In transactions reminiscent of the contentious JCrew “trap door” transaction of 2017, performance entertainment company Cirque du Soleil and travel booking company Travelport Worldwide Ltd. each recently obtained more favorable financing terms, in the face of increasing financial distress, by transferring certain valuable intellectual property rights into unrestricted subsidiaries (thus freeing those rights from their existing creditors’ liens) to be pledged as security for new loans.  Each company’s transfer has been disputed by certain existing creditors claiming that such actions violated the companies’ existing credit agreements; Travelport now has commenced a declaratory judgment action in New York state court to validate its transfer.

In the case of Cirque du Soleil, the company skipped an interest payment on its senior secured lending facility, cancelled performances, and laid off approximately 95% of its workforce all in response to disruptions caused by COVID-19 pandemic.  At the same time, the company transferred certain trademarks and other intellectual property rights into an unrestricted subsidiary controlled by three of the company’s largest equity holders.  Rejecting a separate financing offer from its existing lenders, Cirque du Soleil then accepted a $50 million loan from these same equity holders, who offered better terms given the intellectual property collateral they were receiving.  While Cirque du Soleil’s creditors have not yet sought affirmative, judicial relief in connection with the transaction, market speculation is that they will seek to have it unwound if Cirque du Soleil subsequently files for bankruptcy, which seems increasingly possible.1

Travelport recently engaged in a similar action, transferring intellectual property to an unrestricted subsidiary and subsequently obtaining a $1 billion loan secured by such intellectual property.2 According to Travelport, the loan was necessary to provide the company with much-needed cash as it navigates a market with substantial drops in flight bookings and an uncertain near-term recovery. In the face of expected opposition from company’s existing first lien lenders, Travelport filed a lawsuit in New York state court seeking a declaratory judgment that Travelport’s transfer of assets was permitted under the terms of its credit facility.3  That action is currently in its early stages.

In the case of JCrew, despite several challenges to the “trap door” approach, the transaction was ultimately approved leading to similar transactions by Clare’s Stores, iHeart Communication, and Revlon, among others.  However, as the analysis and ultimate determination necessarily is dependent upon the scope and terms of the applicable covenants set forth in the operative loan documents, it remains to be seen whether creditors will be able to mount a more successful attack on the Cirque du Soleil and Travelport transactions or, alternatively, whether such transactions will be allowed to stand.  In any event, going forward borrowers and lenders will presumably be increasingly focused on the various covenants and baskets in credit agreements potentially allowing for these types of transactions, as lenders demand tightening and borrowers look to maintain maximum flexibility.

1 See, e.g., Willis, Andrew. Cirque du Soleil asset transfer angers creditors, The Globe and Mail, May 15, 2020,

2 Andrew Scurria, Travelport Owners Defy Lenders to Supply Up to $1 Billion Financing, WSJ, June 5, 2020,

3 Travelport Finance (Luxembourg) S.à .r.l., Toro Private Holdings II, Ltd., and Toro Private Holdings III, Ltd. v. Bank of America, N.A., Index No. Unassigned (Sup. Ct. N.Y., June 5, 2020).