Talking point: 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: when deals are done, and lawyers very much involved, there will always be tension as sponsors and lenders fight their respective corners on terms and conditions. Outcomes can vary wildly depending on where in the world you happen to be based.

Envy-inducing terms

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 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.

“There will always be tension as sponsors and lenders fight their respective corners”

“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 simplistic. Some said that sponsored deals in Durston’s home market of Australia are highly competitive and therefore something of an outlier.

Others point out that there is 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 to more or less 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.