In June 2018, PetSmart transferred 36.5% of its interests to Chewy using limited payment and investment baskets available through its secured credit facilities. PetSmart transferred 20% through distribution to an investor-owned holding company (none of which provided credit to PetSmart`s credit facilities) and contributed 16.5% as an investment to a new wholly-owned subsidiary of PetSmart, which was designated as an unrestricted subsidiary. It is important that PetSmart was based on an “available” basket, which meant that PetSmart was able to make distributions of up to $1 billion in cash contributions received by petSmart shareholders after the first closing of the PetSmart credit facilities. A third-party consultant commissioned by PetSmart is worth US$300 million to US$908.5 million. Thus, PetSmart considered that distribution was permitted by the terms of its debt agreements, since the value of Chewy`s distributed holdings was within the available basket. Meanwhile, Chewy continued to grow rapidly, and PetSmart and its stock market investors followed an IPO of Chewy to monetize this growth. To clarify an IPO, the dispute between PetSmart and its creditors had to be resolved. Following a failed attempt to authorize share transfers, PetSmart was able to convince lenders to accept such authorization, but only after the terms of a second amendment were softened, including higher interest rates, approval fees and improved payment terms. After the agreement of a large large investor, the lenders rushed to give their approval to ensure that they were not left without a proverbial “bone”. PetSmart`s credit agreement provides that this subsidiary will be automatically dismissed from its collateral obligations when a subsidiary is no longer fully owned and all the pawn rights granted by that subsidiary on its assets will be terminated.
While it is customary not to exclude subsidiaries 100% from the guarantee pool, a lender who enters into an agreement on an entire family of companies may consider the unexpected loss of a guarantor and its guarantees as an unexpected result. On the other hand, borrowers want the possibility of exempting a subsidiary from its guarantee obligations and, in the event of a transfer of that subsidiary in an authorized transaction, the right to pledge. PetSmart approached the management and guarantee agent for its credit facilities and requested confirmation of the release of the guarantee and pledge rights, but the administrator and lenders refused to cooperate. There have been disputes in which PetSmart`s lenders have, among other things, questioned the calculations used to evaluate the baskets used by PetSmart for transfers and asserted that transfers and distributions made PetSmart insolvent.