Private equity and portfolios
Can you license data that is collateral under a loan?
By SourceX Editorial · Reviewed by Noah Loul ·
Short answer
A company can usually license data that serves as loan collateral, with conditions. The lender holds a security interest, not ownership, so the company keeps using and licensing its records. The limits come from the loan documents: a non-exclusive license that leaves title in place is the simplest case, while exclusive grants or licensee protections may need lender consent.
Key takeaways
- A security interest gives the lender rights in the collateral on default; it does not transfer ownership of the records.
- Credit agreements often define dispositions to include licenses, then carve out non-exclusive licenses in the ordinary course.
- A negative pledge can be triggered if a licensee asks for any security or lien-like protection.
- Licensees may ask what happens to their license if the lender enforces, so prepare that answer before negotiating.
- Even a permitted license can carry notice or reporting duties to the agent.
What does the lender's lien actually cover?#
A lender's lien gives it a security interest in the company's collateral, which it can enforce if the loan defaults; until then, ownership stays with the company. In most sponsor-backed credit facilities, the collateral description is broad enough to sweep in software, databases, customer records and other intellectual property, often through catch-all categories such as general intangibles.
Because the company still owns and operates the collateral, it can generally keep using it in the business. Licensing is a use, but it can also hand a third party rights that outlast the lender's enforcement or reduce what the collateral is worth. That is why loan documents regulate licenses rather than ignore them, and why the answer sits in the documents rather than in general principle.
Where the answer lives: four documents#
The answer to whether a data license is permitted lives in four documents, which should be read together. A permissive carve-out in the credit agreement can be narrowed by a covenant in the security agreement that bars exclusive licenses of material intellectual property without consent.
- Credit agreement: the disposition definition, permitted dispositions, lien and negative pledge covenants, investment and affiliate covenants, and reporting duties.
- Security agreement: the collateral description, any covenant on licensing intellectual property, and duties to protect and maintain the collateral.
- Intellectual property security agreement and public filings, which show what has been recorded against specific registrations.
- Intercreditor agreement, where there is more than one lender group, which can decide whose consent counts.
Clauses to read and how they treat a data license#
Each clause below can affect a data license in a different way. Counsel will usually start with the disposition definition and its carve-outs, then work outward to the covenants that could be triggered by the license's specific terms.
| Clause | How it can affect a data license | What to look for |
|---|---|---|
| Disposition definition | May define a license as a disposition of assets | Whether licenses are included and which kinds |
| Permitted dispositions | Often carves out non-exclusive licenses in the ordinary course | Conditions such as no material impairment of the business |
| Negative pledge | Bars granting liens on collateral to anyone else | Whether licensee protections could be read as a lien |
| IP covenants | Can require consent for exclusive or out-of-course licenses | Thresholds for material intellectual property |
| Affiliate transactions | Restricts deals with related parties | Relevant if the licensee has any link to the sponsor |
| Restricted payments | Limits upstream payments | How license proceeds may move within the group |
| Reporting and notice | May require telling the agent about licenses | Timing and content of any notice |
Why exclusive and non-exclusive licenses are treated differently#
Exclusive and non-exclusive licenses are treated differently because they affect the collateral differently. A non-exclusive license leaves the company free to license the same records to others and leaves most of the asset's value in place for the lender. An exclusive license, especially one that is long, broad in field or paid up front, can move much of that value to the licensee.
Lenders and their counsel tend to treat the second case as closer to a sale of collateral. Structuring a data license as non-exclusive, time-limited and limited to a defined copy of prepared records keeps it at the simpler end of the spectrum, although the loan documents still decide.
There is a middle ground. A license can be exclusive only within a narrow field of use, a defined record set or a limited period, which leaves the company free to license other uses and other records. Whether that structure still counts as an exclusive license under the loan documents depends on their wording, so counsel should test it against the definitions before it is offered.
What the licensee will ask about the lien#
A licensee will ask whether the company has the right to grant the license and what happens to the license if the lender enforces. Those questions surface in the representations and in any request for non-disturbance, meaning an assurance that the license continues if the collateral changes hands.
For a data license, the practical exposure is often smaller than for a software license, because the licensee usually receives a delivered copy of prepared records rather than ongoing access. Even so, prepare a factual answer in advance: the lien exists, the loan documents permit the license or the lender has approved it, and how delivered copies are treated.
Do not offer the licensee any security interest, escrow or lien-like right of its own without first reading the negative pledge. A protection that looks routine to a licensee's counsel can be exactly what the credit agreement prohibits.
