It’s amazing the difference that one word can make in an 80,000 word document. Last month it came out that the fate of a $450m bond issued by Caesars Entertainment may be determined by an “and” that probably was meant to be an “or” in the loan documentation.
Read about the background of the story here:
http://www.bloomberg.com/news/2014-05-12/caesars-makes-and-four-letter-word-to-lenders-distressed-debt.html
http://www.bloombergview.com/articles/2014-05-13/caesars-and-the-450-million-and
It has often surprised me how little attention senior investment professionals pay to the intricate details of loan and investment documentation. The typical approach is to agree on the broad terms of the deal and let the lawyers and a junior member of the investment team handle the details. By the time the final redline is circulated days, weeks, or months later, the deal’s principal has moved on to the next transaction. But the minutiae of the documents are critical; they often are what save you, or bury you, in the event things don’t work out as planned. I feel that the common approach leaves a lot of potential value, optionality, or accuracy on the table.
For Catalus I personally read from beginning to end every investment related document that I sign or I will be bound to. I have hazy memories of one instance where that approach left me pulling an all-nighter because we had to close the investment the next morning. I find that level of involvement to be unusual in the industry and sometimes I get pressure to “just sign it already” because there are (often artificial) deadlines or people are fatigued from the legal process. But over the years I’ve been able to benefit our investors by catching errors and identifying areas where we can improve our position due to some extra scrutiny.
It has often surprised me how little attention senior investment professionals pay to the intricate details of loan and investment documentation. The typical approach is to agree on the broad terms of the deal and let the lawyers and a junior member of the investment team handle the details. By the time the final redline is circulated days, weeks, or months later, the deal’s principal has moved on to the next transaction. But the minutiae of the documents are critical; they often are what save you, or bury you, in the event things don’t work out as planned. I feel that the common approach leaves a lot of potential value, optionality, or accuracy on the table.
For Catalus I personally read from beginning to end every investment related document that I sign or I will be bound to. I have hazy memories of one instance where that approach left me pulling an all-nighter because we had to close the investment the next morning. I find that level of involvement to be unusual in the industry and sometimes I get pressure to “just sign it already” because there are (often artificial) deadlines or people are fatigued from the legal process. But over the years I’ve been able to benefit our investors by catching errors and identifying areas where we can improve our position due to some extra scrutiny.
The Caesars example is pretty extreme. Would I have caught the “and” that was supposed to be an “or”? No Way. I’m assuming that this clause was buried somewhere deep into the agreement, and by the time I’d get to that page I’d be struggling to focus on what I was reading. Even in the context of this article I had to read the clause 2-3 times before I understood the issue.
So maybe the typical approach isn’t so bad after all, even if you read every word you’re likely to miss stuff. But why not put in the effort to try to weed out as much as you can?
