What have been the key areas of negotiation between borrowers and lenders in the last two years?
The key areas of negotiations between borrowers and lenders have been:
These are usually heavily negotiated at principal level.
Debt providers typically request security interests not only in the assets of the acquisition vehicle but also in the assets of the target and all operating subsidiaries. For the acquisition vehicle, this typically includes security interests in:
• the target's shares;
• the rights and claims under the acquisition documents.
For the target and the operating subsidiaries, this typically includes security interests in:
• bank accounts;
• intellectual property;
• real estate;
In light of the financial assistance legislation (please see question 18 above), all upstream (or sidestream) securities given by an Austrian corporation need to be given subject to limitation language referring to the mandatory legal provisions. This limitation language is usually subject to negotiations between the parties.
Security realization principles
Borrowers usually try to agree on realization processes which make higher sales proceeds more likely.
Events of default
Events of default are usually negotiated in detail between lenders and borrowers.
The loan agreement typically provides for positive and negative covenants to ensure a certain conduct of business by the target group. In addition, the loan agreement usually provides for regular financial testing, reporting and information covenants. Exclusive lender clauses and intercreditor arrangements are entered into to address structural subordination of debt, priority and rights upon the occurrence of an enforcement event.
The scope of the collateral package, regarding which collateral will be required in addition to the shares of the target, is among the most heavily negotiated issues in financing documents.
Among the deal specific provisions in a loan agreement, the representations and warranties, covenants, conditions precedent, and events of default are the most heavily negotiated provisions. With respect to the covenants, in addition to financial covenants, those covenants which would place restrictions on the business operations of the target company (such as any restriction on capital expenditure by the company) are the most heavily negotiated.
Negotiations tend to be around questions of financial covenants definitions (e.g., EBITDA, Leverage Ratio, etc.), material adverse changes and other business related terms.
The general trend is that covenants tend to get lighter in most acquisitions financings. In particular, financial covenants remains a key area of negotiations, with borrowers continuously pushing for lighter covenants. That said, the key terms of a Norwegian financing are still quite far less sponsor/borrower friendly as compared with UK and European deals. In addition, lenders are frequently seeking to increase their ability to transfer their commitments without the consent of the borrower.
The key areas of negotiation are, similar as in other jurisdictions, the financial covenants, certain fund mechanism, clean-up concept, prepayment provisions, security package, debt push down and flexibility in terms of future facility increases. From a Swiss tax law perspective, substantive negotiations take place around provisions to mitigate withholding tax risks which may result in the restriction of transfers to new lenders, the limitation of the use of proceeds in Switzerland or an obligation to obtain tax rulings.
Although the level of negotiation strongly varies per transaction, the key areas of negotiation in most transactions evolves around the general undertakings (even more so for buy-and-build companies), the financial covenants (in particular the use of equity cures and the scope of EBITDA normalisations) and financial reporting. We do see the leveraged loan market, including traditional banks, becoming more accepting of looser covenants as a result of increased competition in the market.
Over three quarters of European leveraged loans are now covenant-lite (with no financial covenants for the term loans and a ‘springing’ covenant for the benefit of revolving lenders only). Many loan agreements on larger deals now contain New York bond-style covenants, importing bond market concepts.
Although the level of negotiation strongly varies per transaction, the key areas of negotiation in most transactions evolves around the general undertakings (even more so for buy-and-build companies), the financial covenants (in particular the use of equity cures and the scope of EBITDA normalisations) and financial reporting. We do see the leveraged loan market, including traditional banks, becoming more accepting of looser covenants as a result of increased competition in the market (so-called “cov-lite loans”).
Depending on which side the party is involved in the negotiations, the approach may be different.
From the lender's perspective the important issues are:
a. increased costs related to the introduction of new European regulations in this area, such as Basel II and Basel III, on the basis of which new costs may be generated in the future;
b. transfer of rights clause enabling the lender to transfer financing to another entity.
From the borrower's perspective the important issues include:
a. depending on the borrower's needs in terms of their business, clauses relating to negative pledge, non-disposal of assets, financial indebtedness, merger and acquisitions;
b. material adverse change (MAC) clause allowing the lender to qualify practically any event as an event of default under the loan agreement;
c. clauses referring to possible changes in law in the future that would increase the cost of financing for the borrower.
Key areas of negotiation between borrowers and lenders in financing agreements include, among others: definition and mechanics of distributions, market disruption provisions, breakage costs and order of repayment upon triggering of a voluntary repayment. Material representations and warranties and certain borrower covenants are often discussed, as well.
