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Negotiating Leveraged Loans in Private Equity and Corporate Transactions

Negotiating the key commercial and legal terms in club and syndicated facility agreements

Negotiating Leveraged Loans in Private Equity and Corporate Transaction

A one-day course

  • The trainer is a Senior Consultant to Grant Thornton in Debt Advisory so has visibility into current trends affecting loans for both corporate and sponsored deals
  • The trainer was a senior consultant to Reorg Debt Explained for 9 years so developed insight into large cov-light deals across Europe
  • The trainer’s role at Reorg Debt Explained also provides insight into the trends in the European high yield bond market which have been imported into leveraged loans (e.g. grower baskets, debt reclassification)
  • The trainer’s career also includes stints in commercial and investment banking and law, so he has experienced debt from the perspective of the lender, advisor to both borrowers and lenders and also from a legal perspective in drafting loan documentation
  • The trainer has a global perspective on loans in different jurisdictions having presented programs or advised on debt products, to clients in Europe, Africa, North America, Asia and Australasia

  • Get an in-depth understanding of the key commercial issues in loans and loan documentation affecting corporates and PE borrowers in Europe particularly how Covid-19 is and affecting lenders in the approach to the loan (structure, terms and pricing)
  • Understand how and why the ‘Permitted’ baskets are important to borrowers
  • Analyse the issues borrowers must consider in accessing additional lines of liquidity (e.g. Incremental debt /Accordions or RCFS) co to provide liquidity to tide them through the crisis
  • Understand the relevance of the voting various thresholds in the loan and how they can impact the lenders especially in distress
  • Identify the key subsidiaries on the Restricted Group and how they can adversely impact recovery in distress
  • Learn which mandatory prepayments really matter and why some Events of Default should be structured as cash sweeps
  • Appreciate which financial covenants matter and what to expect in the different types of loans (syndicated vs clubs vs bilateral vs unitranche)
  • Identify which points to negotiate in equity cures and why deemed cures matter
  • Understand how grower baskets work and interact with incremental facilities, and how debt reclassification can magnify leakage for lenders
  • Isolate the key issues in negotiating Most Favoured Nation (MFN) clauses
  • Understand the key trends in restrictions on transferability and the role of White & Black lists and why they matter in distress
  • Case Studies: The programme will include a case study comprising a composite term sheet (drawn from real-life transactions) which will be used to analyse and discuss key aspects of the loan from the perspective of both borrower and lender. Aspects covered include, inter alia, the market flex (what is it, pros and cons), guarantor coverage levels and scope, analysis of the Restricted Group, information and financial undertakings, CPs margins, margin ratchets and fees, cash sweeps and permitted baskets.

Key negotiating strategies – the Borrower’s view

  • Criteria for selecting the most appropriate lender - Banks vs Direct lenders
  • Key differences in approach between banks and direct lenders
  • Pros and cons of Banks vs Direct lenders
  • Some banks (and branches) are different
  • Can direct lending be applicable for corporate borrowers?
  • Strategies for negotiating the key commercial terms
  • How to approach the term sheet
    • Hard or soft terms?
    • Focus on everything or only a few “critical” issues
  • Do debt advisors offer value for money - Getting the best from your advisors
  • What about the fees?
  • A Checklist for borrowers 

The Lender’s perspective

  • The role of the information covenants – why they matter
  • How the financial covenants impact other areas of the loan
  • What to focus on in the collateral package - the pros and cons of
    • Negative pledges
    • Guarantees
    • ""Secured"" guarantees
    • The role of share pledges how and why they really matter 

Scope of the Loan

  • The “Restricted Group” - why it matters
  • What is a ""Material Subsidiary"", whats the market & why it matters
  • Non-material subsidiaries - how and when they matter
  • Immaterial subsidiaries (what are they)
  • Dormant subsidiaries – why they may matter
  • The potential value leakage posed by non-guarantor restricted subsidiaries (NGRS) and how lenders can mitigate these risks
  • Unrestricted subsidiaries 

