective until the Co-op lenders holding a majority of the principal amount of relevant debt tranches under the loan agreement (with thresholds reaching 75% in some instances) have joined. A Co-op is not limited to Day 1 lenders, but provides for a joinder mechanism whereby additional lenders become party to the agreement after the effective date (and in some instances a lender’s affiliates may also be bound). Importantly, the borrower is not a party to the Co-op, and therefore no term sheet is agreed between it and lenders as to any potential restructuring.

By signing onto the Co-op, the lenders agree for a predetermined “effective” period to not transact with the borrower, or enter into a transaction concerning the borrower’s indebtedness, separate from the group unless it is an “Approved Transaction” in which the Co-op group participates. The Co-op typically provides for pro-rata treatment on the underlying “Approved Transaction” amongst those lenders that do participate in their respective tranches or facilities. The Co-op parties also have some flexibility in that the Co-op will not mandate that they participate in any particular transaction and will provide that the signatory parties will not consent to a transaction unless a specified threshold of lenders (typically 66.67%) elects to support it.

Co-ops are drafted so that the obligations thereunder terminate upon the occurrence of key events, including (i) the consummation of an “Approved Transaction”, (ii) delivery of a termination notice by the requisite number of lenders, (iii) the borrower’s filing for bankruptcy under Chapter 11, or (iv) the occurrence of an “Outside Date” (generally defined to last from three to 18 months (subject to extension rights).

Co-ops may also typically distinguish between Day 1 Co-op lenders, or the “Initial Parties” (each, an “Initial Party”) that receive pro-rata treatment with respect to the underlying deal documents, new money financings, backstop and related premium and fees, and post-closing joining lenders, or “Subsequent Parties”, which benefit exclusively from pro-rata treatment with respect to the underlying transaction terms. Another nuance is the existence of “Golden Hands” language, the most common form of which provides that any debt acquired by an Initial Party automatically receives such benefits on the condition that it remain with the Initial Party.

Other key language includes the definition of “Required Holders”, which sets a threshold for approval of a subject transaction, transfer provisions, which generally require transfers of Co-op debt to satisfy certain conditions, standard representations and warranties, amendments clauses and confidentiality provisions.

The goal of a lender in entering a Co-op is to obtain a favorable outcome in the event a borrower under a credit agreement becomes distressed. (Tellingly, these agreements frequently feature as a predecessor step to to a transaction support agreement or an in-court restructuring support agreement.) Co-ops emerged as an integral collective action tool for lending syndicate members seeking to defend themselves against the onslaught of non-pro-rata liability management transactions that occurred at the outset of the 2020 pandemic (and which have continued to predominate). The consequence of an LMT transaction is disparate treatment of minority and majority lenders, and a concomitant disparity in recovery rates for such lenders. By positioning signatory parties to negotiate directly with a borrower, a Co-op provides an advantage to those lenders included in the group, allowing them to organize collectively to address their respective capital structures. Parties should recognize that Co-ops are not a failproof safeguard against an LMT, given they function to prevent transactions requiring lender consent (such as uptiering and priming transactions), but may not prove useful in preventing dropdown transactions where this is not the case (i.e. transfers of collateral to unrestricted subsidiaries or non-guarantor restricted subsidiaries).

It is equally important to recognize that while there are certain benefits a lender may receive by signing onto a Co-op, namely, minimizing the risk of being left behind as an excluded lender and increasing one’s chances of a better recovery on the subject debt, the Co-op may also hamstring a lender by limiting its rights once it becomes bound by the terms of the agreement. For instance, a Co-op lender may be prohibited from participating in another lender group, or from working unilaterally with a company where it is advantageous to do so. In addition, it may receive worse economics where it is a “Subsequent Party.” The decision to enter into such an agreement will involve a careful consideration of the costs and benefits of purchasing Co-op debt.

For further information, please review the LSTA’s “Cooperation Agreements, TSAs, RSAs and other Ad Hoc Group Agreements Market Advisory” and the LSTA/Practical Law “Glossary of Loan Market Terms (2025).”

Please also reference the LSTA/Alston & Bird Bird presentation and webinar “Cooperation Agreements 101: Building Blocks, Fundamental Issues and Latest Trends.”

