Trlpc european sponsors seek aggressive us style leveraged loans

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Feb 20 Lenders are under increasing pressure from sponsors of European companies to accept more aggressive US-style terms on leveraged loans that would give them more flexibility amid an expected upturn in M&A activity. US practices such as covenant-lite structures became established features on European deals in 2014 and now other aspects of US loans are crossing the Atlantic. The changes will enable sponsors to raise additional debt and make acquisitions more easily than has been the case until now. Banks are seeking to capitalise on the expected increase in M&A activity and competition to win mandates is fierce. It means they are more accepting of requests from sponsors to underwrite deals with US-style documentation for European companies under UK law."Top-tier sponsors are pushing, and successfully so, especially on the stronger credits, for lenders to agree to more US-style docs," said Philip Bowden, co-head of leveraged finance at law firm Allen & Overy."Lenders are under increasing pressure to grant flexibility on incremental facilities to enable sponsors to raise more debt, particularly for acquisitions. As in the US, sponsors are pushing to reduce or remove the separate restrictions on making acquisitions."

Laxer loan docs also make it easier for sponsors to extract value from their assets through taking dividend payments at an earlier stage - and on lower thresholds - than they would be allowed to under traditional European lending practices.

GLOBAL VIEW One of the main drivers pushing banks in Europe to follow the US model is the increased globalisation of funds, which can invest in loans and bonds in either US dollars or euros. Given that they have already accepted such aggressive terms on US and transatlantic deals, they have limited grounds on which to push back against similar proposals in Europe, bankers said. Investors are more likely to support the laxer standards on larger loans for strong European companies in the right sectors, as such deals are likely to be more liquid on Europe's secondary market and therefore easier to trade into and out of.

"We are starting to see docs for European companies under UK law that look quite a lot like US loans. If the size and sector are right and the business is strong and stable, there is a good case for it. It gives sponsors greater flexibility as the docs don't restrict acquisitions and there is a greater chance to pay a dividend earlier than in a traditional European deal," said Matthew Sabben-Clare, a partner at private equity firm Cinven."A lot of it is to do with the consolidation in the institutional buyer base as there is more money in the market but in fewer hands, (and those) are global debt managers."If investors accept the changes on the larger European deals, in time they are likely to appear on smaller loans, too - as was the case with the use of covenant-lite, which started as a feature on larger deals before appearing lower down the spectrum."It is only a matter of time before we see more flexible terms accepted on standalone European deals," one syndicate head said.