Yes, after months of banking lawyers grumbling that lax lending, sponsor-driven termsheets and a ‘through the looking glass’ attitude to risk from debt investors would end in tears, the sub-prime meltdown has caused it all to come to pass.
By late July it was clear the fallout was having a significant impact on the credit market across
Ashurst’s Mark Vickers says: “Credit quality of corporate
Some of those holding the parcel include the syndicate of banks behind Kohlberg Kravis Roberts & Co’s acquisition of Alliance Boots, reported to have delayed syndication of £5bn of senior debt after failing to find investors — and this is only the most visible of a string of deals that have left banks parcel-laden.
The main result of this dramatic shift in sentiment is a sharp reversal in the trend that has defined the leveraged finance market for three years: the increasing power and influence of sponsors at the expense of debt providers.
This trend achieved its controversial apex in the first half of 2007 when sponsors began successfully shoving ‘covenant-lite’ borrowing — where lenders sacrifice most of their normal powers to police borrowers — into the
It is not yet back to 2003, but lawyers confirm ‘cov-lite’ is dead in the water as a European product for the foreseeable future.
Good riddance, cov-lite
It will now be interesting to see how debt teams culturally aligned to borrowers, such as Simpson Thacher & Bartlett and Kirkland & Ellis, will adapt to the new environment as bank-friendly terms make a comeback.
Not lying down, according to
Wider interest-flex terms — which allow rates to be increased if a lender cannot syndicate — are again making an appearance, as are banks’ abilities to insert stricter covenants retrospectively.
Of wider interest to City lawyers will be whether the prospect of more costly debt will spell the end of an M&A boom that has often been financed by cheap debt. Certainly, private equity acquirers are expected to scale back their ambitions for the moment; one buy-out partner reports that the most worrying sign so far has been bumping into his clients in the gym.
Yet many M&A lawyers believe, with corporate profits still robust, share valuations within normal historical ranges and a new wave of acquirers in the shape of sovereign wealth funds, there is still solid support for deal markets. Indeed, many argue recent developments are a welcome retrenchment after a period of credit market excess. “It is a return to rational pricing,” says Vickers.
The test now will be how the market performs again in the key September period. The credit market remains somewhat fragile and vulnerable to shocks (collateralised debt obligation lawyers are particularly nervous right now), so a full-blown crunch cannot be ruled out. As banking lawyers enjoy a little more down time than they have been used to of late, the key to relaxation will be to resist wondering just how long it will last.
See Editors' Blog entry on cov-lite... and another entry on credit terms.
