The world is different, but not the deal documents

Prior to the pandemic, it was commonly believed that a crisis would allow a reset of deal documentation in which the balance of power would shift from borrower to lender. So far, there’s little sign of it.

Before the coronavirus, the widely held narrative was that when a crisis hit, leveraged loan deals would collapse under the weight of their own folly. If this narrative had been followed, it would have enabled lenders in that segment of the market to exert considerably more bargaining power when negotiating new deals.

The exclusion of covenants would equate to a failure to take remedial action fast enough. Giving borrowers the freedom to pile up leverage would be viewed as unsustainable, as trading conditions took a turn for the worse. The mistakes would be acknowledged, borrowers would be granted less flexibility in future and everyone would move on.

Instead, the rather anti-climactic conclusion is that nothing much has changed. Around a year on from the emergence of a world-changing health crisis, the debt markets are in decent shape, deals are continuing to be done and documentation is not radically different. The backdrop, which we all know well by now, is the unprecedented level of government and central bank assistance to economies, which have enabled companies to kick their troubles down the road.

There have been some signs of pushback from lenders at the margins. The much-maligned EBITDAC – allowing borrowers to add profits they would have made had it not been for the coronavirus – appears to have failed to gain traction. However, this is more a sign of just how extreme that proposed clause was, rather than indicating a meaningful recalibration of the borrower/lender relationship.

A more fundamental change may have to wait for the delayed but perhaps inevitable downturn that will follow the withdrawal of support schemes. Some market observers are pencilling in late 2021 or early 2022 for an acceleration of defaults and restructuring. Perhaps that will be the time of reckoning for borrowers. Until then, the weight of debt finance still available for deployment will continue to place them in an advantaged position.

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