BACK TO TOP

GREEN LOANS – DECLASSIFICATION PROVISIONS

WHAT IS IT?	WHY DOES IT MATTER?
A green loan (“Green Loan”) is a facility the proceeds of which are exclusively applied to the financing of an expressly defined green project or activity (“Green Project”) which satisfies certain environmental attributes. While Green Loans most commonly take the form of full credit facilities, they span a range of financing instruments, including bonding lines, guarantees and letters of credit, amongst others. Eligible projects include those dedicated to energy efficiency, clean transportation, pollution prevention and control, climate change adaptation and green buildings. The debt proceeds from such facilities may also serve to finance or refinance preexisting Green Projects, whether in whole or in part. Market standard instruments identified as Green Loans will conform to the four core components of the LMA and LSTA’s Green Loan Principles, which comprise use of proceeds, project evaluation and selection of the green project, management of the loan proceeds and reporting. Because the classification of a debt instrument as “green” must be determined by the borrower based on the principal objective of the Green Project, the value of a Green Loan will depend on the identity of the project and on strict compliance with the use of proceeds covenant, which ensures the loan’s proceeds are used for the agreed “green purpose”. To protect the integrity of the instrument, Green Loans are drafted to incorporate a declassification mechanism in the event such proceeds are diverted from their intended use. This language will provide for declassification of the facility as a Green Loan upon the occurrence of certain enumerated triggers (namely the breach of certain key agreed provisions), which are each described as a declassification event (“Declassification Event”). If the borrower fails to remedy the Declassification Event within an agreed upon grace period, typically 10 Business Days, the lenders will strip it of its “green” status and the green provisions in the facility will no longer apply. The Borrower will consequently be prohibited from marketing the loan as a Green Loan, and will covenant to cease representing in any communication (internal or external) or publication that the instrument qualifies as a Green Loan. Where the declassification of the loan results in alternative pricing under the credit facility, the language may also require that the borrower repay any outstanding principal and interest amounts. While the enumerated list of Declassification Events is determined on a case-by-case basis by the borrower and lender, the draft language in the LSTA Green Loan Drafting Guidance defines these to include the failure by the borrower to deliver the “Green Loan Report,” or any required certifications thereunder, the existence of a material inaccuracy in that report, the failure to comply with any governing principles or the relevant provisions of the credit facility governing the green project (defined as the “Applicable Green Principles” and the “Green Loan Credit Extension Provisions”) and breach of the use of proceeds covenant. Lastly, standard documents will include a catchall declassification prong for changes in law which may cause the parties to be in violation of the loan terms or limit a party’s ability to make or maintain any Green Loan.	The green loan market seeks to further the important role of credit markets in financing progress towards environmental sustainability. Over the past few decades, key constituencies (including investors, regulators, credit providers, rating agencies and companies) have been drawn to green and sustainable lending for a host of reasons, such as economic risk reduction, opportunity realization and the mitigation of risk stemming from the climate crisis and resource depletion. Recent focus on “greenwashing” (i.e., situations where deceptive, inaccurate, or exaggerated claims are made regarding the green characteristics or benefits of a project to be financed by a green loan) and the politicization of environmental, social and governance (“ESG”) factors have raised concerns regarding the robustness and integrity of the Green Loan as an instrument. The declassification mechanism in a green facility responds to this dual concern because it clearly sets forth the criteria for an admissible product and delineates the instances in which a loan may or may not be categorized as “green.” By tying the declassification process to a breach of the “green” use of proceeds covenant, it ensures the credibility and transparency of the loan. Furthermore, this language works in tandem with the management and reporting requirements to ensure that earmarked funds are used solely for the sustainably beneficial purposes contemplated in the loan agreement. Conversely, the absence of a declassification mechanism (or ineffectual declassification language) in a facility may result in significant greenwashing risk for both parties. In the case of a lender, there may be significant harm where a compromised loan continues to be labeled as a Green Loan or where the borrower continues to unfairly receive the economic benefits associated with it. Similarly, borrowers will face scrutiny regarding whether their loans contribute to significant environmental benefits or whether they actually underwrite environmentally harmful activities. Serious reputational and litigation risk may also follow. The definition of Declassification Event and other operative language seeks to avoid such eventualities and provides the parties in a green facility increased certainty and transparency. For further information, please review the LSTA’s “Drafting Guidance for Green Loans”, “Green Loan Structuring Agent Engagement Letter Inserts” , “G reen Loan Principles” and “Guidance on Green Loan Principles”. Please also reference the LSTA’s “Drafting Guidance for Sustainability-Linked Loans” and “Sustainability Structuring Agent Engagement Letter Inserts.”

