Senior Syndicated Leveraged Loans; Negotiating Issues & Trends

Course Overview:

This programme is aimed at professionals involved in syndicated high-yield (leveraged) loans used by both Sponsored and Corporate borrowers.

Historically, bonds were structured mainly as junior debt in the European high yield market whereas the recent trend has seen them used increasingly used as senior debt together with senior loans and/or super-senior RCFs in bifurcated pari Loan / Bond structures.

These developments have intensified pressure on syndicated lenders to adopt a more borrower-friendly approach than is advocated by the relevant Loan Market Association precedents. Borrowers have become increasingly frustrated by the conflicts between the flexibility offered by incurrence-based bond covenants and the more restrictive maintenance-based loan covenants. This conflict is driving convergence between these products and has accelerated the migration of terms from bonds to loans and vice versa.

Well known examples of the former include cov-lite loans and debt buy backs but more recent areas include covenant release/loosening on I-Grade rating and greater flexibility in the use of the various permitted baskets (including reclassification and splitting).

The recent Orange deal introduced a more alarming (and little noticed) innovation which, if adopted in loans, could allow Midco permitted payments to service debt.

This programme will look at the current trends and developments in syndicated loans and will draw on data and analysis from DebtXplained’s Representative Loan Terms Database (www.debtxplained.com).

The database is a unique tool that has already changed the way that sell-side practitioners pitch for mandates and keep abreast of market trends. It tracks over 400 terms of loan documentation on a non-confidential basis allowing the users to precisely understand what is “market” for all significant negotiating points of a deal at any given time.

This information has never been available to the market before and gives borrowers, bankers, lawyers and advisors unprecedented knowledge of the current trends and practices in the Loans Market and Loan Terms.

Course Content:

Part 1: Deal & Loan structure, changes to the Parties & Buybacks

Scope of the Loan

• Concept and composition of the “Covenant (Restricted) Group”
• Issues re Dormant subsidiaries – why they matter
• Issues re Joint Ventures
• Dealing with Acquired firms

Debt buy-backs

• Buybacks provisions – present or silent, permitted?
• Conditions permitting debt buybacks
• Affiliate debt buyback methods
• Investor buyback – restrictive conditions

The Lenders, changes to the Lenders & relevant thresholds

• Key voting thresholds & why they matter
• Super-Majority lenders – typical thresholds
• Matters requiring Unanimous consent
• Facility Change/Structural Adjustment
• Treatment of Hedge parties
• Ability to transfer – Consent vs Consultation Methods
• Carve-outs from Restricted transfer
• Minimum transfer sizes

Part 2: Key “Permitted” definitions & Additional facilities

Permitted Acquisitions

• What is “Permitted”
• Aspects re the Baskets
• Additional restrictions:
• Impact on financial covenants – pro forma synergies?

Permitted Disposals

• What types of transactions are affected / carved-out
• Which Group companies affected
• Aspects re the Baskets
• Carve-out for non-obligors

Permitted Financial Indebtedness

• Scope – Financial Indebtedness defined (typical exclusions)
• Issues re the Baskets – General & other baskets
  • Size and availability
  • Automatic increase in Basket
  • Carry forward and Carry back (rare)

Accordion Facilities

• Availability
• Which Facilities are affected (RCF, New, M&A)
• Committed at signing
• Existing lenders right of 1st refusal
• Lender consent requirements
• Specified purpose (Capex, Restructuring, JVs)
• Cap on Additional facilities

Basket erosion

• Reclassification of baskets
• Splitting of deals over baskets

Part 3: Interest & Yield Protection & Availability

Debt Service

• Interest and default interest periods
• Libor floors
• Margin and margin ratchets
  • Increased costs – Basel 2 and 3 (silent, included, carver-out, one/both)
• Interaction with Financial covenants

Specific issues for Revolving Credit Facilities (“RCFs”)

• Clean-downs re RCFs, Ancillary Outstandings, LCs
• Clean-down amount
• Periods fixed – Annual, Borrower’s election
• Periods – timing, one or more
• Cashless rollovers – why they matter
• Problems with Headroom

