European borrowers swat down traders

Fear of ‘aggressive’ secondary buyers has led borrowers to push for more of a say in the composition of their lender group. 

European borrowers wary of “aggressive” investment funds attempting to purchase their bank debt on the secondary market are increasingly using their consent right to deny sales, according to a paper published by Schulte Roth & Zabel attorneys David Karp and Anthony Lombardi.

In 2014, a growing number of European borrowers are taking steps to maintain control of their lender group, pushing for economic participation and voting rights.

“In many cases, the loan agreement requires the borrower not to unreasonably withhold consent to the transfer; but what constitutes ‘consent being unreasonably withheld’ is an unsettled point of English contract law, which governs many loan agreements across Europe,” according to the report. “Further, borrowers are pushing for a tightening of the transferability language and extension of their consent right to include participations or other types of ‘transfers’, potentially further clouding how a secondary market trade will settle.”

The development could spell trouble for funds specialising in the acquisition of corporate bank debt, as borrower action could be preventative to such transactions, or at the very least make them more costly.

One recent case that may have illuminated how such loan agreements are treated was recently settled out of court. A borrower sued private equity firm Terra Firma for its refusal to provide syndicate information access to a competitor. Unfortunately, because the case was settled, it did not provide any guidance on how courts will determine what constitutes ‘unreasonably withheld’ consent.

“It is important to note that in many European loan agreements , an existing purchase does not grant lenders an automatic right to increase their position and bypass borrower consent,” according to the paper. “Ultimately, like many European trade issues, borrower consent risk needs to be actively managed on a case-by-case basis. It is crucial for investors to begin to address this issue before saying 'done' or they will be fighting an even steeper uphill battle with both their counterparty and the borrower.”