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Private Credit / Unitranche - ASPAC

2 Part Course  |  Reviewing Key Trends, Structures, Documentation & Topical Issues for Direct Lenders, Banks & Borrowers

Advanced Negotiation Issues in M&A – ASPAC Training Course

  • The trainer is a Senior Consultant to Grant Thornton in Debt Advisory so has visibility into current trends in the (opaque) direct lending / unitranche market and challenges in structuring capital structures from the borrower’s perspective
  • The programme includes data on key commercial terms re margins, fees, leverage, covenants, sweeps and other relevant matters
  • Through his training/consultancy practice he has exposure to a wide range of parties around Europe involved in the direct lending market including funds (e.g. Ares, Carlyle Group, Northleaf, Muzinich, Bluebay, Ardian); banks (e.g. Berenberg, Nordea, HSBC and BNP) and debt advisory (e.g. Deloitte, Lincoln, PWC, Houlihan Lokey) so gains additional insight into market trends from those varied sources
  • The trainer has over 20 years’ experience in junior debt providing valuable insight into the legal, structuring and practical challenges which arise in using junior debt especially the inter-creditor issues
  • The trainer’s career also includes stints in commercial and investment banking, accountancy, tax and law providing insight from a wide range of perspectives.

  • Market dynamics and players – The market in private credit is evolving rapidly in ASPAC especially in the developed economies. ANZAC saw issuance of $2.8Bn in 1Q22 boosted by Greencross’s $1Bn deal. The programme identifies the main drivers underpinning these trends and discusses how and why this is likely to gain traction in the current (challenging) credit environment
  • Understand the range of products from private credit – private credit providers are eclectic in their approach to lending and will provide products across the spectrum from senior through junior (second lien, PIK) to various forms of equity (warrants, prefs and straight equity)
  • Understand the range of ‘Unitranche’ structures – ‘Unitranche’ is a term of art and covers a very wide variety of structures; the programme analyses the pros / cons and rationale of each structure classic product, FOLO/bifurcated, clubbed, syndicated
  • Bespoke Transaction Documents – unitranche loans are based on the standard LMA leverage precedent (neither the APLMA nor the LMA have produced precedents for Unitranche deals); however the market has developed various innovations in the credit agreement to protect the priority of the supersenior tranches (typically the RCF and the first out in FOLO structures). The programme identifies the key issues and discusses which terms are essential to super senior lenders and which are nice to have
  • Key commercial terms – private credit approach credit agreements from a differing perspective to traditional bank lenders (for example, cash sweeps, amortisation). The programme analyses these differences and explains the rationale behind this differing approach
  • Intercreditor issues – unitranche deals adopt a unique approach to intercreditor issues which differ greatly from traditional senior/junior structures (which feature mezzanine or 2nd lien). The LMA has produced a Senior/Super Senior Intercreditor precedent for Unitranche deals precedent which seeks to reconcile the competing interest of the super senior lenders vs the Unitranche providers. The programme analyses the key issues arising from these novel arrangements in terms of which the (more junior) Unitranche providers control enforcement (at least ab initio)
  • ABL & Unitranche – Deals which include ABL to fund working capital (as opposed to RCFs) raise a host of contentious issues for both ABL and Unitranche. The programme considers these issues and provides guidance on potential solutions
  • ESG - Discuss impact of ESG principles on the market and issuance of sustainability linked-loans on unitranche deals
  • NOTE: deal metrics will be illustrated with reference to European and US data since data for ASPAC not available

Review of lenders and the market

  • The funding options in Asia Pacific
  • Convergence of private credit with traditional loan market
  • The direct lending market in ASPAC – deals and country data
  • Review of direct lending fundraising landscape
  • The private credit landscape – from senior through to Holdco PIK
  • Review of different fund strategies
  • Review of target returns for the different sectors

