Debt Explained, the leverage finance data and analysis company, has released its latest Loan Market Update showing that investors are increasingly finding their ability to limit borrowers right to incur additional debt is being curbed. Plus restrictions on the yield of that new debt are being materially weakened potentially damaging the value of investors existing debt from those borrowers. The report tracks the terms and conditions associated with leverage loans and shows that Sponsors and Borrowers are increasingly having success in carving out exceptions to lender protections in respect of existing debt - the Most Favoured Nation (MFN) clauses.
The data shows that previously Investors were having some success in pushing back on Sponsor demands earlier this year. In Q1, almost 80% of deals had no sunset period – a period after which MFN status would disappear. This protected the market price of existing debt. The tide has turned in Q3 with only 31% of deals having indefinite yield protection. Levels of MFN protection are also settling – with a more borrower-friendly 0.5% being achieved under NY law as opposed to 1% in European law.
Further limitations being negotiated include MFN protection only applying where additional debt is in the same currency (19%); debt is not incurred under the “free and clear” portion of the incremental facilities basket (6%); interest on the additional debt was paid in cash other than from specified sources (6%) and the additional facility matured more than 12 months after the reference facility.
Other findings include:
- Covenant lite and covenant loose (leverage maintenance only) deals continue to dominate the market – however nuances are beginning to creep in;
- There has been a dramatic increase in the number of deals excluding mandatory prepayments following a Change of Control; and
- Q3 sees the return of hard caps for permitted acquisitions.
Stephen Mostyn-Williams, Chairman of Debt Explained, explained that the report shows how important it is to track the details of the terms and conditions in the leverage finance market.
“While MFN protection remains a go-to tool to protect the value in the market of existing debt,sponsors and borrowers are increasingly finding ways to carve out exceptions to it. It is only by tracking these details over time and with an overview of the whole market, that it is possible to see how the terms and conditions are being used to drive a more borrower-friendly market.”