Clearlake Expands Pretium Packaging’s Disqualified Lender List to Nearly 100 Names

Clearlake Capital Group has expanded the disqualified lender list for Pretium Packaging to almost 100 names, pushing the boundaries of what has become a standard tool for sponsors navigating distressed situations.

Clearlake acquired the Missouri-based plastic packaging manufacturer in 2020, but by 2023 the company was faced with slowing consumer demand and struggled to service its debt load from the initial acquisition and subsequent add-ons. After a distressed exchange in October 2023, Pretium’s $1.2 billion loan due 2028 now trades at around 56 cents on the dollar. S&P Global Ratings predicts the company will run free operating cash flow deficits through 2025.

The disqualified lender list expansion came after an investor seeking to take over the troubled manufacturer nearly acquired a significant chunk of its debt through a block trade. Clearlake responded by dramatically expanding the lender blacklist to prevent the trade and similar attempts in the future.

Historically, disqualified lender lists (“DQ List”) were designed to prevent competitors of the borrower, or other entities with competing business interests (like owners of competitors), from acquiring debt and then using that position to access confidential information or to otherwise intentionally harm the borrower.

Over the last ten years, borrowers in the syndicated loan markets have expanded the scope of DQ lists to include investors affiliated with competitors, firms perceived as too aggressive during restructurings, or simply those deemed difficult to work with. Borrowers and sponsors now regularly negotiate for the right to amend the list of lenders after the closing date—like Clearlake’s list expansion—to ensure ongoing control over investors in the borrower’s debt.

Even with this trend toward elongation, DQ lists typically include a handful of firms to a few dozen at most. By comparison, Clearlake’s approach looks extreme.

The potential pitfall with a lengthy list is the possibility of artificially capped demand in the secondary market when large groups of potential purchasers are prohibited from buying the debt.

DQ lists are also typically preserved through a default event, which can be problematic for lenders trying to exit positions. It’s not always clear that lenders who purchase the debt when issued are adequately pricing in the risk of reduced liquidity and the corresponding effect on their ability to unload the debt down the road if it becomes distressed. This can be particularly true in the less liquid middle market.

With growing DQ lists, “loan liquidity becomes limited as certain lenders are constrained from getting involved in certain situations and, as a result, existing lenders may struggle to exit stressed positions,” writes Proskauer.

This can leave holders stranded and limit options in a restructuring.

The risk to the borrower is that they could end up in a situation where they’re stuck with existing creditors who can’t sell down their holdings, but who also don’t want to own the company or put in any new money.

For Clearlake, the list expansion prevented one unwanted investor from gaining a foothold. Whether avoiding that immediate threat justifies the potential consequences remains an open question. If Pretium continues to struggle, financing options may be hard to come by when optionality is needed most.

Citing a source familiar with the firm’s thinking, Bloomberg reported that Clearlake views the Pretium list expansion as a one-time occurrence and does not intend to use such expansive blacklists as a broader firm-wide strategy.