Banks adopt new debt terms to avoid repeat of Citi’s $ 900 million payment crash

U.S. banks have started injecting legal terms into debt documents to protect against accidental fund transfers in the wake of Citigroup’s $ 900 million payments debacle.

The new terms come after Citi last year transferred $ 900 million of its own money to creditors of cosmetics group Revlon and later. lost a legal battle to recover the funds. The error resulted in the bank sharp its fourth quarter profits of $ 323 million.

Now Wall Street banks, including Citi, are protecting themselves against similar situations by inserting legally binding clauses in the form of accidental payment clauses in debt documents, which allow banks to demand repayment of any money. sent to lenders in error.

According to credit documents assessed by credit analysis firm 9fin, building materials maker Eagle Materials, pet supply chain Petco, and industrial equipment manufacturer Mesa Laboratories all included some type of condition of “Wrong payment” in their loan agreements in the United States.

“It’s such a rare thing that has not happened in the US leveraged loan market for a very long time on such a scale,” said Justin Forlenza, senior analyst at the credit research firm’s agreements. Covenant Review, referring to Citi’s mistake. “All the arrangers want to avoid this scenario in the future.”

The pact generally gives banks the discretion to judge whether a payment has been made in error and to demand its repayment along with any interest from the date the funds were received. Banks typically provide administrative services through which they coordinate the payment of coupons and other “back office” tasks related to debt transactions.

JPMorgan was senior arranger for Eagle Materials and Mesa Laboratories while Citi ran the Petco business. Both banks declined to comment.

Protection against accidental payments has so far only been spotted in U.S. documents, according to Steven Hunter, chief executive of 9fin, who said it could be due to a quirk in New York law that allowed Revlon’s hedge fund investors to retain the accidental transfer.

The judge in that case said the recipient could keep the funds transferred in error because they did not know it was a mistake and did not fool the sender.

Kyle Lakin, capital markets partner at the law firm Freshfields, said he “absolutely” expected more deals to include conditions such as eliminating the risk of minor but potential damage to payments. accidental.

Lakin added that the restrictive covenants raised the question of what would happen if a lender on a bond or loan refused to repay a wrong transfer.

“It will be a flashpoint for investors. . . I don’t know if debt investors will agree to default if they don’t pay back the money, ”he said.

Since the start of 2021, at least 10 deals have included accidental payment terms, according to Forlenza, who also expects more deals to follow.

“It’s probably going to become pretty standard. . . There is nothing wrong with introducing it, ”he said.

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