Demand for riskier bonds and loans has been so intense that companies selling them are able to move valuable assets beyond the reach of creditors, the Wall Street Journal reported. And investors continue to make it easier for them to do so by agreeing to terms in new debt sales that offer them fewer and fewer protections. PetSmart Inc., for instance, earlier this year transferred a minority stake in Chewy.com, its fast-growing e-commerce unit, to a special subsidiary that would likely be protected from its existing bondholders in a bankruptcy, and more shares to a parent holding company even further removed from its creditors. Retailer Neiman Marcus Group Ltd. said in September that it had moved its entire MyTheresa internet unit to a parent holding company, having first transferred the website to its own special subsidiary. Bondholders and other lenders have traditionally enjoyed the right to sell a company’s core assets or take ownership of them if it enters bankruptcy. The recent moves challenge that tradition and highlight the risks for investors in the next economic downturn. “When a lender is deciding to lend money to a [debt] issuer, they generally are thinking they’re getting credit support from all of the assets of the issuer,” said Anthony Canale, global head of research at Covenant Review, a research firm. “They don’t understand that when you read the fine print, the issuer actually has the ability to move assets.”
