In the European leveraged loan market, where it doesn’t seem fanciful to suggest that borrowers have never had it so good, the first stirrings of a challenge to the established order can be detected. Or, to be more precise, the first collective challenge.
Earlier this month, the European Leveraged Finance Alliance Investor Group was launched as an “independent associate” of the Association for Financial Markets in Europe, the pressure group which acts as the voice of Europe’s wholesale financial markets. Among the founding members of the group are Allianz Global Investors, AXA Investment Managers and Janus Henderson Investors.
Little fanfare accompanied the announcement and the wording of the press release hardly created the impression of a revolution in the making. It said the Investor Group would “represent the buy side community within the European high yield and leveraged finance market and will help to promote a transparent, efficient and resilient leveraged finance market in Europe”.
While laudable aims in a broad sense, there’s little doubt the group has a more focused mission. Indeed, in an interview with Bloomberg TV, its leader, Sabrina Fox, said its establishment had “a lot to do with market conditions” and referred to the erosion of covenants and lack of transparency – together with expected volatility throughout 2019 – as reasons for taking this kind of action.
The pendulum in the European leveraged loan market has swung decisively in the direction of borrowers, but there have been examples of lenders/investors pushing back against the imposition of what they see as particularly egregious terms – examples from last year include the J Crew and PetSmart deals. But these have been individual skirmishes that have done little or nothing to change the overall status quo.
If the group can get enough high-profile organisations to come together and exert collective pressure to resist weak deal terms, it’s possible to imagine the pendulum starting to swing back the other way. That’s an important “if”, though. In any given deal it only takes one party to break ranks and accept the sponsor’s demands – and it’s worth considering that we’re in an environment where there’s still a lot of pressure to deploy capital.
While some of the largest players are becoming active in the leveraged loan market, the relevance for most private debt firms is whether there would be any implication for the sponsored mid-market – as this accounts for the bulk of their universe. It is generally acknowledged that mid-market private debt deals have been spared the worst excesses of the leveraged loan market, but the structuring of deals was nonetheless a major worry cited in our recent survey of LP opinion – with the level of concern greater than for comparable alternative asset classes.
Here, as at the upper end of the market, the key to successfully rolling back troubling terms would be lenders sticking together and not breaking ranks. But it’s possible that the ‘trickle-down’, which saw the mid-market absorb some of the leveraged loan market’s worst deal structuring traits, could be the same process by which a better equilibrium between sponsor and lender is achieved.
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