France spent five years and 3 billion francs building the Maginot Line – a fortress of concrete and steel stretching 280 miles along the German border. Germany bypassed it in four days.

Serta blockers, the sacred rights designed to protect minority lenders from priming transactions, often prove just as ineffective. While roughly 85% of modern credit agreements include Serta blockers, their protections are steadily eroding. Xtract Research analyzed 40 recent sponsored credit agreements to understand where, and how, these provisions fall short.

Structural Subordination

Structural subordination remains largely untouched by Serta blockers. In our sample, these provisions prevent contractual payment or lien subordination but do nothing to restrict structural subordination.

The workaround is straightforward: borrowers can shift valuable assets or operating subsidiaries into non-guarantor entities and then raise priming debt at that level. Existing lenders are left structurally subordinated, with no consent required.

This risk can be mitigated by limiting investment baskets for unrestricted subsidiaries or capping debt at non-guarantor restricted subsidiaries. But as STG Logistics reminded us (where majority lenders stripped such protections), investment baskets and structurally senior debt baskets can be amended with majority-lender consent, leaving minority lenders exposed.

Partial Collateral Priming

In 90% of the agreements reviewed, Serta blockers are triggered only if “all or substantially all” collateral is subordinated. This creates another obvious loophole.

Borrowers and majority lenders can prime a significant portion of the collateral, so long as they stay below the undefined and borrower-friendly “substantially all” threshold.

Only 10% of the agreements eliminate this qualifier and trigger lender consent whenever any collateral is subordinated. These provisions offer meaningfully stronger protection but remain the exception.

The “Same Terms” Illusion

Every Serta blocker permits borrowers to avoid unanimous consent if new priming debt is offered to all lenders “on the same terms.” On its face, this sounds fair. In practice, it rarely is.

70% of these provisions explicitly exclude fees from the definition of “same terms.” The remaining 30% are silent, leaving the issue open to interpretation. This matters because uptier transactions routinely involve substantial backstop, arranger, structuring, underwriting, or commitment fees paid only to participating lenders.

The result: majority lenders receive materially better economics while minority lenders are technically offered “the same terms.”

The Self-Defeating Clause

Three of the 40 agreements include Serta blockers that are internally contradictory and include exceptions that permit amendments to increase the amount of priming debt. Below is an example:

(it being understood that this clause (viii) shall not… restrict an amendment to increase the maximum permitted amount of Indebtedness that is secured by Liens on all or a portion of the Collateral on a senior basis to the Liens securing the Obligations…)

In effect, they prohibit subordination while expressly permitting it. How a court would interpret this inconsistency is unclear. What is clear is that these exceptions swallow the rule.

Non-Pro Rata Buybacks

Many paths around Serta blockers rely on offering a subset of lenders an exchange into structurally senior debt. Historically, borrowers have relied on standard “open market purchase” provisions to facilitate non-pro rata buybacks.

That strategy took a hit when the Fifth Circuit held that a privately negotiated exchange with select lenders does not qualify as an “open market” transaction because it was not offered to all lenders.

Credit agreements have since adapted. In our sample, 73% explicitly permit repurchases through “privately negotiated transactions,” “negotiated transactions,” or simply “purchases.” These formulations sidestep the Fifth Circuit’s reasoning by clearly authorizing private deals.

The remaining 27% still permit only “open market purchases.” Under the Fifth Circuit’s logic, these provisions arguably require buybacks to be genuinely open to all lenders, offering some protection, though the issue remains jurisdiction dependent.

Conclusion

The takeaway is simple: do not rely on Serta blockers to protect against uptiers. Real protection comes from (1) tighter limits on structural subordination, (2) narrower “same terms” exceptions, (3) eliminating the “substantially all” qualifier, and (4) requiring that borrower buybacks be offered to all lenders.

And of course, it always helps to get invited into the ad hoc group.

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