Slim Loan Supply Can Mean Compliant Lenders. Not This Time

(Bloomberg) -- Lenders in Europe’s leveraged loan market have won concessions on a spate of deals from private equity sponsors.

It’s unusual that borrowers have met with resistance when supply is scarce. Loan managers say this may be due to increased scrutiny by regulators and rating agencies over loose terms, and could point to a sustained shift in dynamics in the ongoing tussle over documentation.

Five borrowers have rowed back on their attempts to secure more flexible loan terms this year. Amer Sports Oyj has made changes to its loan facility, while BVI Medical Inc. Independent Vetcare Ltd., Comexposium Group and Ahlsell AB have also tightened their terms.

Managers enjoyed similar power last summer when a supply glut gave them room to pick and choose. Lenders now say some transactions have term sheets that are even more aggressive than those seen at the end of last year.

“In a couple of occasions lawyers and arrangers have pushed too far and perhaps crossed the line of what’s acceptable in some recent transactions," said Thierry de Vergnes, European head of bank loans at Amundi SA.

The fact that investors are collectively trying to resist the most aggressive terms may draw a line in the sand for future transactions, Vergnes said.

Sharpened focus on looser terms from regulators and rating agencies has spurred investors in Europe’s loan funds to take note, prompting managers to take a tougher stance, a London-based portfolio manager said.

The volatility seen late last year has also heightened managers’ efforts to ensure they are investing in the credits with the right lender protections.

The pushback also comes at a time when money managers, including Allianz Global Investors, AXA Investment Managers and Janus Henderson Investors, have formed a group to demand better terms in Europe’s leveraged finance market.

Core List

PE firms and arrangers may have been emboldened by the lack of M&A backed supply to push unpalatable terms to see what sticks. There is no downside to putting the same clauses in, said a London-based arranger, especially if it helps win a mandate when fresh opportunities are hard to come by.

But investors are only engaging if they know the terms will change, said another London-based arranger said.

While revisions to terms differ from deal to deal, investors remain focused on a core list of terms that they will seek to strip out. These include clauses around incremental debt, reporting, MFN language, ticking fees and EBITDA adjustments, among others.

For instance, in the case of Amer, the scope for earnings adjustments and dividend payments has now narrowed.

“We’re noticing a trend of investors becoming more disciplined on documentation in recent months, regardless of whether they like the credit or not,” said Ben Thompson, a managing director for high-yield and leveraged finance in Europe, Middle East and Africa.

Find a list of deals that changed documentation in lenders’ favor here.

--With assistance from Ruth McGavin.

To contact the reporters on this story: Sarah Husband in London at shusband@bloomberg.net;Laura Benitez in London at lbenitez1@bloomberg.net;Marianna Aragao in London at mduartedeara@bloomberg.net

To contact the editors responsible for this story: Tom Freke at tfreke@bloomberg.net, V. Ramakrishnan, Charles Daly

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