Why a battle over terms may be a phoney war

“The battle lines” are being drawn during the syndication process, proclaimed a recent research paper from Debt Explained, the debt and high yield data provider.

If this is true then it could be argued, from the investor side, that it’s not a moment too soon. The description of the leveraged loan space as being a “borrower’s market” has been around for so long that it has almost created the impression of being an inevitable and permanent state of affairs.

Hence, when the term “investor’s market” started to surface recently – the timing is inexact, but let’s say a month or two ago – it will certainly have raised a few eyebrows. “About time,” may have been the first thought on reading this, perhaps followed by a sceptical feeling that surely things can’t have turned around that quickly.

Debt Explained found that 89 percent of deals being put forward for syndication in 2018 have been met with investor resistance in the form of investors forcing some kind of change to the documentation. This compares with 77 percent in 2017. Also, each deal now sees an average of 6.1 changes per deal, compared with 3.3 changes in the second half of last year.

These figures certainly suggest investors are starting to draw lines in the sand. However, in examining the areas now being highly negotiated, the interesting point is just how many areas investors are now pushing back on – or, in other words, the extent of the concessions that have been made to borrowers up to now.

Areas of intense negotiation, according to Debt Explained, number no fewer than 11 – with some of the most heated discussions around areas such as debt-caps, margin ratchets, excess cashflow sweeps and restricted/permitted payments. Pricing has traditionally been the number one area of negotiation and is still as hot an issue as it has always been – but six other factors are now changed more often than the price during the syndication process.

In other words, while investors are now pulling up borrowers more often and are less inclined to hand them carte blanche, they are doing so from a position in which a hell of a lot has already been conceded. Moreover, Debt Explained says it is unsure that the pushbacks being seen now are actually a sign of dissatisfaction with loose terms in general. They may just reflect unease with particular credits.

In which case, what we are witnessing now is undoubtedly a skirmish. But there may yet be a long way to go before the war is won – and only then would the description “investor’s market” truly seem apt.

Write to the author at andy.t@peimedia.com 
Are you an LP or direct investor? If so, please take a moment to take part in our Perspectives 2019 survey, where we focus on institutional investors’ approach to the alternative asset classes.