Cov-lite (& Cov-loose) Loans

£695.00 +VAT

Clear

This Cov-lite Loans course can also be presented face to face in-house or via live in-house webinar.

Negotiating and analysing the key commercial terms and current trends in cov-lite and cov-loose loans

Cov-lite Loans Course Objectives:

Participants will:

  • Acquire a detailed understanding of the key terms in cov-lite (and cov-loose) loans and how these differ from the LMA approach
  • Review the current market approach to springing leverage covenants in terms of the RCF thresholds, headroom
  • Review the current approach to equity cure rights – when and how?
  • Gain an understanding of the key aspects (terms) of high yield bonds which have been imported in the cov-lite loan market
  • Understand the “grower” and “builder” baskets which are used in the “Permitted” baskets and the variables that drive them (e.g. EBITDA, Total / Tangible Assets)
  • Analyse the key various “Permitted” baskets and how these vary from the LMA approach (e.g. debt incurrence, acquisitions and disposals)
  • Analyse how debt can be can reclassified between the various baskets and the ratio debt basket
  • Review the current trends to the definition of EBITDA with focus on borrower-friendly add-backs and run rate adjustments
  • Discuss how the financial covenants and their constituents and how these affect other key terms of the loan (margin ratchets, debt incurrence)
  • Review lender protection in terms of yields, MFN and sunset periods and how borrowers can (and have) gamed the lenders
  • Topical issues in the market – restrictions on transfer (White and Black lists) – when can the lenders sell and to whom? Holding limits and restrictions

Cov-lite Loans Course Content:

Key Concepts

  • Review of the various types of cov-lite and cov-loose loans and how they are documented
    • Structure of English cov-lite loan
    • Structure of NY cov-liye loan
    • How to read/approach a New York style credit agreement
  • The Restricted Group
    • Inclusions and exclusions
    • Approach used in high yield bonds & why it matters
    • Re-designation of subsidiaries to and from the Restricted Group
    • Non-guarantor restricted subsidiaries
  • Material subsidiaries
    • What constitutes at material subsidiary – market approach to the threshold %
    • The various tests: EBITDA and other approaches
    • Relevance and application in the SFA
    • Date and manner of determination- Certificate (LMA vs market approach)
  • Information and financial reporting
  • Term Loan “B” vs LMA approach
    • Treatment of unrestricted group
    • Presentations
    • Access rights

A Word About Baskets

  • Use and application
  • Key variables and their ramifications
    • Lender vs Borrower friendly
  • Fixed baskets
    • Life time vs annual limit
    • Carry forward and back
  • Grower
    • Application
    • Key variables
  • Builder
    • Application
    • Key variables
  • Are baskets refillable, can amounts be split, restrictions

Case: review of use and application of different types of baskets

Voting Thresholds, Amendments & Waivers

  • LMA / EU thresholds vs NY style thresholds
  • Majority lenders
  • Super-majority
    • Thresholds
    • Typical matters
  • Entrenched rights
    • “Unanimous” consent? – Typical matters
  • Facility change / Structural adjustments (or equivalent)
    • Approval Requirements
    • Major vs minor vs payables
    • Matters affected
  • Snooze you lose – timing
  • Yank the bank
    • Required consent threshold
    • Non-consenting trigger
    • Can non-consenting lenders be prepaid or bought at par
    • Required source of funds
  • Debt buy-backs
    • Permitted
    • Cap on amount
    • Disenfranchisement

Yield / Margins, Ratchets & Call Protection & Hedging

  • Trends in LIBOR/Euribor floors
    • Differences in NY law vs English law
    • Matters affecting the Floor
  • OID – market trends
  • Margin ratchets
    • Incidence – Application to facilities & step downs
  • Commitments fees on RCFs etc
  • Call protection
    • Application & Scope – Repricing Events
    • Specific carve-outs (Specifc Asset Sales or Significant Acquisitions, CoC, IPO, EBITDA increase, other)
    • Basis of calculation of the Call protection (effective yield)
  • Hedging required

Permitted Acquisitions & Investments

  • Structure of ‘Permitted” acquisitions
  • Permitted Acquisitions – LMA vs Cov-lite approach
  • Ability to acquire Majority interests & applicable requirements/ conditions
    • Type and structure of basket lifetime or annual limit
    • Typical tests & thresholds
    • Similar or complemetary business
    • Leverage test applicable to Target
    • Due diligence requirement – Third party / Independent certification
    • Other restrictions (jurisdiction)
  • Treatment of pro-forma synergies
    • Can management add synergies to the test
    • What synergies qualify, time limits?
  • Limits on non-guarantor entities
  • Must target accede to the collateral package
  • Ability to acquire minority stakes
    • Applicable requirements/ conditions

Permitted Asset Sales

  • Requirements for assets sales
  • Threshold amount
  • Nature of the consideration received
  • Other requirements
  • Fair market value – certificates?
  • Payment waterfall & de minimis amounts

Debt Incurrence

  • Incremental / additional debt generally
    • “Accordion–style” facilities
    • Permitted Alternative debt
  • Structure of incremental debt basket
    • Ratio debt vs hard vs soft caps
    • Grower cap
    • Ratio & hard cap
    • Hard and grower caps
    • High Yield Bond style
  • Accordion facilities
    • Terms and conditions
  • Types of debt baskets
    • Free and clear baskets
    • General basket
    • Acquired debt basket
    • Acquisition debt basket
    • Contribution debt basket

Case: review of use and application of different approaches to incremental (and accordion) debt

