The syndicated loan market and high yield bond markets continue their “race to the bottom”. The continued inflows of liquidity from existing and new sources, coupled with the resurrection of the CLO market, continues to create intense competition between these two, historically different forms of finance. The main upshot has been the continuing, if not accelerating, convergence between the terms for loans and high yield bonds.
The convergence is being driven both on the buy and the sell-side; first, 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 particular in the larger deals which include both term loans and bonds (e.g. Kirk Beauty /Douglas where the bonds were flexed down to accommodate larger TLBs).
The more borrower-friendly-incurrence covenants in bonds are also not unimportant for these borrowers; second, an increasing number of U.S. credit funds who have tapped into the European market and they too are keen to synchronise their documentation. The more liquid secondary loan market in the U.S. means these lenders are more relaxed about the absence of financial-maintenance covenants since their protection comes from the ability to trade when borrowers are in or near distress.
One further source of impetus has been the opening of high yield bond markets in Europe to mid-cap issuers with bonds now in the 200 million mark (and lower q.v. Wagamama £150m) increasingly common. In this context, the markets have seen smaller deals, of this size, increasingly arranged on a syndicated basis.
These developments also explain the increasing incidence of documentation being drafted according to NY State law which, through no co-incidence also tend to mirror the terminology used in high yield bond indentures. The trend towards using NY law is supported by data from DebtXplained which indicates that, in 2014, nearly half of all TLB Yankee loans were subject to New York state law and this trend seems to be accelerating in 2015.
This Yankee loans examines the typical terms of syndicated loans in the current market and compares the key differences between LMA-based senior facilities and NY style documentation.