The typical credit agreement: long, boring, unavoidable
The credit agreement, a lender-borrower contract that tends to run into the hundreds of pages, is traditionally an exercise in downside protection.
The credit agreement dictates the terms of a business loan: it tells borrowers how much they can borrow, when they need to pay back their lender, and what their loan can be used for. Should things go awry, the credit agreement conveniently spells out what actions the lender can take to be made whole. The well-crafted agreement contains a number of covenants and details how situations like bankruptcy, fraud, and natural disaster will be handled.
The credit agreement is also ubiquitous. Much like the infomercial disclaimer or the website cookie notice, the credit agreement is so common as to be virtually unnoticeable. In private credit, an asset class that is larger than all of venture capital combined, the credit agreement is the lingua franca of the lender-borrower arrangement.
And yet, after a little-noticed development last week, the credit agreement is also poised to be an instrument of sustainability and social change.
The new model: long, boring, and sustainable?
Last week, BlackRock executed an amendment to a five-year revolving credit agreement for $4.4 billion. The amendment, which can be found here, totals over 89,000 words and spells out the (mostly mundane) conditions of BlackRock’s access to revolving capital from banks.
The groundbreaking page of this amendment is tucked away at the end: a list of sustainability goals that BlackRock must meet in order to access capital at the most favorable terms. These goals are a target growth percentage for Black and Latino employment at the firm, growth in the number of women in senior roles, and the percentage of BlackRock’s investments that are deployed toward sustainable assets.
As Matt Levine has noted, it was almost certainly BlackRock that pushed for the inclusion of these criteria, as they're not standard credit agreement stipulations that BlackRock's creditors might request.
The impact? BlackRock can lower its own cost of borrowing by meeting its diversity goals for hiring and increasing its sustainable investing.
In other words, BlackRock has taken the first step in transforming the credit agreement from a contract focused entirely on risk avoidance to one that incentivizes sustainable business practices. There may be no stronger precedent than the world's largest asset manager shifting from a "stick" to "carrot" mental model for credit agreement compliance.
What to look for moving forward
The credit agreement will continue to serve primarily as a risk management tool for capital providers, but our guess is that some version of BlackRock's sustainability KPIs will begin popping up in other credit agreements as well.
Environmental, Social, and Corporate Governance (ESG) investment has trended toward higher granularity over time. Earlier on in the evolution of ESG investment, large asset managers sought to divest from industries that they deemed unsustainable. That approach was blunt and looked at each industry as a monolithic entity. As ESG indicators have become more commonly adopted, companies have sought to provide data that shows their performance in the E, S, and G categories, even if this data can be hard to verify or reproduce, and investors have sought to assess investments on a per-company basis.
By shifting the burden to borrowers to show consistent progress over time in order to minimize their capital costs, the credit agreement example pioneered by BlackRock allows for even more "high-resolution" linkage of capital availability to discrete sustainability metrics.
It's the first step in broadening the scope of what credit agreement compliance means, as well as what credit agreement negotiations might look like as capital providers include more ESG and interest rate incentives to the existing laundry list of disincentives.
Want to learn more?
Credit agreement compliance is complex and can require the integration and analysis of business and financial data from across a number of different data sources. If you're interested in learning more about technology that can streamline your credit agreement and facility management, just request a demo of Finley here. We'd love to chat!