A short checklist before signing#
Run this checklist once the license scope is clear and before terms are agreed, so any lender conversation happens on the company's timetable rather than the licensee's.
- Pull the credit agreement, security agreement, any IP security agreement and the intercreditor agreement.
- Confirm how dispositions are defined and whether the license fits a permitted carve-out.
- Check IP covenants for consent requirements on exclusive or material licenses.
- Read the negative pledge against every licensee protection in the draft license.
- Note any notice or reporting duties to the agent and when they apply.
- If consent is needed, send the agent a short summary of scope, exclusivity, term, records covered and how proceeds will be handled.
Illustrative: a specialty manufacturer with a term loan#
Illustrative: a fictional sponsor-owned maker of industrial valves has a term loan secured by substantially all of its assets. It wants to license prepared quality records, including nonconformance reports, CAPAs and maintenance logs, to an AI developer. Counsel finds that the credit agreement permits non-exclusive licenses in the ordinary course, but the security agreement requires agent consent for any exclusive license of material intellectual property.
The company keeps the license non-exclusive and time-limited, excludes customer-owned drawings, and sends the agent a courtesy summary. The licensee's request for a lien-like protection over the delivered copy is dropped after counsel points to the negative pledge, and the license is signed without a formal consent process.
Where lender approvals sit in a SourceX transaction#
Within the SourceX five-step transaction, loan documents are first read during Rights, alongside customer contracts and vendor terms, and any lender consent or notice they call for is then collected during Approval. Any lender consent or notice is recorded as part of release authorization in the SourceX Evidence Packet, so the supplier, its lender and the licensee can all see that the release was cleared.
Because licenses arranged through SourceX are licenses of prepared copies, with the company keeping ownership of its records, the structure starts at the simpler end of the spectrum described above. The loan documents still govern, and the supplier's counsel decides whether consent or notice is needed.
Frequently asked questions
Can a licensee check whether our data is pledged?
Often, yes. Public financing statement searches can show that a lender has filed against a company's assets, and recorded IP security agreements can show liens on registrations. Expect a careful licensee to ask, and answer with the facts rather than waiting for them to search.
Does a permitted license still need lender notice?
Sometimes. Some credit agreements require periodic reporting of licenses or notice of material contracts even when no consent is needed. Check the reporting covenants and compliance certificate requirements, and keep a copy of whatever was sent.
Is a data license treated like a software license by lenders?
Not always the same way. Loan documents often address intellectual property licenses in general terms, so a data license can fall within the same clauses. The practical difference is that a data license usually delivers a fixed copy rather than ongoing access, which counsel can point to when describing its effect on collateral.
What if the license fees go to the sponsor?
License fees are earned by the operating company that signs the license. Moving that cash to the sponsor or a holding company is governed by restricted payment and affiliate covenants, so the CFO and counsel should check those limits before promising any distribution.
What happens to the license if the company goes bankrupt?
It depends, and counsel should assess it. Under 11 U.S.C. §365(n), if a trustee rejects a license of intellectual property, the licensee may elect to keep its rights for the contract term if it keeps making royalty payments. But the Bankruptcy Code defines intellectual property narrowly in §101(35A), covering items such as trade secrets, patents and copyrighted works, so a dataset may or may not qualify. Separately, in Mission Product Holdings v. Tempnology (2019), the Supreme Court held that rejection has the effect of a breach and does not rescind rights already granted.
Does a refinancing change the answer?
It can. New loan documents may define dispositions and IP covenants differently. If a refinancing is close, it may be simpler to negotiate a clear permitted-license carve-out for data into the new documents than to seek consent under the old ones.
Sources
- Under 11 U.S.C. §365(n), if a trustee rejects an executory contract under which the debtor licenses intellectual property, the licensee may elect to retain its rights to the IP for the duration of the contract and any extensions available as of right, provided it continues to make all royalty payments due. Source
- 11 U.S.C. §101(35A) defines intellectual property for Bankruptcy Code purposes as trade secrets; inventions, processes, designs or plants protected under title 35; patent applications; plant varieties; works of authorship protected under title 17; and mask works. Source
- In Mission Product Holdings, Inc. v. Tempnology, LLC, decided May 20, 2019, the U.S. Supreme Court held that a debtor's rejection of an executory contract under §365 has the same effect as a breach outside bankruptcy and cannot rescind rights the contract previously granted. Source
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