June 5, 2020 / 2:27 PM / a month ago

Investors demand restrictive non-call features on loans

LONDON, June 5 (LPC) - Leveraged loan investors are locking borrowers into expensive loans for a longer period of time, adopting more restrictive measures from the bond market to try and get comfortable lending again as the market reopens for business.

Europe’s leveraged loan market reopened for business in late May following a two month hiatus after March’s lockdown, as banks attempted to sell down loans underwritten before March.

Since its reopening, lenders have been far more cautious and are demanding higher pricing and improved terms as the table of power turns firmly to investors, having rested with sponsors since around 2013.

As such, restrictive non-call periods are being placed on leveraged loans including UK software company Micro Focus, European higher education platform Galileo Global Education and Germany-based parking operator Apcoa.

These loans are also paying higher margins and wider OIDs to compensate investors for risk.

“Is it absolutely necessary? Yes, the market says it is,” said a leveraged finance banker. “It will be hard for now to do a deal without offering the right overall package and that includes better call protection.”

Non-call periods make it very expensive to call in debt and gives investors protection to make sure they are being paid for doing the work on an investment.

Non-call protection typically pays the full margin in the first year and a few of points in the subsequent years. It reduces the likelihood of a borrower conducting a sale, refinancing or repricing during that period and gifts investors a pay out if they do.

The loan market has been far less restrictive and typically offered soft-call protection for six months, merely preventing a company from refinancing or repricing during that period.

“One of the key features of the loan market has been prepayability, enabling rapid repricing, refinancing or frictionless sale,” a syndicate head said.


Non-call is helping investors to lock in higher returns on the more expensive paper as it will prevent borrowers from repricing or refinancing on better terms as and when the market improves.

“The call protection protects lenders from refinancing risk,” said a credit analyst. “Clearly investors are worried about better terms developing and a company refinancing at a lower rate.”

To some investors, non-call protection has become a key factor in their decision making.

“It’s a feature we like and that’s why we committed a decent ticket in Micro Focus,” a credit fund manager said.

A number of sponsors are viewing non-call positions in a positive light, especially on portfolio companies that are negatively hit by Covid-19. With very little chance of being able to refinance or reprice, it ensures liquidity is locked in when they announce negative business performance in the second and third quarters.

“It’s relatively easy for sponsors to give. Everyone takes a view that some struggling businesses won’t be able to reprice for a while anyway,” a second credit investor said.

It’s expected non-call features will continue to emerge in upcoming deals, however, it is unlikely to stay once investors increase their risk appetite.

“It won’t stay, it will be the first term to reverse back to normal,” said the leveraged finance banker. “But the loan market now is far from back to normal.” (Editing by Claire Ruckin)

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