| LONDON, June 2
LONDON, June 2 European leveraged loan borrowers
are imposing tougher restrictions on which investors can hold
debt in portfolio companies in a bid to strengthen their control
Buyout firms have taken advantage of the deep liquidity on
offer in Europe and the supply-demand imbalance to secure lower
pricing on loans, higher leverage ratios and weaker
Targeting transferability is the next stage of sponsors’
assault on investors as they become increasingly vocal on which
investors they want to do business with.
“Investors are agreeing to so many restrictions because
pricing has been pushed as low as it can go and leverage is as
high as it can go. Now, borrowers are seeing what else can be
given up,” a banker said.
Within the past six to 12 months, sponsors have stepped up
efforts to control which investors can hold and access loans,
seeking to prevent any fund from exerting too much influence or
building a controlling stake.
Private equity firm Advent shocked the market in December by
limiting any one investor from holding more than 10% of a jumbo
€2.1bn-equivalent term loan to back French smartcard maker
Oberthur Technologies’ acquisition of Safran’s biometrics and
security business Morpho.
Since then, private equity firms have attempted to squeeze
lenders further. Crucial language enabling fluid transferability
has been removed from some credit agreements, for example, so
investors can only “transfer with consent” as opposed to the
more usual “transfer with consent, not unreasonably withheld”.
Sponsors have also clamped down on sub-participation (an
arrangement where a new lender provides funds to an existing
lender to lend to borrowers), in some cases not allowing it at
all. In other cases, language in loan docs says that an event of
default can only be triggered by a major event, rather than a
small covenant breach.
The suppressing of transferability has been worsened by an
increase in covenant-lite deals and both bankers and investors
share a consensus that a loan should - at a minimum - have
either covenants or transferability, but be not devoid of both.
“You have to choose covenants or transferability. Investors
rationalised [the relaxation of] docs by thinking if they didn’t
like a deal or it went wrong, they could express opinion, not by
bringing it to the table, but by leaving the table. If you limit
their ability to step out, they are powerless,” a head of
leveraged finance said.
Covenant-lite deals typically feature so-called springing
covenants on their revolver tranches, which in the event of a
default also trigger a default on the equivalent term loans. But
sponsors are seeking to stipulate that there can be no
cross-default between the revolvers and term loans, which would
keep institutional investors (which typically only hold the
terms loans) locked into a struggling deal.
Transferability - or the lack of it - is likely to prove a
battleground on a new batch of potential financing packages that
are backing auction processes, including Danish packaging group
Banks have resisted some of the requests, including pressure
from sponsors that “white lists” remain intact, even in a
A white list is a list of pre-approved funds that investors
are able to sell paper to on a deal. White lists have been
getting shorter and more restrictive but until now have always
maintained a precedent that they fall away on default, enabling
investors to sell to anyone willing to buy the paper.
“Sponsors want white lists to apply in an event of default
but this has been universally pushed back on. There are lots of
difficult terms being asked for but this one won’t be given,” a
second head of leveraged finance said.
Some bankers are lobbying sponsors, asking them to re-evaluate
their stance on transferability, worried that it will put off
new inflows to Europe’s leveraged loan market that have been
attracted by high yields and low default rates.
Bankers fear much of the new money from insurance companies
and pensions funds will leave the market and not return if they
get burned on credits they can’t get out of.
“There is a problem, as once the cycle turns and loans
become stressed and distressed, investors need to trade out of
them. If they can’t, then the issue will be how to attract those
investors back to the market once the cycle turns again. I
guarantee that when people can’t get out of the assets, they
won’t return. Once you scare some marginal investors away, they
aren’t coming back. The sponsors, however, don’t want to
listen,” a capital markets head said.
(Editing by Christopher Mangham and Matthew Davies)