Negotiating Leveraged Loans in Private Equity and Corporate Transactions

Key Negotiating Strategies – The Borrower’s View

• Criteria for selecting the most appropriate lender - Banks vs Direct lenders

• Key differences in approach between banks and direct lenders

• Pros and cons of Banks vs Direct lenders

• Some banks (and branches) are different

• Can direct lending apply to corporate borrowers?

• Strategies for negotiating the key commercial terms

• How to approach the term sheet: Hard or soft terms?

• Focus on everything or only a few “critical” issues

Do debt advisors offer value for money - Getting the best from your advisors

What about the fees?

A checklist for borrowers

The Lender’s Perspective

• The role of the information covenants – why they matter

• How the financial covenants impact other areas of the loan

• What to focus on in the collateral package - the pros and cons of: Negative pledges

• Guarantees

• "Secured" guarantees

• The role of share pledges - how and why they matter

Scope of the Loan

• The “Restricted Group” - why it matters

• What is a "Material Subsidiary", what’s the market & why it matters

• Non-material subsidiaries - how and when they matter

• Immaterial subsidiaries (what are they)

• Dormant subsidiaries – why they may matter

• The potential value leakage posed by non-guarantor restricted subsidiaries (NGRS) and how lenders can mitigate these risks

• Unrestricted subsidiaries

Changes to the Lenders

• Transferring a loan – methods, pros and cons: Novation

• Assignment – legal and equitable

• Sub-participation

Restrictions on Transferability:

• Why transferability is important for lenders - what they want and why

• Ability to transfer - Consent vs Consultation

• What does consultation mean, and is it useful to lenders in practice?

• What is reasonable consent (of the borrower)?

• What are the trigger points when consent is no longer required?

The role of White and Black lists

Voting Thresholds

• Key voting thresholds - how and why they matter

• Different approaches in syndicated leveraged loans vs club loans: Majority lenders

• Unanimous consent

• Super-majority lenders – “typical” scope & thresholds

How and when Yank the Bank can be used to manipulate the syndicated leveraged finance

Role of Snooze & Lose - how distressed lenders can use this to gain control

Treatment of Hedge counter-parties

Debt Service

• Differences between banks and direct lenders in amortisation

• Interest and default interest periods

• Libor/Euribor floors

• Original issue discount (OID) – use in the deal, market trends

• Margin and margin ratchets

• Increased costs & gross-up clauses

Mandatory Prepayments (Cash Sweeps)

• The definition of Excess Cash flow

• Excess Cash Flow – typical deductions

• De minimis basket

• Cash sweep – step downs (PE vs Corporate)

• Use and Application of Retained Excess Cashflow

The ‘Permitted” Baskets: How & Why They Matter

• Role and application of baskets in the loan market

• Grower baskets: How are they structured

• What is the specified variable - EBITDA, Total or Tangible Assets (pros and cons of each)

• What happens when the specified variable subsequently declines?

Builder baskets - when are they used:

• How builder baskets are abused by borrowers

Reclassification and splitting between baskets

“Permitted” Definitions: How & Why They Matter

• Role and relevance of the “ Permitted ” definitions

• Synchronising the “ Permitted ” baskets

• Permitted Acquisitions: Typical carve-outs- hard vs soft baskets

• Additional restrictions

Permitted Financial Indebtedness / Security / Guarantees:

• Scope – Financial Indebtedness defined (typical exclusions)

• Incremental debt- scope and coverage

• Accordion facilities Typical terms & conditions

• Pricing - MFN & sunset periods – what’s market

General & other debt-related baskets

Permitted Disposals:

• Loan Market Association (LMA) - Typical ‘ordinary course of business’ Carveouts

• Cov-lite approach – two requirements Fair Market Value (Independent Board, Fairness opinion?)

• Proceeds in ‘cash or cash equivalents or ‘designated non-cash consideration’

Interaction with Mandatory Prepayments

• Annual basket carve-out

• Excluded Disposal proceeds / Reinvested amounts

Permitted Distributions

• LMA vs. Cov-lite approach

• Issues re Fair market value

• Issues re Cash and cash equivalents

• What about designated non-cash consideration

Permitted Payments - typical carve-outs

• Basket carve-outs

• Subordinated debt, equity & equity substitutes

• Management/monitoring fees

Covenants & Undertakings Generally

• Covenants (three general categories)

• Information covenants: Why and how do they matter?

• Issues for lenders, issues for borrowers

• LMA v Market approach

General undertakings:

• Guarantor coverage – scope and issues for borrowers

• What comprises ‘security’?

