A lot has been written (and continues to be—proof positive right here) about the First Brands bankruptcy and its various elements. The complex debt structure of First Brands, mixed with the allegations of fraud, has led to a range of issues for lenders to consider.  (EDITOR’s NOTE: SFNet’s Supply Chain Finance Convergence, which will be held in New York on March 3, will also cover recent prominent frauds as well as SFNet’s Fraud Task Force recommendations.)

Please click here to read the first part of this article, which was published in TSL Express on January 12-13, 2026.

Credit Agreement Provisions: Defining the “Permitted Receivables Financing”

As the description of the issues for the asset-based lender to consider suggest, there are a number of provisions in the credit agreement that will be affected by having a borrower that has some form of receivables financing facility in place, or wants the flexibility to do so in the future.

The Affected Covenants

Depending on the exact nature of the receivables purchase facility, the credit agreement may need to address permitting such a facility in some or all of the following provisions:

• eligibility criteria for eligible accounts,
• the negative covenant on asset dispositions,
• the negative covenant on investments,
• the negative covenant on indebtedness,
• the negative covenant on liens, and
• the affirmative covenant on reporting.

The receivables purchase facility will also have implications for the terms relating to the financial covenants, including the definition of EBITDA and related provisions (such as interest expense).  And the negative covenant on allowing subsidiaries to enter into agreements that restrict dividends or other transactions and the negative covenant on transactions with affiliates may also have to be addressed.

The impact on the various negative covenants is much broader if the receivables purchase facility is in the form of a securitization given the use of a special purpose bankruptcy remote subsidiary as a fundamental element of the structure.  As a subsidiary of the borrower, it will generally be subject to the covenants in the credit agreement and so its unique purpose will lead to various “baskets” to permit it to function as intended as part of the securitization facility.  The covenants affected will be more limited if the receivables purchase facility will only be in the form of factoring or dealing with a customer’s supply chain program.

While there will typically be a specific clause in the negative covenant on asset dispositions permitting the sales of the receivables and related assets under the receivable finance facility, the other baskets in the negative covenant on asset dispositions, investments and restricted payments should be reviewed to see if those other baskets might inadvertently permit the sale of receivables through a receivables financing facility, but without requiring the satisfaction of the conditions that should apply to the sale.

Scope of Assets Permitted to be Sold

For each of factoring, supply chain and securitization facilities, there will be a need to define the scope of the assets that may be sold, since this will understandably include not only the receivables, but related assets, sometimes defined as “Related Assets” or “Receivables Assets” or “Securitization Assets.” 

The assets will typically include the receivables owed to the borrower arising in the ordinary course of business from the sale of goods or services, all collateral securing such receivables, all contracts and contract rights and all guarantees or other obligations in respect of such receivables, in each case to the extent sold by the borrower to the receivables purchaser in connection with the permitted receivables financing, together with the collections and proceeds of the receivables and all lockboxes, lockbox accounts, collection accounts or other deposit accounts exclusively used for the receipt of such proceeds.

In some instances, a borrower may want to expand the categories of assets that might be the basis for some form of “securitization” or separate financing, but that should depend on the nature of the borrower’s business and be carefully considered in how it impacts the risks for the asset-based lender.

The Securitization Special Purpose Vehicle

For a securitization, there will be a need to define the special purpose bankruptcy remote subsidiary that will be used to purchase the receivables.  The requirements for this special purpose subsidiary may include, among other things, that it:

• engages in no activities other than the purchase of the “Securitization Assets”, the issuance of debt, equity or other interests to finance the purchase of them, and any activities reasonably related thereto and that is designated by the board of directors (or similar governing body) of the borrower as a “Securitization Subsidiary”;
• has no indebtedness that: (i) is guaranteed by the borrower (other than a guarantee that might be deemed to exist by virtue of the “Standard Securitization Undertakings”); (ii) is otherwise with recourse to the borrower (other than such Standard Securitization Undertakings) or obligates the borrower in any way or creates a lien on, or otherwise encumbers or restricts, any assets of the borrower; or (iii) subjects any property or assets of the borrower, directly or indirectly, contingently or otherwise, to the satisfaction thereof;
• has no agreements with the borrower other than on terms no less favorable to the borrower than those that might be obtained at the time from a person that is not an affiliate of the borrower, consisting of customary agreements with respect to the sale, purchase and servicing of Securitization Assets on market terms for similar securitization transactions;
• the borrower does not have any obligation to maintain or preserve the Securitization Subsidiary’s financial condition or cause the Securitization Subsidiary to achieve levels of operating results; and
• does not commingle its funds or assets with those of the borrower.

The Key: Defining the “Permitted Receivables Financing”

Most of the points noted above as to how an asset-based lender should consider structuring its documents to work with a receivable purchase facility will tie to a definition of “Permitted Receivables Financing” or “Permitted Securitization Facility” or an equivalent term that refers to a sale of receivables and related assets pursuant to a securitization or other similar financing (including any factoring program) that has at least the following characteristics:

• it is “non-recourse” to the borrower or its assets except for the obligation of the borrower as the seller to repurchase or indemnify the receivables purchaser if the receivables sold are not paid for a reason other than the financial inability of the customer to make the payment (or otherwise referring to the “Standard Securitization Undertakings”);
• the proceeds of the sold receivables (and related assets) are clearly identifiable and are paid to separate deposit accounts established and exclusively used for such purpose and are not commingled with any assets of the borrower;
• the release of the security interest of the lender in the receivables and related assets sold only occurs contemporaneously with the payment of the net cash proceeds of such sale to the borrower;
• the security interests of the lender (A) continue in the proceeds of the sale of the receivables and related assets (that is the purchase price) and (B) automatically attach to any such receivables and related assets required to be, or that are, repurchased by, or otherwise reconveyed to the borrower;
• the borrower receives fair value in the form of cash in exchange for the sale of the receivables; and
• a limit on the amount of the receivables that may be sold.

Conclusion

No terms of a loan document will, in and of itself, prevent a fraud that may lead to a loss for a lender.  But having documentation that sets out a road map for the scope and nature of other obligations of a borrower and the assets that secure such other obligations, together with ongoing diligence, may provide a tool for a lender to find one.