Private Equity Firms Push for New Clauses to Protect Borrowers From AI Disruption

Private equity firms are starting to add new clauses to loan deals that let companies pause the clock on debt defaults caused by artificial intelligence. Traditionally, force majeure clauses only protected businesses from natural disasters, pandemics, or terror attacks. Now, firms like H.I.G. Capital have successfully added language to a €470 million loan for Terras Group that stops the consequences of missed interest payments if the business suffers from AI disruption.

Loan Terms

The new provisions aim to stretch out grace periods when companies miss their interest payments. Under the H.I.G. agreement, the Terras Group deal lets the borrower delay lender remedies for as long as it feels the impact of AI, alongside other triggers like pandemics, war, or soaring energy prices. Creditors warn that unlike a sudden disaster, AI disruption has no clear end point, meaning lenders cannot easily demand their money back when things go wrong.

Market Pushback

Not all private equity firms are managing to push these terms through the market. Lenders successfully blocked similar clauses from Bain Capital's €4.7 billion loan deal to buy a stake in Volkswagen AG's heavy diesel-engine unit, Everllence. Meanwhile, legal advisers like Neel Sachdev at Paul, Weiss have helped private equity sponsors trim down traditional creditor protections, while lenders continue to push back against the trend.

Context

Private equity firms use large amounts of borrowed money to buy majority stakes in companies, putting debt structures under heavy pressure as technology changes. Software firms and service providers face particular vulnerability from rapid advancements in artificial intelligence. When these business models face sudden disruption, sponsors try to secure extra flexibility in their financing documents to avoid immediate default actions.