WHAT IS IT?

WHY DOES IT MATTER?

A green loan (“Green Loan”) is a facility the proceeds of which are exclusively applied to the financing of an expressly defined green project or activity (“Green Project”) which satisfies certain environmental attributes. While Green Loans most commonly take the form of full credit facilities, they span a range of financing instruments, including bonding lines, guarantees and letters of credit, amongst others. Eligible projects include those dedicated to energy efficiency, clean transportation, pollution prevention and control, climate change adaptation and green buildings. The debt proceeds from such facilities may also serve to finance or refinance preexisting Green Projects, whether in whole or in part. Market standard instruments identified as Green Loans will conform to the four core components of the LMA and LSTA’s Green Loan Principles, which comprise use of proceeds, project evaluation and selection of the green project, management of the loan proceeds and reporting.

Because the classification of a debt instrument as “green” must be determined by the borrower based on the principal objective of the Green Project, the value of a Green Loan will depend on the identity of the project and on strict compliance with the use of proceeds covenant, which ensures the loan’s proceeds are used for the agreed “green purpose”. To protect the integrity of the instrument, Green Loans are drafted to incorporate a declassification mechanism in the event such proceeds are diverted from their intended use. This language will provide for declassification of the facility as a Green Loan upon the occurrence of certain enumerated triggers (namely the breach of certain key agreed provisions), which are each described as a declassification event (“Declassification Event”). If the borrower fails to remedy the Declassification Event within an agreed upon grace period, typically 10 Business Days, the lenders will strip it of its “green” status and the green provisions in the facility will no longer apply. The Borrower will consequently be prohibited from marketing the loan as a Green Loan, and will covenant to cease representing in any communication (internal or external) or publication that the instrument qualifies as a Green Loan. Where the declassification of the loan results in alternative pricing under the credit facility, the language may also require that the borrower repay any outstanding principal and interest amounts.

While the enumerated list of Declassification Events is determined on a case-by-case basis by the borrower and lender, the draft language in the LSTA Green Loan Drafting Guidance defines these to include the failure by the borrower to deliver the “Green Loan Report,” or any required certifications thereunder, the existence of a material inaccuracy in that report, the failure to comply with any governing principles or the relevant provisions of the credit facility governing the green project (defined as the “Applicable Green Principles” and the “Green Loan Credit Extension Provisions”) and breach of the use of proceeds covenant. Lastly, standard documents will include a catchall declassification prong for changes in law which may cause the parties to be in violation of the loan terms or limit a party’s ability to make or maintain any Green Loan.

The green loan market seeks to further the important role of credit markets in financing progress towards environmental sustainability. Over the past few decades, key constituencies (including investors, regulators, credit providers, rating agencies and companies) have been drawn to green and sustainable lending for a host of reasons, such as economic risk reduction, opportunity realization and the mitigation of risk stemming from the climate crisis and resource depletion.

Recent focus on “greenwashing” (i.e., situations where deceptive, inaccurate, or exaggerated claims are made regarding the green characteristics or benefits of a project to be financed by a green loan) and the politicization of environmental, social and governance (“ESG”) factors have raised concerns regarding the robustness and integrity of the Green Loan as an instrument.

The declassification mechanism in a green facility responds to this dual concern because it clearly sets forth the criteria for an admissible product and delineates the instances in which a loan may or may not be categorized as “green.” By tying the declassification process to a breach of the “green” use of proceeds covenant, it ensures the credibility and transparency of the loan. Furthermore, this language works in tandem with the management and reporting requirements to ensure that earmarked funds are used solely for the sustainably beneficial purposes contemplated in the loan agreement.

Conversely, the absence of a declassification mechanism (or ineffectual declassification language) in a facility may result in significant greenwashing risk for both parties. In the case of a lender, there may be significant harm where a compromised loan continues to be labeled as a Green Loan or where the borrower continues to unfairly receive the economic benefits associated with it. Similarly, borrowers will face scrutiny regarding whether their loans contribute to significant environmental benefits or whether they actually underwrite environmentally harmful activities. Serious reputational and litigation risk may also follow.