• Core carve-outs for sponsors

• Carve-outs for corporate borrowers

Financial Covenants & Private Equity Cures

• The main covenants per the LMA & market: Cash flow cover

• Leveraged Finance to Private Equity

• Interest cover

• Capital expenditures (Capex) limits

• Earnings before interest, taxes, depreciation and amortisation (EBITDA) limits (not LMA)

• Springing covenants – use, application and triggers

• Other matters – starting headroom

Market trends:

• Number of covenants

• Headroom

• Impact of Covid 19

Equity cures:

• What do they apply to EBITDA, leverage, and cash flow?

• Terms - How many consecutive, over-cures, applications of the private equity funds leverage

• Cures in practice

Default & Events of Default

• Default vs Event of Default

• What are the key EoDs?

• What about cross-default?

• Material Adverse Change (MAC) - do they still matter: Material Adverse Effect (MAE)

• Why it matters (appears in numerous clauses in the loan)

• The potential impact of MAE

• Scope of the MAE: what are the critical issues in the MAE

Training Objectives

• Get an in-depth understanding of the key commercial issues in leveraged loan funds and loan documentation affecting corporates and PE borrowers in Europe, particularly how COVID-19 is affecting lenders in the approach to the loan (structure, terms and pricing).

• Understand how and why the ‘Permitted’ baskets are important to borrowers.

• Analyse the issues borrowers must consider in accessing additional lines of liquidity (e.g. Incremental debt /Accordions or (RCFS) Revolving Credit Facilities) to provide liquidity to tide them through the crisis.

• Understand the relevance of voting various thresholds in the loan and how they can impact the lenders, especially in distress.

• Identify the key subsidiaries of the Restricted Group and how they can adversely impact recovery in distress.

• Learn which mandatory prepayment matters and why some Events of Default should be structured as cash sweeps.

• Appreciate which financial covenants matter and what to expect in the different types of high-yield leveraged loans (syndicated vs. clubs vs. bilateral vs. Unitranche).

• Identify which points to negotiate leverage in private equity cures and why deemed cures matter.

• Understand how grower baskets work and interact with incremental facilities, and how debt reclassification can magnify leakage for lenders.

• Isolate the key issues in negotiating Most Favoured Nation (MFN) clauses.

• Understand the key trends in restrictions on transferability, the role of White and black lists and why they matter in distress.

Case Studies: The programme will include a case study comprising a composite term sheet (drawn from real-life transactions), used to analyse and discuss key aspects of the loan from the borrower and lender perspectives. Aspects covered include inter alia, the market flex (what it is, pros and cons), guarantor coverage levels and scope, analysis of the Restricted Group, information and financial undertakings, CPs margins, margin ratchets and fees, cash sweeps and permitted baskets.

Training Course Summary

Our Negotiating Leveraged Loans in Private Equity and Corporate Transactions training course focuses on the club and syndicated leveraged loans provided to both corporate and PE borrowers (i.e. typically this covers loans > 2.0x Debt/EBITDA for most sectors). European leveraged Loan markets have experienced significant changes over the last few years on several fronts. Larger, syndicated and leveraged finance and club deals have seen the importation of terms from the bond markets (e.g. grower baskets and cov-lite, cov-loose packages). Many of these larger deals have also imported N.Y.-style language, which is more familiar to U.S. borrowers and lenders. At the same time, direct/alternative lending had made significant inroads into the lending market, bringing a more eclectic approach to lending (e.g. a preference for a bullet, as opposed to amortising facilities).

Whilst there are subtle differences between the objectives of corporate and PE borrowers, both share a common objective of seeking to obtain the optimum terms, pricing and flexibility which will allow them to execute their strategic objectives. The larger deals, where borrowers have the option of accessing the high-yield bond market, offer borrowers greater flexibility. However, smaller facilities have also benefited from stiff competition from direct lenders (which reaches well below that threshold - in some cases 15 million), which has forced banks and other lenders to offer borrowers better terms and pricing (e.g. grower baskets have been seen in facilities below 30 million).

The topics aim to provide participants with an understanding of the trends and key issues affecting loan facilities in both club deals and syndicated deals, and provide borrowers and lenders with a template of how to approach the negotiations. Our Negotiating Leveraged Loans in Private Equity and Corporate Transactions training is aimed at borrowers and lenders as well as lawyers, accountants, debt and corporate advisory and other professionals involved in these transactions.

Whilst there are subtle differences between the objectives of corporate borrowers on the one hand and PE borrowers on the other, there is a high degree of overlap across.