This Yankee loans course examines the issues driving these trends, the typical terms of Yankee loans and how they differ from traditional European LMA-based senior facilities.
Yankee loans (or TLBs as they are also known) refer to senior syndicated facilities provided to European borrowers which, initially, were sold to mainly U.S. based investors or were governed by New York law and drafted in line with U.S.style credit documentation.
Yankee loans have experience strong growth in Europe over the last 18 months for a variety of reasons. First, an increasing number of European borrowers (most recently Altice) have sought to take advantage of the more borrower-friendly terms offered by these loans; second, the globalisation of the debt markets (particularly in leveraged finance) has seen an increasing number of U.S. credit funds tap into the higher yields available from European borrowers (although this spread has narrowed); third, U.S. based Private Equity funds in Europe have been keen synchronise their pari loan/bond capital structures, by aligning the terms of their loans more closely with their bonds.
This latter trend has been particularly influential in terms of driving convergence of loan documentation towards incurrence-base high yield covenants and finally, both the U.S based PE firms and U.S. investors understandably prefer more familiar U.S. style credit documentation since this affords them better understanding of the key terms and conditions in the loan both at the time of investment and in terms on on-going monitoring. The trend towards using NY law is supported by data from DebtXplained which indicates that, in 2014, nearly half of all Yankee loans were subject to New York state law and this trend seems to be accelerating in 2015.
The greater willingness on the part of U.S. investors to accept bond-style covenants (and thus lower lender protection) has been motivated by two drivers; first, their aversion to reinvestment risk (which explains their preference for bullet structures and antipathy to cash sweeps) and second, their greater focus on liquidity. The depth of the U.S. loan market means these lenders are willing to trade less investor protection in exchange for the liquidity, specifically the ability to trade out prior to distress.
The approach of U.S. Investors means that Yankee loans mimic many of the features found in high yield bonds with the same advantages even if these loans are drafted under English law. Specific examples include; reduced financial-maintenance covenants (e.g. either cov-loose or cov-lite seen in Ceva Sante Animale and more recent deals) together with greater flexibility across a wide range of corporate actions particularly the ability to incur and secure additional debt (via bond-style ratio debt baskets and carve-outs baskets for debt incurrence), the ability to sell assets together with flexibility in dealing with the proceeds, bond-style approach to permitted payments (using restricted payment baskets with carve-outs) and, more recently, greater flexibility on exceptions to mandatory prepayments.
This seminar examines the typical terms of Yankee loans in the current market and how they differ from traditional European LMA-based senior facilities together with the trends driving these developments.