How will the terms of today affect the restructurings of tomorrow?

BeneluxCentral & Eastern EuropeFranceGermanyIrelandItalyNordicSpainSwitzerlandUnited KingdomRestructuring

On Wednesday, the Debtwire European Restructuring Forum 2016 afforded delegates an excellent opportunity to engage with market participants discussing the latest developments in the European restructuring landscape.

Christine Tadros - Head of European Research at Xtract Research – participated in a dynamic panel discussion entitled: “How will the terms of today affect the restructurings of tomorrow?” moderated by Mariana Valle, Co-Deputy Editor at Debtwire Europe, along with fellow panelists Ian Anderson, Principal in Credit at KKR and Romain Cattet, Partner at Marlborough Partners. The angle of the panel was to explore the current state of the leveraged loan market, consider how this has pushed banks and buysiders to accept increasingly permissive terms in the primary market and, in turn, how this might impact restructuring opportunities in the future.

Against the background of this debate, we present below some of the latest key observations that our review of cross-Atlantic large cap syndicated loan documentation has enabled us to make of late .

Erosion of lenders’ rights – how low is it going?

It bears reiterating that – not least from a documentation perspective – we need to differentiate between the US TLB market (i.e. loans governed by New York law – and if these are entered into by European borrowers, we refer to them as “Yankee Loans”) and the European leveraged loan market. Over the past couple of years, we have observed an overwhelming amount of convergence of terms between the US TLB, high yield and European leveraged loans markets. Despite this, although the lines are blurring increasingly, the development of European leveraged loan documentation continues to have its own dynamic. So, we believe it remains valuable to distinguish it as a separate phenomenon from US credit or high yield documentation. In order to illustrate this point, we set out below some statistics reflecting the trajectory of prevalence of certain borrower-friendly terms in European leveraged loans (“SFAs”), as opposed to Yankee Loans (i.e. New York law governed credit agreements entered into by European borrowers and including a € tranche) (although we must stress that statistics are illustrative only and apparent trends and themes can vary between periods):

  • European Cov-Lite Loans

  • Leverage-ratio based incremental facility capacity
  • Uncapped EBITDA Add-Backs from projected cost savings/synergies from nebulous ‘group initiatives’ etc
  • EBITDA Cures
  • EBITDA soft-capped baskets throughout

Transferability of Loans

So far this year, we have observed more onerous restrictions on transferability of loans under the assignments regime in SFAs generally. This has been on multiple fronts, such as through the exercise of greater discretion by the borrower (e.g. the absence of a requirement that borrower consent not be unreasonably withheld or that its consent be deemed if it is not forthcoming within a certain number of business days) and control over Approved Lender Lists and the imposition of sweeping restrictions on “Industrial Competitors”. In certain of the more aggressive deals, we are even seeing in-roads made by the borrower into a lender’s freedom to sub-participate its loan allocation, including a condition that the lender of record retain voting rights. More commonly, borrower consent requirements only apply where voting rights pass to a sub-participant. Lenders need to be aware of such incursions into their ability to exit the credit, as this will inevitably have an impact on the liquidity of a given loan.

Next refinancing wall – when will it hit us?

We at Xtract question the existence of the next perceived refinancing wall in the large cap syndicated loans market, given the numerous repricings and amendments that have come to market of late accompanied by a pushing out of maturities. 

In fact, European SFAs have metamorphosed to such a degree in the past couple of years that successive amendments and refinancings build in layer up on layer of flexibility with a view to perpetuating the deal and lenders’ participation in it. Case in point: (A) the ‘Structural Adjustments’ amendments regime allowing an ever-increasing spectrum of changes to the economic terms of a loan to be made with diminished lender majorities and (B) the rise of European SFAs containing lender put rights on a change of control of the borrower group, as opposed to the traditional automatic acceleration and cancellation of the facilities. 

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For the purposes of this Special Report, our data is based on normally widely syndicated European law governed senior facilities agreements and New York law governed credit agreements entered into by European borrowers that we have reported on. Our database includes draft facilities and credit documentation (as in some cases we do not receive the final executed versions). 

Meaning: no financial covenants for the TLB institutional tranche but generally, typically a leverage ratio financial covenant only for the benefit of the revolving lenders, that typically ‘springs’ (i.e. is tested) only if a minimum amount of the revolver is drawn at the time. 

See our two-part Special Report on Lender Voting Regimes in European Leveraged Loans: Part I – A General Outline (7 Mar 2016) and Part II – Noteworthy Omissions, Ambiguities and Loopholes (10 March 2016).