There’s a theory that civil unrest is often triggered by the oppressive heat of the summer months. Perhaps the record temperatures experienced in many parts of the world recently, amid renewed debate about climate change, may explain what some are seeing as an investor revolt in the leveraged loan market.
With pricing having jumped in European deals by around 50-100 basis points over the last few months, there are signs that the era of weak documentation investors have been forced to get accustomed to over the last couple of years may now be challenged. In mid-July, Reuters cited the term loan B for German metering business Techem as an example where a pricing increase had led to changes in the documentation.
In the US – where deal documentation is different in subtle ways from Europe, but the same borrower-friendly environment persists – CNBC earlier in the year picked up on the financing of Clayton, Dubilier & Rice’s buyout of home remodelling firms Ply Gem Industries and Atrium Windows and Doors. In that deal, covenants were reportedly tightened – including a proposed weakening of the protection of asset sale proceeds being removed.
But those expecting rebel investors to smash through the barricades, ushering in a new investor-friendly era may be guilty of wild over-optimism. Sources canvassed by PDI say, if there is a pushback, it’s more to do with a glut of supply, which means investors have more of an ability to pick and choose the deals they do. When it comes to the documentation, there have been tweaks around the edges (the restricted payment and springing covenants have in some cases been made marginally more palatable), but there has been no material change.
Some think investors are just as guilty as borrowers in failing to ascribe much importance to the documents, a view based on the theory that a good deal with bad documentation will end up fine, whereas a bad deal with great documentation will land you in trouble. If this is true, they arguably have only themselves to blame for the situation they find themselves in and might find it hard to argue with one debt expert who expressed this view of today’s market standard: “It’s a new norm and it’s here to stay.”
The one eventuality that could perhaps tip deal documentation meaningfully in favour of investors is a major downturn in which the value of loan assets falls in the secondary market and people lose money as a result of there having been no warning signs and no ability for investors to take control (as well as, in Europe at least, severe restrictions on the transfer of assets). This just might throw things into reverse.
Until then, no one should get too excited by recent headlines. Borrowers will not be taking fright at the strength of this pushback.
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