Changes to the Lenders 

  • Transferring a loan – methods, pros and cons
    • Novation
    • Assignment – legal and equitable
    • Sub-participation
  • Restrictions on Transferability
    • Why transferability is important for lenders - what they want and why
    • Ability to transfer - Consent vs Consultation
    • What does consultation mean & is it any use to lenders in practice?
    • What is reasonable consent (of the borrower)?
    • What are the trigger points when consent is no longer required?
  • The role of White and Black lists 

Voting thresholds

  • Key voting thresholds &- how & why they matter
  • Different approaches in syndicated vs club loans
    • Majority lenders
    • Unanimous consent
    • Super-Majority lenders – “typical” scope & thresholds
  • How and when Yank the Bank can be used to manipulate the syndicate
  • Role of Snooze & Lose - how distressed lenders can use this to gain control
  • Treatment of Hedge counter-parties 

Debt Service

  • Differences between banks and direct lenders to amortisation
  • Interest and default interest periods
  • Libor/Euribor floors
  • Original issue discount (OID) – use in the deal, market trends
  • Margin and margin ratchets
  • Increased costs & gross-up clauses 

Mandatory prepayments (Cash sweeps)

  • Excess Cash flow defined
  • Excess Cash flow – typical deductions
  • De minimis basket
  • Cash sweep – step downs (PE vs Corporate)
  • Use and Application of Retained Excess Cashflow 

A word about the ‘Permitted” baskets – how and why they matter

  • Role and application of baskets in the loan market
  • Grower baskets
    • How are they structured
    • What is the specified variable - EBITDA, Total or Tangible Assets (pros and cons of each)
    • What happens when the specified variable subsequently declines?
  • Builder baskets - when are they used
    • How builder baskets can be abused by borrowers
  • Reclassification and splitting between baskets 

“Permitted” definitions – how & why they matter

  • Role and relevance of the “Permitted” definitions
  • Synchronising the “Permitted” baskets
  • Permitted Acquisitions
    • Typical carve-outs- hard vs soft baskets
    • Additional restrictions
  • Permitted Financial Indebtedness / Security / Guarantees
    • Scope – Financial Indebtedness defined (typical exclusions)
    • Incremental debt- scope and coverage
    • Accordion facilities
      • Typical terms & conditions
      • Pricing - MFN & sunset periods – what’s market
    • General & other debt-related baskets
  • Permitted Disposals
    • LMA approach - Typical ‘ordinary course of business’ Carveouts
    • Cov-lite approach – two requirements
      • Fair Market Value (Independent Board, Fairness opinion?)
      • Proceeds in ‘cash or cash equivalents or ‘designated non-cash consideration’
    • Interaction with Mandatory prepayments
      • Annual basket carve-out
      • Excluded Disposal proceeds / Reinvested amounts
  • Permitted Distributions
    • LMA vs. Cov-lite approach
    • Issues re Fair market value
    • Issues re Cash and cash equivalents
    • What about designated non-cash consideration
  • Permitted Payments - typical carve-outs
    • Basket carve-outs
    • Subordinated debt, equity & equity substitutes
    • Management/monitoring fees 

Covenants & Undertakings generally

  • Covenants generally – three categories
  • Information covenants
    • Why and how they matter?
    • Issues for lenders issues for borrowers
    • LMA v Market approach
  • General undertakings
    • Guarantor coverage – scope and issues for borrowers
    • What comprises ‘security’?
    • Core carve-outs for sponsors
    • Carve-outs for corporate borrowers 

Financial covenants and Equity cures

  • The main covenants per the LMA & market
    • Cash flow cover
    • Leverage
    • Interest cover
    • Capex limits
    • EBITDA limits (not LMA)
    • Springing covenants – use, application and triggers
    • Other matters – starting headroom
  • Market trends
    • Number of covenants
    • Headroom
    • Impact of Covid 19
  • Equity cures
    • What do they apply to EBITDA, leverage, cash flow?
    • Terms - How many, consecutive, over-cures, application of the funds
    • Cures in practice 

Default and Events of Default

  • Default vs Event of Default
  • What are the key EoDs
  • What about cross-default
  • MAC - do they still matter
    • MAE
    • Why it matters (appears in numerous clauses in the loan)
    • Potential impact of MAE
    • Scope of the MAE – what are the critical issues in the MAE

The trainer is a consultant, public speaker and author with expertise in private equity, debt advisory, restructuring and infrastructure. He is a Senior Advisor to KPMG Finland, a Senior Advisor to Reorg EMEA Covenants, the leading provider of information to the European High Yield community, and a Senior Consultant to Grant Thornton UK.