Review of “Unitranche” structures

  • The basic deal structures – senior, Unitranche, other
  • Wide variety of structures
    • The “classic” structure
    • Bifurcated / FOLO Unitranche
    • Clubbed Unitranche
    • Syndicated Unitranche
    • “Junior” Unitranche
    • JV structures
    • Holdco PIK
  • Review of ranking/priority in different deals
    • SSRCF, Unitranche A, Unitranche B and Hedge
  • Interaction with the bank-led facilities - RCF, Acquisition, Capex and ABL

Facility size and leverage

  • Facility size and application – how small or large can it go?
  • Review of data on tranche sizes
  • Review data on leverage metrics
  • Tenor – what’s market?
  • Bullets vs. amortising – impact on the deal
  • Role play: Traditional senior / Mezz vs Unitranche structure

Coupon structure, Margins, ratchets, fees & call protection Tenors

  • Structuring the coupon
    • Cash
    • PIK - PIYC / Toggles
    • Equity kickers
  • Review data on margins for Unitranche and RCF
  • Other yield protection aspects
    • Use of ‘Floors”
    • Margin ratchets
    • “Typical” arrangement fees
  • Call-protection
    • Why does it matter?
    • “Hard vs soft call protection
    • Equity kickers
    • Why does equity matter to private credit
    • Key issues (conflicts) for lenders & borrowers (information rights, representation, dilution)
Permitted Actions, Cash Sweeps, Portability
  • How prevalent are grower baskets
  • Permitted Indebtedness
    • Accordion facilities
    • What’s market in terms of caps on incremental debt?
    • How prevalent is MFN?
  • Permitted Disposals
    • What are the ‘market’ limits and where do they kick in
  • Other Permitted actions
    • Distributions – how are these policed?
    • Sponsor fees – limits
    • HoldCo admin fees – market approach
  • Mandatory prepayments (Excess cash)
    • How prevalent are they
    • How many step downs
    • A different approach- Banks vs Funds
  • Mandatory prepayments (Disposal proceeds)
    • The risk for super senior lenders
    • The three market-based approaches
  • Portability on Change of Control
    • Impact on mid-market deals
    • Pros and cons for PE, Funds and Banks
    • Typical controls on Portability

Use and application for non-sponsored corporate deals

  • A viable option for corporate deals?
  • Pros and cons of using unitranche in corporate deals
  • Issues for corporate (non-sponsored) deals
  • “Typical” use and application for European corporates

Sustainability (ESG) linked-loans (“SSLs”)

  • Market trends data
  • Recent deals
  • Pros and cons of SSLs
  • ESG margin ratchets
  • Sustainability-linked loan principles (LMA guidelines)
    • Selection of KPIs
    • Calibration of KPIs
    • Loan characteristics
    • Reporting
    • Verification

Financial maintenance covenants

  • Review of the standard LMA covenants
    • Current market approach to covenants – how many and which ones?
    • What about headroom/cushion –what’s market?
  • Separate covenants for the Super Senior lenders
    • How are they structured - Springing covenants
    • Additional headroom vs the standard covenants
  • EBITDA add-backs
    • Exceptional items – market limits
    • Cost savings – market limits
    • Impact on other aspects of the loan
  • Equity cures
    • The ‘typical’ terms
    • Why equity cures are necessary for lenders
    • Issues for borrowers
    • Topical matters - EBITDA cures allowed

Intercreditor considerations

  • Concerns of the Super Senior lenders (“SSL”)
  • Potential problems for Super Senior Lenders
  • Solutions for the Super Senior Lenders
    • Controls (veto rights) on Amendments and Waivers (“A&Ws”)
    • Review the list of A&Ws which require separate SSLs approval
    • Which A&Ws are problematic for the Unitranche
    • Disenfranchisement of Sponsors
  • Role of Material Events of Default (“MEDs”)
    • What are the MEDs the SSLs typical seek?
    • Which MEDs are problematic for the Unitranche?

Enforcement Rights & Standstills

  • Who is the Instructing group?
  • The Option to Purchase
    • Potential problems
    • Alternative solutions in practice
  • Enforcement Standstills on the SSL
    • Why are they needed
    • How long are they (market)?
  • When can the SSL take enforcement action?
    • Review the main circumstances when this applies
    • What controls / protection does the unitranche have?
  • Step-in rights for the SSL
    • What is the current market position?

