Noetica

Capital markets folks listen up because this last week taught us something: time to make “𝗘𝗕𝗜𝗧𝗗𝗔” → “𝗘𝗕𝗜𝗧𝗗𝗔𝗧”, or risk a breach. “EBITDA” definitions in credit terms are incredibly important. Add-backs are highly negotiated, hard fought, and, in many cases, the difference between a go/no go on a leveraged finance deal. There’s a pretty good reason for this: large swings in EBITDA are the primary driver of defaults—making it incredibly important to properly insulate credit term EBITDA from any wider, non-operationally driven swings. So now, here’s my question: 𝘄𝗵𝘆 𝘀𝗵𝗼𝘂𝗹𝗱𝗻’𝘁 𝗯𝗼𝗿𝗿𝗼𝘄𝗲𝗿𝘀 𝗴𝗲𝘁 𝘁𝗼 𝗮𝗱𝗱 𝗯𝗮𝗰𝗸 𝘁𝗮𝗿𝗶𝗳𝗳𝘀? In a world where borrowers’ COGS can increase 100%+ overnight due to non-operational factors like tariffs, which may be ephemeral, uncertain and unpredictably large—borrowers and lenders alike should want to insulate core debt terms from those swings. As a matter of policy, lenders already functionally agree to all types of tax add-backs (excise, franchise, income, capital gains, etc.) under the theory that policy matters should not affect cash flow health assessments in credit terms—tariffs are no different. Noetica’s analytics illustrate one borrower got the memo: in 2018, in response to the first wave of tariffs, Motorcar Parts of America, Inc. included “amounts in connection with tariff costs incurred in excess of price increases” as an add-back to EBITDA in their credit deal, up to a $5M cap. 𝗧𝗵𝗶𝘀 𝗮𝗱𝗱-𝗯𝗮𝗰𝗸 𝗶𝘀 𝗽𝗿𝗲𝘀𝗲𝗻𝘁 𝗶𝗻 <𝟭% 𝗼𝗳 𝗰𝗿𝗲𝗱𝗶𝘁 𝘁𝗲𝗿𝗺𝘀 𝘁𝗼𝗱𝗮𝘆.   𝗕𝗼𝗿𝗿𝗼𝘄𝗲𝗿𝘀 𝗱𝗼 𝘆𝗼𝘂𝗿𝘀𝗲𝗹𝗳 𝗮 𝗳𝗮𝘃𝗼𝗿: pay 10 bps to your lender group for an amendment to add-back “tariffs” under your existing debt, otherwise your CFOs will be on edge the next 3.5 years. “𝗘𝗕𝗜𝗧𝗗𝗔” → “𝗘𝗕𝗜𝗧𝗗𝗔𝗧”

Congratulations, Daniel Wertman and to our many customers recognized by Lawdragon!

Honored for Noetica to be recognized as one of Lawdragon's Leading AI & Legal Tech Advisors, alongside other category-defining leaders in the space. Truly wouldn't be possible if not for our customers: including the chairs, managing partners, innovation teams, and practice group leads of some of the best firms in the industry, who share our vision for how transactional markets should operate and are helping us drive massive advancements in data & insights for corporate transactions. Congratulations to our many customers who also find themselves on this list—excited to continue innovating together. https://lnkd.in/eJi-aKMn

“𝗣𝗿𝗶𝗺𝗶𝗻𝗴 𝗱𝗲𝗯𝘁” is like a game of shuffleboard.  Let me explain. Player 1 goes first and lands on 10. Player 2 goes second and knocks Player 1’s disc from 10 to 7, with Player 2’s disc staying on 10. The strategy seems pretty obvious to anyone who’s played shuffleboard: place more discs closer to the top of the board to block the opposing player’s shot, thereby protecting your disc’s placement on 10. “Priming debt” effectively subordinates existing debt to new debt, giving borrowers more time to forestall a restructuring or bankruptcy while utilizing existing collateral. But priming debt isn’t always possible if deals include “sacred rights” blockers. With liability management transactions becoming more prevalent—and borrowers using loopholes to raise priming debt with the approval of a bare majority of lenders—you’d expect increasing prevalence of “sacred rights” blockers in new deals as a counterbalance. Interestingly, that hasn’t been the case. In Q3 ‘24, 74% of publicly filed credit agreements required all lenders to consent to amendments to pro rata sharing provisions, consistent with the same period in 2023. Similarly, in Q3 ‘24, 43% required all lenders to consent to subordination of liens, with 42% requiring the same in Q3 ‘23. Message me if you’d like access to the deal data on “sacred rights” provisions.

https://lnkd.in/eAjWTBEH

Thanks Business Insider for including us as one of the most promising fintech companies. Excited to continue building a best-in-class platform and providing unparalleled data to our trusted partners. https://lnkd.in/eB9KXKsX