The debt market in artificial intelligence (AI) is burgeoning. This two-part series of articles discusses its potential to disrupt traditional debt lending practices. Part 1 discusses how the unique nature of AI companies could present distinct challenges to financial covenants in traditional lending frameworks if not properly considered in the context of such companies. Part 2 examines how the nature of AI-related assets could similarly complicate the process of security enforcement under traditional lending frameworks if not properly adapted to AI assets.
Key takeaways from Part 1:
- In traditional lending frameworks, financial covenants are typically used as an objective and measurable framework for a lender to uphold and monitor a borrower’s financial health.
- Financial covenants tailored to AI companies should account for the valuation complexities of AI-related assets and revenue volatility associated with the AI industry.
- Lenders should adopt innovative and flexible approaches to financial covenants to effectively manage the risks associated with lending to AI companies.
- Given the complexity of these issues, it is crucial to seek expert legal advice to mitigate against potential risks.
Trainee solicitor Trisha Shah also contributed to this article.