In European senior leveraged loans, what happens to cash received from sold material assets has become ever more complicated and the balance has swung in favour of sponsors. Traditionally, senior secured lenders would have first ‘dibs’ but this is no longer the case. We explore how the pool of asset sale proceeds available to senior lenders has drained to its shallowest point.
The Traditional Position
Senior lenders' have traditionally required sale proceeds to be offered to them first, to decide whether they want to be repaid or not. Alternatively, the borrowing group may be allowed to reinvest the proceeds in replacement assets, share acquisitions and sometimes certain other investments.
However, sponsors had started to chip away at this by:
- expanding the scope of reinvestment rights;
- raising the individual sale and financial year de minimis carve outs;
- adding "grower" elements to the de minimis; and
- removing asset sale baskets from the offer to prepay requirements.
However, at least for most deals, proceeds of sales made under the general asset sale basket remained within reach for senior secured lenders.
The introduction of high yield bond terms in European leveraged loans has made the situation more complicated. In addition to high yield bond terms, sponsors have sought additional terms to sweeten the deal. The end result is that English and European law deals are a truly metropolitan high yield/traditional/NY law/tailor made mash up.
The HYB Asset Proceeds Waterfall
High yield bonds typically allow asset sales as long as it is for fair market value, the restricted group receives 75% in cash (or equivalent) and sale proceeds are used to repay debt, reinvested or retained.
Under European deals, the position has been that asset sales are prohibited subject to certain baskets and an offer to repay. The debt that can be repaid in high yield bonds is often:
- Credit Facility debt;
- debt secured pari passu on transaction security;
- debt secured on non-transaction security assets; and/or
- debt of non-borrowers/guarantors.
This is the HYB Asset Proceeds Waterfall which proved popular with sponsors. Initially introduced into leveraged loans where there were high yield bonds in the capital structure, it has now been inserted as a standalone concept.
Debt Explained has continued to see deals using the HYB Asset Sale Proceeds Waterfall but with adaptations - often designed to direct more of the flow of funds towards sponsors. To find out more about these adaptations, log in to read the full report.
About This Report
The data is drawn from Debt Explained’s Representative Loan Terms (“RLT”) database tracking information from syndicated leveraged loans in the European market.
The report is based on those deals which were reviewed by Debt Explained and no distinction is made between deals with different governing laws unless otherwise stated. Unless otherwise stated, all data was drawn from RLT on 23 October, 2018.
Debt Explained’s Market Maker and RLT databases offer unique oversight of the European high-yield bond and leveraged loan markets, with more than 550 and 350 searchable terms respectively. A staple resource for all leveraged finance market participants – including capital markets bankers, legal advisors and asset managers – Debt Explained data reacts to the market in real time: subscribers receive detailed deal snapshots on new issues as information is released.
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Debt Explained creates and curates data and analysis on bond and loan deals through its proprietary databases and unique scoring and bench-marking products. Founded by Stephen Mostyn Williams in 2009, Debt Explained remains the first and only business to create unique searchable leverage finance data which is stored in its own customised databases from document content.
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