How deal documents have divided the world

Western and Eastern private debt deals have little in common when it comes to how borrowers and lenders are treated.

It has been, many in the market claim, a collegial crisis. One where, in the face of tremendous pressures, sponsors and lenders have come together to amicably agree the best way forward for portfolio companies. Not in all cases, mind you, but at least in most.

There’s no getting away from it though: at the point at which deals are done, and where lawyers are very much involved, there will always be tension as sponsors and lenders fight their respective corners on terms and conditions. What we found in this month’s cover story, to be published at the beginning of April, is that outcomes can be very different depending on where in the world you happen to be based.

In Asia-Pacific – where the private debt deal market is still in its infancy and access to debt is prized by borrowers, given the universal issues facing the banks – lenders are still in a strong position to dictate terms. Here, the presence of multiple covenants in transactions is not a rare luxury – it’s the norm. This is a situation that is bound to provoke envy among lenders in the US and Europe, where a surplus of available financing means borrowers can pick and choose who they work with and how the contracts are drawn up.

“The overall picture is that Asia-Pacific is the sweet spot for private debt,” Bev Durston, founder and managing director of Australian advisory firm Edgehaven told us. “It has the best risk-adjusted return because documentation has not deteriorated, which it has in the US and Europe.”

To view all Asia-Pacific markets as some kind of lenders’ paradise would be too simple. Some say that sponsored deals in Durston’s home market of Australia are highly competitive and therefore something of an outlier. Others point out that there’s not much point having more favourable documentation if the political and regulatory landscape makes life too difficult – as is the case in some emerging Asian markets, where the process of debt recovery can be a frustrating one.

In the US and Europe, where a recent survey from Lincoln International found deal terms have returned more or less to where they were before the first major covid-19 outbreak, it’s clear there has been no material and long-lasting change in borrower/lender dynamics. It may also be true, however, that the greater flexibility enjoyed by borrowers and sponsors has enabled them to be nimbler through testing times. Catering more to lenders’ wishes does not necessarily guarantee better results.

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