Investors in Europe’s syndicated loan market, having had terms such as covenant-loose documentation imposed on them by a borrower-friendly environment, are now drawing lines in the sand – and are increasingly pushing back against terms they see as unacceptable.
So far in 2018, some form of change has been made to the documents or pricing in 89 percent of deals, compared with 77 percent in 2017, according to research from debt and high yield specialist Debt Explained.
The report found not only that more deals are seeing changes requested, but also more changes per deal. Each deal is now likely to see an average of 6.1 changes made during syndication, compared with 1.6 in the first half of last year and 3.3 in the second half.
The sponsor market is under particular scrutiny from investors, with an average of more than 6.3 changes per deal compared with 4.0 changes per non-sponsor deal.
Debt Explained said its database shows over 30 different kinds of changes made to accommodate investors this year, including in relation to Most Favoured Nation (MFN) protection, synergies and cost savings, debt caps and restricted payments. It added that while many pushbacks were in areas traditionally contentious, some were being seen in areas that tend to be less fought over such as prepayments and transfers.
Throughout 2017, pricing was the leading area of renegotiation, with changes made in 13 percent of deals. While that percentage has remained about the same for pricing in 2018, other areas have seen much more change and left pricing trailing in their wake. Debt caps, for example, are seeing change in more than 30 percent of deals and MFN/MFN protection in around 25 percent.
Debt Explained said it was unclear as to whether the increasing pushbacks reflected unease with particular credits or more general dissatisfaction with loosening terms.
In a recent Friday Letter, we reported how legal advisers were urging lender clients to maximise opportunities to get back to the negotiating table with borrowers. The ability to change deal terms and shift the balance of power back towards investors may help cushion them in the event of a significant downturn – though there’s always a danger of this happening after the horse has bolted.