The definition of Declassification Event and other operative language seeks to avoid such eventualities and provides the parties in a green facility increased certainty and transparency.

For further information, please review the LSTA’s “Drafting Guidance for Green Loans”, “Green Loan Structuring Agent Engagement Letter Inserts” , “G reen Loan Principles” and “Guidance on Green Loan Principles”.

Please also reference the LSTA’s “Drafting Guidance for Sustainability-Linked Loans” and “Sustainability Structuring Agent Engagement Letter Inserts.”

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SACRED RIGHTS

WHAT IS IT?	WHY DOES IT MATTER?
“Sacred rights” (“Sacred Rights”) refers to a set of fundamental lender rights relating to the core economic terms of a loan, amendments to which require unanimous lender consent or, alternatively, the consent of all lenders adversely affected by such amendments. The LSTA form credit agreement reflects the traditional approach in this area and defines as Sacred Rights those provisions affecting principal amount, interest rate, payment dates, pro rata sharing and relative position within the waterfall, along with the voting rights lenders receive at closing. More specifically, amendments to the below set of credit agreement provisions will require unanimous lender consent, or the consent of all affected lenders: a reduction in the amounts or extension of the scheduled dates for payments of principal, interest, or other amounts (with waivers of post-default interest requiring only majority lender consent); any change to the percentage of loan commitments; a release of all or a material portion of any collateral or all or some subsidiaries from their guaranty or security obligations; changes to the amendments provision; and . changes to the definitions of required or supermajority lenders and removal of lender voting rights. It is also important to consider the different operation of the Sacred Rights provision in single- and multi-facility loan agreements. In a single-loan credit agreement, an amendment would affect all lenders similarly. However, where more than one facility is involved, only lenders to the facility being amended would be required to consent to the change. In this case, a typical loan would be drafted to mandate a majority lender vote under the entire loan agreement, with the votes of each of the affected lenders considered in the determination of whether the threshold is met. Other issues may also require a unanimous vote if the lenders decide they are sufficiently significant.	The categories of modifications included in Sacred Rights amendments relate to core economic or structural changes to a credit agreement. For this reason, they involve heightened lender consent thresholds that go beyond mere Required Lender or majority consent. In other words, they represent “the last line of defense” against transactions that can be accomplished with only the consent of Required Lenders and the borrower and without the approval of minority lenders. Borrowers may capitalize on weak Sacred Rights protections to pursue LMTs (notably uptiers) or amend loan agreements to build in additional document flexibility. In the area of LMTs, borrowers and sponsors have effected “uptiering” transactions (typified by the 2020 Serta Simmons “uptiering” LMT in 2020) by amending their credit agreements to permit non-pro prata (and frequently privately negotiated) exchange and priming transactions which subordinate existing or minority lenders. The maneuver is possible where a loan agreement does not enshrine subordination, pro rata payment and sharing provisions in the set of Sacred Rights requiring Affected Lender consent. Lenders have recently redressed this lacuna by including such terms as Sacred Rights in their credit agreements in the form of so-called “expanded Sacred Rights language” otherwise known as “Serta blockers”. A further nuance is that typical loan agreements contain exceptions to the pro rata sharing Sacred Right, namely in the case of “open market purchases” and “Dutch” auctions (as discussed here). Where these exist, borrowers can use simple majority voting to amend these carveouts to allow for non-pro-rata privately negotiated purchase/exchange transactions. Existing lenders are consequently excluded from key voting decisions and risk being subordinated leading to reduced recoveries on the loans they extend. Any discussion of Sacred Rights would also be remiss if it did not recall the core covenants that they do not cover, and which borrowers can thus amend to build in additional flexibilities into their documents. These include negative covenant baskets, such as restrictions on debt, lien capacity and restricted payments/investments, which can be removed or amended with simple majority consent, as well as LMT blockers not involving Serta protections (namely, J.Crew and Chewy). By remaining cognizant of the provisions which are effected through simple majority voting and by enshrining core protections as Sacred Rights in the amendment section of a credit agreement, lenders and counsel may ensure that both majority and minority lender groups get a seat at the negotiation table. For further information, please review the LSTA’s “Private Corporate Credit – Representative Liability Management Transaction Protections for Credit Agreements”, the LSTA’s “Liability Management Transaction: Drafting Fixes” Market Advisory and “The LSTA’s Complete Credit Agreement Guide, Second Edition.”

