The LMA Early Evening Seminar at Hogan Lovells Amsterdam on 1 October 2019 explored some trends in the leveraged finance market, with reports of a very healthy Dutch market, notwithstanding effects of Brexit, recession indicators in some European economies, trade wars and ECB interventions.
The panel, chaired by Hogan Lovells partner Wouter Jongen, reflected on a good pipeline for rest of 2019, increased competition due to ample liquidity, rising market share of debt funds, loosening of documentary terms and predictions for 2020.
Competition due to excess liquidity
Whilst 'top of the market' predictions have been ongoing for the last 18 to 24 months, the ground reality is more optimistic. Leading sponsors in the Dutch market have lenders lining up to finance their deals.
This flush of liquidity has helped with the upkeep of good sentiments, but has increased competition for lenders where the same assets are being chased by ever deeper pockets. Given the choice now available to sponsors, an important differentiator has become existing 'relationships'. Sponsors are not looking to drive their return on the basis of marginally better pricing, but for flexibility from funds who are willing to finance buy and build strategies and faith that debt funds will be reasonable should the investment go sour.
Documentary terms: everyone wants flexibility
Increased competition is giving way to continued loosening of documentary terms where sponsors are able to extract various EBITDA adjustments, a particularly from debt funds. Dutch banks are typically seen as more conservative in this respect.
A possible fightback for lenders is to resist transferability restrictions, which would be their most likely exit scenario should an investment become distressed. During a distress period, dealing with an industry competitor or a loan-to-own fund may be a distraction too far for sponsors, and this is broadly accepted by most banks and debt funds alike, but in an age of cov-lite terms and EBITDA adjustments, transferability provisions will continue to become more of an area of focus over the coming months.
What to do when financials weaken
When things are not going smoothly a delicate balance has to be maintained between responding to lender requests for information and the sponsor needing to stay ahead of the narrative by providing solutions with business plans and forecasts. A good solution should include a proactive all-stakeholder analysis, of which lenders are...