Private Equity Firms Add AI Disruption Clauses to Debt Agreements

Borrowers Seek AI Default Protections as Private Equity Rewrites Loan Terms

Companies facing disruption from artificial intelligence are securing new debt protections that allow them to pause default consequences, marking a shift in leveraged buyout financings.

Traditional force majeure clauses excuse contractual obligations during catastrophic acts of God such as hurricanes, earthquakes, pandemics, or terrorist attacks. Buyout sponsors have amassed significant exposure to software-as-a-service providers vulnerable to automated disruption, prompting a push for broader borrower safeguards.

H.I.G. Capital Secures Terras Group Concessions While Lenders Push Back

H.I.G. H.I.G. Capital successfully incorporated the AI disruption language into a €470 million ($524 million) loan backing its majority acquisition of Terras Group, a German infrastructure engineering and construction services provider, according to people familiar with the deal. The agreement allows Terras Group to defer the remedies lenders typically enforce after a 30-day grace period for missed interest, suspending those actions for the duration of the perceived AI impact.

“Lenders and investors are closely reviewing language proposed by sponsors that seeks to permit event of default flexibility in connection with AI,” said Jeremy Duffy, a partner and chair of European leveraged finance at Cahill Gordon & Reindel LLP.

Creditors argue that open-ended suspensions undermine basic lending premises because artificial intelligence lacks the clear endpoint associated with public health crises. Not all sponsors succeeded in altering terms. Creditors managed to strip similar provisions from Bain Capital’s €4.7 billion-equivalent ($5.3 billion) leveraged-loan deal supporting its acquisition of a controlling stake in Volkswagen AG’s heavy diesel-engine unit, Everllence, said the people.

Legal Advisers Help Reduce Creditor Protections

The leveraged finance market remains split between aggressive sponsor demands on performing credits and tighter covenant re-insertions for troubled sectors like software. H.I.G. Capital received advisory support from Paul, Weiss partners, including Neel Sachdev, who has played a central role in reducing creditor protections across recent financing packages.

Capital and Bain Capital declined to comment on the loan negotiations, and Sachdev did not reply to requests for comment, according to Bloomberg News. Financial institutions and legal advisers continue to monitor how upcoming debt issuances will address technological volatility.