Training programmes are provided to a wide range of blue-chip clients in Europe, Africa, the Middle and Far East, North America and Australasia. In-house clients include banks (BNP Paribas, Société Générale, ING, Barclays Capital, Bank of China, RBS, SEB); lawyers (Baker & McKenzie, Skadden Arps, Sullivan & Cromwell, Cadwalader, Latham & Watkins, Weil, White & Case); advisory firms (Lazard, PWC, M&A International, KPMG, EY, Deloitte); PE firms (Cinven, Advent, Barings Asia, Waterland); corporates (Siemens, Airbus, Turkcell, Candy Crush, Gunvor, Statkraft) and governmental bodies (the UKLA, the EBRD, the ECGD, Omani Oil Corp.)

He qualified in South Africa both as a Chartered Accountant, with Deloitte, and as a lawyer with Hofmeyr where he was involved in structuring a number of high-profile project financings including BMW 3 Series, Ford Sierra, GM, Sappi and Mondi.

When he moved to London and joined Lazard Brothers as a corporate finance executive he was involved in a wide range of public and private transactions. Subsequently he joined Hoare Govett as an assistant director where he acted as an advisor to smaller listed companies and was involved in several syndicated Euro-Equity Initial Public Offerings.

In 1991 he joined ABN Amro’s cross border M&A team prior to being transferred to MeesPierson Corporate Finance as a Director in Cross-Border M&A where he was also involved in a number of deals in Central Europe. During this time he was a member of the EU-PHARE programme and advised the Estonian government on their privatisation programme.

He is the Programme Director at the City Business School, London, for Infrastructure Finance for the M. Sc. programme in Business Administration and Finance.

He is a member of the Institute of Chartered Accountants in England & Wales and the South African Institute of Chartered Accountants. He completed a BA and an LLB at the University of Natal and a B. Compt. (Hons) at UNISA.

This programme focuses on club and syndicated leveraged loans provided to both corporate and PE borrowers (i.e. typically this covers loans > 2.0x Debt/EBITDA for most sectors).  Loan markets have experienced significant changes over the last few years on a number of fronts; first, larger, syndicated and club deals have seen the importation of terms from the bond markets (e.g. grower baskets and cov-lite, cov-loose packages). Many of these larger deals have also imported N.Y. style language, which is more familiar to U.S. borrowers and lenders.   At the same time, direct/alternative lending had made significant inroads into the lending market bringing with them a more eclectic approach to lending (e.g. a preference for bullet, as opposed to amortising facilities).

Whilst there are subtle differences between the objectives of corporate and PE borrowers, both share a common objective of seeking to obtain the optimum terms, pricing and flexibility which will allow them to execute their strategic objectives. Clearly the larger deals, where borrowers have the option of accessing the high yield bond market, offer borrowers greater flexibility however smaller facilities have also benefitted from stiff competition from direct lenders (which reaches well below that threshold - in some cases 15 million) which has forced banks and other lenders to offer borrowers better terms and pricing (e.g. grower baskets have been seen in facilities below 30 million).

The topics aim to provide participants with an understanding of the trends and key issues affecting loan facilities in both club deals syndicated deals and provides borrowers and lenders with a template of how to approach the negotiations. The programme is aimed at borrowers and lenders as well as lawyers, accountants, debt and corporate advisory and other professionals involved in these transactions.

Whilst there are subtle differences between objectives of corporate borrowers on the one hand and PE borrowers on the other; there is a high degree of overlap across.

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