Banks Tighten Debt Terms as Global Economic Storm Looms

JPMorgan, one of the world's largest banks, helped Coherent Corp., a US-based maker of lasers and optical equipment, refinance some of its debt with a new 1.25 billion private credit loan and a 700 million revolving credit facility in September of this year. The deal contained a newly trendy clause in its legal paperwork: a J. Crew blocker. The term refers to a 2017 incident in which the preppy clothing chain, under pressure from hedge funds, used a similar clause to block a rival suitor from acquiring the company. According to industry experts, this move by JPMorgan is part of a broader trend among banks to require ever-stricter legal terms for debt-ridden companies. "Banks are quietly preparing for some distress on the horizon," said a senior banker, who wished to remain anonymous. "They're taking steps to protect themselves in case things go wrong." This shift in banking practices is a response to the increasing number of companies struggling with debt and the growing risk of defaults. The J. Crew blocker clause is a type of "poison pill" provision that allows a company to issue new shares or take other actions that would dilute the ownership of any potential acquirer. This clause was first used by J. Crew in 2017, when it was facing pressure from hedge funds to sell the company. The clause was seen as a way to prevent a hostile takeover and protect the interests of the company's management and employees. The use of such clauses is becoming more common in the private credit market, where banks are increasingly taking on risk by lending to companies with weak credit profiles. "Banks are being more cautious and are looking for ways to mitigate their risk," said a credit analyst at a leading investment bank. "These clauses are one way to do that." The analyst noted that the use of such clauses is not limited to the US and is being seen in other parts of the world, including Europe and Asia. The current economic climate is contributing to the growing use of such clauses. The COVID-19 pandemic has led to a surge in debt levels among companies, particularly in the US. Many companies are struggling to service their debt, and there is a growing risk of defaults. In this environment, banks are taking steps to protect themselves and minimize their losses. As the global economy continues to face challenges, it remains to be seen how the use of such clauses will evolve. Banks are likely to continue to require stricter legal terms for debt-ridden companies, and the use of clauses like the J. Crew blocker is likely to become more widespread. However, the impact of these clauses on the private credit market and the broader economy remains to be seen.