Distressed disposals – potential problems and solutions

  • Why this matters
  • Position when the Unitranche is the Instructing Group
    • Steps the SSL can take to protect their interests
  • Position when the SSL is the Instructing Group
    • How does the unitranche protect their interests
    • Fairness opinions – who provides these
    • Competitive sales process – what does this mean
    • Other methods to protect the Unitranche

Intercreditor Issues when ABL & Unitranche

  • How and why this differs from structures with an RCF?
  • Distinction between classic unitranche and 1st out / last out structures
    • Security position
    • Enforcement standstills
    • Control of enforcement
  • The key areas for negotiation
    • Who is the Qualifying Floating Charge Holder (why this matters)
    • Standstills on the ABL

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.

Direct lending in general and Unitranche, in particular, continues to make significant inroads across Europe over the last 12 months reporting YOY growth of 22% (source: Deloitte, Alternative Deal Tracker).

Growth has been driven by numerous favourable factors. First, the relaxation on direct lending in France, Germany and Italy; second, the ECB restrictions on leveraged debt (which affects mainly banks but not direct lenders) and third, the large amounts of capital which continue to make their way into funds which is often augmented by fund-investors willing to co-invest in large-ticket individual deals. Together these trends have seen direct lending carve out nearly 50% market share of mid-market deals in the UK and Germany whilst France is second in terms of number of deals*. Moreover, direct lenders are gaining traction in other European markets, particularly the Netherlands, Spain and Italy*.

However, the funds have not had it all their own way as debt markets have remained highly liquid with copious amounts of funding available from both the traditional bank-driven loan markets and the high yield bond market. Together these forces have exerted downward pressure on both margins and terms for all lenders across all sectors including.

In response, funds have scaled up their activities in terms of fund size in order to fund ever larger transactions and loans over 1$ billion (e.g. Daisy Group) are now available from certain funds (Ares and GSO to mention two).

Unitranche continues to evolve as a highly bespoke product offered in a wide variety of forms including; clubbed, bifurcated, “dual-tranche”, First out-last-out (as provides by Ares for the Primonial deal in France) and even junior (HoldCo PIK) Unitranche, all of which seem to beg the question of whether the term ‘Unitranche’ adequately describes these various structures. Direct lenders are being forced to develop a wider range of strategies and products in an effort to differentiate their offering from other providers and some are increasingly willing to offer undrawn facilities as part of the financing (q.v. the £50 million undrawn CAPEX line provided by Goldman’s as part of Unitranche financing for Zenith).

Documentation continues to adapt to the myriad of structures in the market which has had to develop to accommodate the position of the RCF lenders (and the first out Unitranche), both of whom lack the ability in 'LMA standard leveraged loans', to control amendments, waivers and acceleration despite being super senior. This has led to the creation of veto rights and a new class of defaults (Materiel Vents of Default) which are primarily for the benefit of those lenders.

The complex nature of these structures means that Intercreditor issues have become a key negotiating area for lenders and borrowers, and the publication of the Senior/Super Senior Intercreditor precedent for Unitranche deals recognises both the evolution in the market and also the desire to achieve standard terms.

Direct lenders have also gained significant traction in Asia Pacific primarily in Australia which has seen over $4.2 billion of issuance in that market by September 2019 since the launch of unitranche in 2017 by PEP & Carlyle in the iNovea Pharmaceuticals deal. More recent deals include the A$515 million unitranche used to back Advent's buyout of Transaction Services Group (New Zealand), the A$500 million Unitranche in TPGs buyout of Greencross and the Real Pet Foods A$435 million take-out of the senior and mezzanine facilities. Supply in Australia is being driven by a rash of private debt funds which have launched recently notably, Revolution Asset, Perpetual and Metrics Credit Partners. Unitranche has also been used in India in the AGS Health and Healthium Medtech deals and also in Taiwan (Gong Cha Group).

Participants will receive various models (including a professionally designed LBO model which measures debt capacity and exit returns).
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