WHAT IS IT?

WHY DOES IT MATTER?

“Sacred rights” (“Sacred Rights”) refers to a set of fundamental lender rights relating to the core economic terms of a loan, amendments to which require unanimous lender consent or, alternatively, the consent of all lenders adversely affected by such amendments. The LSTA form credit agreement reflects the traditional approach in this area and defines as Sacred Rights those provisions affecting principal amount, interest rate, payment dates, pro rata sharing and relative position within the waterfall, along with the voting rights lenders receive at closing. More specifically, amendments to the below set of credit agreement provisions will require unanimous lender consent, or the consent of all affected lenders:

a reduction in the amounts or extension of the scheduled dates for payments of principal, interest, or other amounts (with waivers of post-default interest requiring only majority lender consent);
any change to the percentage of loan commitments;
a release of all or a material portion of any collateral or all or some subsidiaries from their guaranty or security obligations;
changes to the amendments provision; and .
changes to the definitions of required or supermajority lenders and removal of lender voting rights.

It is also important to consider the different operation of the Sacred Rights provision in single- and multi-facility loan agreements. In a single-loan credit agreement, an amendment would affect all lenders similarly. However, where more than one facility is involved, only lenders to the facility being amended would be required to consent to the change. In this case, a typical loan would be drafted to mandate a majority lender vote under the entire loan agreement, with the votes of each of the affected lenders considered in the determination of whether the threshold is met.

Other issues may also require a unanimous vote if the lenders decide they are sufficiently significant.

The categories of modifications included in Sacred Rights amendments relate to core economic or structural changes to a credit agreement. For this reason, they involve heightened lender consent thresholds that go beyond mere Required Lender or majority consent. In other words, they represent “the last line of defense” against transactions that can be accomplished with only the consent of Required Lenders and the borrower and without the approval of minority lenders.

Borrowers may capitalize on weak Sacred Rights protections to pursue LMTs (notably uptiers) or amend loan agreements to build in additional document flexibility.

In the area of LMTs, borrowers and sponsors have effected “uptiering” transactions (typified by the 2020 Serta Simmons “uptiering” LMT in 2020) by amending their credit agreements to permit non-pro prata (and frequently privately negotiated) exchange and priming transactions which subordinate existing or minority lenders. The maneuver is possible where a loan agreement does not enshrine subordination, pro rata payment and sharing provisions in the set of Sacred Rights requiring Affected Lender consent.

Lenders have recently redressed this lacuna by including such terms as Sacred Rights in their credit agreements in the form of so-called “expanded Sacred Rights language” otherwise known as “Serta blockers”. A further nuance is that typical loan agreements contain exceptions to the pro rata sharing Sacred Right, namely in the case of “open market purchases” and “Dutch” auctions (as discussed here). Where these exist, borrowers can use simple majority voting to amend these carveouts to allow for non-pro-rata privately negotiated purchase/exchange transactions. Existing lenders are consequently excluded from key voting decisions and risk being subordinated leading to reduced recoveries on the loans they extend.

Any discussion of Sacred Rights would also be remiss if it did not recall the core covenants that they do not cover, and which borrowers can thus amend to build in additional flexibilities into their documents. These include negative covenant baskets, such as restrictions on debt, lien capacity and restricted payments/investments, which can be removed or amended with simple majority consent, as well as LMT blockers not involving Serta protections (namely, J.Crew and Chewy).

By remaining cognizant of the provisions which are effected through simple majority voting and by enshrining core protections as Sacred Rights in the amendment section of a credit agreement, lenders and counsel may ensure that both majority and minority lender groups get a seat at the negotiation table.

For further information, please review the LSTA’s “Private Corporate Credit – Representative Liability Management Transaction Protections for Credit Agreements”, the LSTA’s “Liability Management Transaction: Drafting Fixes” Market Advisory and “The LSTA’s Complete Credit Agreement Guide, Second Edition.”

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Loan Market Covenant Trends – 1Q25

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