MFN & Sunset Provisions That Relate To Incremental Facilities

  • MFN provisions – scope
    • Incidence in deals
    • Scope – application to specific facilities
    • Method – margin cap vs all-in-yield cap
    • Other requirements and exclusions
    • Structuring the yield cap to avoid being gamed by borrowers
    • Issues for lenders
  • Sunset provisions
    • Incidence
    • Duration
    • Effective date?
    • Differences in NY law vs English law

Case: review of approach to MFNs and sunset provisions

Restricted Payments (Distributions)

  • Permitted / Restricted Payments General Basket(s)
    • Hard vs soft caps
    • “Source of funds” condition
    • “Builder basket” approach
  • Investor Payments Leverage Basket
    • Typical range
  • Available Amount (“AA”) / Cumulative Credit (“CC”) – Leverage compliance test
  • Investor payments – Leverage Basket Funding Sources (other than AA/CC)
  • Other conditions for Investor Payments Leverage Basket (other than AA/CC)

Sponsor Fees & Sub-debt Payments

  • Types of fees and their caps
    • Holding Co / Admin fees
    • Sponsor / Monitoring fees
    • Advisory fees
    • Other material fees
    • Parent Debt Servicing / Fees/ Expenses
  • Aggregate of hard capped equity and sub debt related payments
    • Equity repurchases
    • Employee benefits

Negative Pledge, Permitted Liens / Security

  • Can incremental debt be secured & if so what assets are available
    • Existing collateral
    • No collateral assets
    • Non-Guarantor Restricted Subsidiaries
    • Restrictions on securing incremental debt
  • Availability of general and other baskets
  • Hard vs soft “grower” permitted lien baskets
  • Intercreditor accession

Mandatory Pre-payments (Cash Sweeps)

  • Excess cash
    • Opening percentage
    • Step down
    • Step down mechanism – linear or stepped
  • IPO
    • Applicable repayment percentage
  • [Available amount vs Cumulative Credit basket]
  • The five main basket combinations
  • CNI and “out of the box” amount
  • Build up basket start date – when does this start?
  • Ratio test
    • Leverage
    • FCCR
    • Other
  • Change of control
    • Is this treated as an EoD or mandatory prepayment
    • Six approaches – automatic exit, Lender has option etc

Transferrability & Portability

  • Transferrability
    • Whitelists / Approved lenders
    • Blacklist / Disqualified Institutions List present
    • Specific affected parties
      • Industry competitors
      • Loan to own investors
    • Consent, Deemed consent & “Reasonableness requirement
    • Triggers to facilittae sell-down
    • Minimum transfer & hold sizes – interaction with Related/ Existing lenders
  • Matters affecting the RCF
  • Portability
    • Ratings test
    • Ratio – Leverage or Enterprise value ratio
  • Timing periods/limits & Frequency
  • Additional requirements

Financial Maintenance Covenants & Covenant Suspension

  • Financial covenant package type
  • Review of current market approach: Traditional vs Cov-loose vs Cov-lite
  • “Springing” leverage covenants
    • What are they
    • Typical terms
  • Aggressive add-backs to EBITDA
    • Synergies and other add-backs
    • Por-forma adjustments – Scope
    • Run-rate adjustments – what does this mean in practice
  • Equity cures
    • Current market approach – what can be cured; how often, over-cures?
    • Deemed cures – what are they and why they matter
  • Deal outliers
    • Introduction of minimum EBITDA covenant
    • Maintenance covenants tested at greater intervals
  • Covenant suspension
    • Trigger
    • Availability and scope

Case: review of Equity cures

Guarantor Coverage

  • Incidence of guarantor coverage
  • GCT percentage (where present)
  • Exclusion of Material subsidiaries & materiality threshold
  • Other market exclusions

Events of Default

  • LMA EoDs and typical market exclusions
  • Clean-up period
  • Cross-default or cross-acceleration
  • Right to accelerate
  • Grace periods
    • Non-payment
    • Other obligations
    • Commencement of grace period
  • MAC
    • Review of market variations

Background of the Trainer:

The trainer is a consultant, public speaker and author. He provides training programmes globally to a blue-chip client base on private equity, debt finance, loan documentation and restructuring. He is a senior consultant with Debt Explained and as such has access to current market trends and developments in the cov-lite loan market. He is also a Senior consultant to Grant Thornton UK (Debt Advisory) and is also a Senior Advisor to KMPG Finland.

He has spoken at conferences in the UK, Europe, Australasia & South Africa. He provides training to a wide range of banks, law firms, advisors and other parties involved in the leveraged loan market on a bespoke, in-house basis. Additionally, he is the Programme Director for the infrastructure/project finance module for the MBA programme at the Cass Business School in London.

Cov-lite Loans Course Summary:


The European leveraged loan market has experienced significant changes over the last few years. The market has bifurcated into two segments; larger loans above roughly 200m which compete with the high yield bond market and smaller loans. The latter continue to follow LMA leverage precedents, however the larger loans have adopted many aspects imported from the high yield bond market. The most obvious and high profile example is the advent of cov-lite loans. High yield bonds have incurrence rather than maintenance covenants and these larger loans have been forced to follow suit with the result that the incidence of financial maintenance covenants has declined alarmingly (from the lenders’ perspective); grower and builder “Permitted” baskets have also become a standard feature (with some even appearing in loans sub 50m) along with the ability to reclassify amounts as between baskets. At the same time borrowers have taken advantage of current borrower-friendly conditions to curb lenders’ ability to transfer their loans and thus limit their downside. The programme uses data from the Debt Explained database to review the current trends prevalent in this dynamic market.

 

0/5 (0 Reviews)
Select-your-course-date

20 September 2018, 4 February 2019, 16 September 2019