Part 4: Exit, Acceleration and Prepayments (Sweeps)

Change of Control

• Pre and Post IPO
• Change in ownership chain
• Various thresholds that apply – voting control
• Sale of all or substantially all of the assets of the Group – single or series

Mandatory Repayments (Cash Sweeps)

• Disposal proceeds
  • What is a “Disposal”
  • Baskets to sale proceeds
  • Annual – individual deal amount
  • Annual basket carve-out
  • Excluded Disposal proceeds
• Acquisition Proceeds
  • What are “Acquisition Proceeds”
  • Excluded Acquisition proceeds
  • Basket annual and individual
• Insurance Proceeds
  • Excluded Insurance Proceeds
  • Basket – annual or per deal
  • Retention periods
• Listing Proceeds
  • Does Listing trigger full repayment
  • Does covenant grid cover repayment
  • Application of IPO proceeds – leverage grid?
  • Application of retained funds
  • Potential tests that can be used
  • Relevant period

Excess Cash

• Excess Cashflow defined
• Excess Cashflow – typical deductions
• De minimis basket
• Use of Retained Excess Cash flow

Voluntary Prepayment, Trapped Cash & illegality

• Can Borrower prepay voluntarily
• Are there minimum / max. amounts
• Circumstances when Borrower can avoid mandatory prepayment
  • Tax – Trapped Cash (amounts)
• Impact of illegality lender’s commitment
• Prepayment Fees and Order
  • Prepayment fees
  • Does Borrower have option to vary prepayment order
  • Can borrower prepay next four TLA amortisations
  • Designated prepayment order

Part 5: Dividends, Share Redemption and Subordinated Debt Payments

Limitation on Dividends and Share Redemption

• What types of distributions / redemptions are covered
  • Investor equity related payments e.g. dividends / distribution
  • Management or advisory fee
  • Retirement of share capital
  • Redemption, repurchase or similar payment in respect of any of share capital
  • Share premium reserves
• Exceptions
  • Permitted Payments
  • Permitted Transactions

Permitted Payments

• What payments are permitted
  • Basket carve outs – amounts, caps, carry forward/back
  • payments in re Equity & equity substitutes , Management/monitoring fees
  • Subordinated debt
• Basket carve outs – conditions precedent
• Basket Carve-out categories
• Restrictions on source of cash to fund sponsor distributions
• The “Orange” issue – permitted payments to service debt from Midco

Part 6: Covenants & Undertakings & Events of Default

Covenant Overview

• Covenants generally
  • Function
  • Covenants in Loans vs Covenants in Bonds
• Covenant Suspension/Loosening
  • Triggers – Qualified Listing and/or I- Grade Rating
  • Available to Borrower
  • Scope of covenants affected
    • Material event reporting – scope
    • Access Rights for Lenders
  • Triggers for Access rights – EoD, Agent “suspects” EoD

Financial covenants and Equity cures

• The main covenants per the LMA
  • Cash flow cover
  • Leverage
  • Interest cover
  • Capex restrictions
• Equity cures
  • Current market practice
  • Cures in practice
  • Recent case law

General Undertakings

• Permitted Security Basket
  • Amount
  • Availability
  • Automatic increase in basket
  • Trigger mechanism – I-Grade, Listing. M&A
• Permitted Guarantees & carve-outs
• The Guarantor Coverage Test
  • Core carve-outs sought by Sponsors
  • Other exceptions sought by Sponsors

Default and Events of Default

• Default vs Event of Default
• Grace periods
• Sensitive EoDs
• Cross default to financial Indebtedness
  • Cross-default defined
  • Sponsor friendly exclusions

MAC / MAE clause

• Arguments for and against inclusion
• Objective or subjective test
• Impact of “Reasonably Likely”
• Scope of MAE clause
  • Security / Security Documents
  • Finance documents
  • business, operations or financial condition of the Group