With market conditions having begun to move in their favour in the second half of last year, leveraged finance borrowers have since taken the opportunity to push back against lenders’ traditional freedom to transfer their loans – even in a default situation.
The tension in negotiations is between the lenders’ wish to trade as freely as possible in the secondary market and the aim of borrowers and sponsors to retain control over the identity of their lenders.
Data from Debt Explained’s Representative Loan Terms (RLT) database shows that, so far this year, 27 percent of English and other European law deals do not allow free transferability during all events of default.
While borrowers still say they will adhere to the general principle that they will not act unreasonably in giving consent to a transfer, more carve-outs are being introduced. For example, 20 percent of deals in 2017 have removed the requirement to act reasonably in withholding consent to a transfer of debt to a distressed debt/loan-to-own investor or hedge fund.
“There has always been a dynamic between terms (including pricing) and liquidity (the right “exit”),” said Stephen Mostyn-Williams, chairman of Debt Explained. “Restrictions on transferability went hand in hand with better terms. Now the market has been driven to worse terms and greater restrictions on transferability.”
Mostyn-Williams advised lenders to “watch out if there is a general fall off in credit quality. Lenders may be stuck with truly illiquid credits”.
However, one area where the balance has moved a little in favour of lenders is that the speed of response from borrowers if they wish to refuse consent has shortened, with over 50 percent of lenders achieving a timeline of five business days or less so far in 2017.
Debt Explained is a leveraged finance data firm and a provider of high yield bond and leveraged loan legal analysis for the European market.