2016 Leverage Loan Market Review shows Sponsors pushing the debt covenant package
Sponsors are increasingly negotiating incremental debt allowances in the covenant package, according to the 2016 European Leveraged Loan Market Review by Debt Explained.
Drawn from data in the Representative Loan Terms (RLT) database, the report shows that EBITDA grower in “free and clear” incremental debt baskets has come from being a marginal presence in 2015 to being in approximately a third of all European Law Deals by the end of 2016.
The most pro-sponsor debt amount for these baskets in 2016 European Law Deals was 45% of EBITDA for general debt and 100% of EBITDA for incremental “free and clear” debt, for a 145% of EBITDA total.
One in five European law deals in H2 2016 had an EBITDA grower for the combined general and incremental debt “free and clear” baskets of 100% of EBITDA or more. This is a stark difference to previous half years; 4% for H1 2016, 9% for H2 2015 and 3% for H1 2015.
Arrangers are having to be more concessionary for many reasons – the most topical of which is the incoming ECB guidelines for regulation of leveraged loans (expected early this year). However the increased presence of self-arranged deals and high demand mean that the arranger banks and potential investors are facing an increasingly competitive environment. As a result, Investor protection through covenant packages continues to weaken irrespective of leverage and credit quality.
Other findings include:
- 2016 ended with covenant-lite deals dominating after a shift from H1 to H2 and where a covenant-loose package is used the trend is to only include a leverage maintenance covenant;
- Springing leverage covenants were the most commonly found financial covenant in Q4, as in Q3, reflecting the fact that covenant-lite packages prevailed in H2 2016;
- European law deals are increasingly restricting secondary trading in the event of default; and
- Most Favoured Nation (MFN) margin and yield protection – both in presence and scope - has been the focus of negotiation throughout 2016 and Q4 saw a higher percentage of transactions with no MFN protection than any other quarter.
Stephen Mostyn-Williams, Chairman of Debt Explained, explained that the report shows how important it is to track the details of the terms and conditions in the leverage finance market.
“More than ever before the leverage loan market is driven by Sponsors which use precedent as the basis for each deal. Deal data is therefore essential but hard to access. The data shows clearly how Sponsor requirements are dominating market terms. The consequences of these terms will only be seen in the future and will depend on the success (or otherwise) of the businesses being financed. In a negative scenario it seems likely investors will suffer from their generosity”.
About The Report
This report refers to data drawn from Debt Explained’s Representative Loan Terms (RLT) Database which tracks information from syndicated deals in the European leverage loan market.
The report is based on those deals which were in the market during , as indicated, and which were reviewed by Debt Explained during this period and no distinction is made between deals with different governing laws unless otherwise stated.
Debt Explained’s Market Maker and RLT databases offer unique oversight of the European high-yield bond and leveraged loan markets, with more than 550 and 350 searchable terms respectively. A staple resource for all leveraged finance market participants – including capital markets bankers, legal advisors and asset managers – Debt Explained data reacts to the market in real time: subscribers receive detailed deal “snapshots” on new issues as information is released.
About Debt Explained
Debt Explained is a leveraged finance data firm and the only independent provider of High Yield Bond and Leverage Loan Legal Analysis in the European Market. In addition to storing analyses in custom, searchable databases, the company sends out timely and finely-tuned “snapshots” following the activity of the primary and secondary markets.
Debt Explained was founded in 2010 by Stephen Mostyn-Williams, previously a Senior Partner at four international law firms and the chair and co-founder of the European High Yield Association. It is staffed by experts in Capital Markets and Financial law with extensive experience in new issuance, corporate advisory work and restructurings. We pride ourselves on hiring extremely experienced professionals as we know the level of expertise that is required to put deals together. As a consequence we only hire lawyers with at least 10 years in capital markets or financial law and with deep knowledge of our product areas.
For further information on Debt Explained please contact Sophie Belcher on +44 (0) 20 7100 9777 or firstname.lastname@example.org