Credit Markets Seek to Limit the Influence of Net Short Lenders

Jason Ulezalka and Rob Evans, Partners in Locke Lord’s New York office, wrote an article for The Banking Law Journal examining net short lender provisions. Net short lenders generally hold a long position in a borrower’s loans or bonds and, at the same time, hold a more-than-offsetting credit default swap or other short position. They are therefore positioned to profit economically from an event of default by the borrower. Net short lenders have caused a number of “manufactured” defaults. As a result, some corporate borrowers are now using net short lender provisions in their credit agreements and indentures to try to block net short lenders from acting against the interests of the borrower and long-only investors.

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