Financial covenants remain a hot topic among borrowers and lenders, with a push towards relaxation of covenants, less testing frequency and more flexibility in sponsor’s equity cure rights. Borrowers are also keen to build in flexibility for exit strategies such as an IPO of the group up front.
Referring to Question 19, the key areas of negotiation in credit agreement negotiations depend on the outcome of the term sheet negotiations. Overall, borrowers and lenders have had detailed discussions of thresholds for covenant trigger events and on covenants as a whole, as well as on collateral and security packages. Reflecting general trends in other markets, the number and strictness of covenants as well as the required collateral and the extent of security packages demanded have been decreasing in Finnish transactions as well. Further, it has become customary over the last few years in private equity deals for financial sponsors, as lessees, instead of lessor banks (which overwhelmingly provide debt financing in Finland) to draft the credit agreement.
For large and mid cap transactions, there is a general trend in the acquisition finance market to only put in place a Term Loan B to take into account the weakening of banking monopoly prohibitions and covenant lite documentation. In addition, sponsors often obtain provisions of a springing covenant whereby the financial ratios are tested only when a certain percentage of the revolving credit facility is drawn.
However, for small and mid cap transactions, an acquisition amortizable term loan are still widely used.
For all type of financings, there also has been an increase in negotiations relating to sanctions.
Aside from the obvious commercial points for negotiation, sponsors have been pushing for more favourable terms in certain key aspects of the credit agreements:
Credit agreements have generally tended to have only a covenant lite protection (with no protection for term loan lenders and springing financial covenants for revolving lenders only). In the same context, cure rights for financial covenants are almost always EBITDA cures, where the cure amount does not decrease the borrower’s debt but increases borrower’s EBITDA (giving any cure a commercially significantly greater effect). Calculation of EBITDA has frequently taken into account cost savings and synergies from acquisitions (or other initiatives), in many cases even on an uncapped basis. Especially on larger deals the credit agreements many times incorporated a New York notes style covenant section.
Many credit agreements allow the incurrence of additional debt subject only to a financial ratio test and in any case allowing for a certain “freebie” amount which can be incurred at all times. Lastly, credit agreements have been increasingly tightened with respect to assignments and transfers which can be made without the borrower’s consent, particularly with respect to assignments/transfers to competitors or loan-to-own investors.
In the last two years there is very limited access to finance for businesses in Greece. As a result, lending activity in the Greek market was mostly limited to refinancing and rescheduling transactions. In this context, the main negotiations are related to financial covenants and repayment schedules as well as the provision of additional security.
Over the last two years, the key areas of negotiation include covenants and associated baskets around the use of cash, mandatory prepayment triggers and assignment and transfer provisions (and, in particular, the scope of white/black lists) and governing law. Accordion facilities are quite common features, as well as options to extend and the mechanics around exercising these options tend to be closely scrutinised.
In contrast to the UK, the local Irish market has not embraced cov-lite transactions, although in recent deals we are starting to see a relaxation of permissions around use of cash. Consequently, transactions involving local Irish banks will typically include substantial covenant protections. As a result, certain Irish borrowers have sought financing from foreign banks or the bond markets. It remains to be seen whether new alternative credit providers that are entering the market post-Brexit will reduce the requirement for significant covenant protection on wholly local deals.
Another common feature in the leveraged acquisition finance market is the use of certain funds language in the loan agreement even where the borrower is not a listed company.
The scope of representations and covenants remain a hot topic in many finance deals. In that respect, more covenant-lite credit agreements are now being seen on the market.
Negotiation has focused on the terms of “most favored nation” pricing protection of syndicated term loans as well as continued convergence with U.S. high yield terms. In addition, 2018 saw certain borrower advancements in high yield terms where the market had historically been slower to adapt.
We have seen an increase in negotiations relating to extension options in loan agreements (primarily a three year option with an optional one plus one year extension). We have also seen somewhat of an increase in negotiations relating to sanctions in the past couple of years which has led to a new, more borrower friendly, market standard.
The most contentious points of negotiation in credit agreements over the past two years include the controlling of floating interest rates and the margin charged over the base rate, the definition of material adverse effects triggering events of default, the degree of clearances and approvals imposed by the syndicate on the borrower, and the management of dividend distributions subject to the accomplishment of pre-agreed financial targets.