Longer and longer: the ever lengthening loan agreement
European Leveraged Finance Customer Alert Series
Leveraged loan agreements form key facets of money structures, balancing loan provider security against enabling the debtor to perform its company based on its caris company business strategy. In recent years, the length of such loan agreements has increased significantly, and White & Case investigates the causes behind this.
To offer some context, think about the after. The present LMA-form senior multicurrency term and revolving facilities contract for leveraged purchase finance deals (senior/mezzanine) (excluding footnotes) is 314 pages very very long. A sample leveraged loan agreement is 205 pages very very long whereas an example equivalent is 473 pages very long. This extremely summary that is brief exactly just exactly how in market examples (and as time passes), the size of loan agreements has increased considerably. This is often related to a true quantity of reasons, a number of that are talked about below.
Practical experience, evolution and flexibility
Before concentrating on certain areas, while there might be many and varied reasons for longer documents we might claim that the main reasons are: (i) the effect of working experience, (ii) freedom (or most frequently a mixture of (i) and (ii)) and (iii), the development of documents.
With regards to working experience, particular conditions are added with time to prevent inadvertent and/or technical defaults under appropriate documents, in specific through a wide range of improvements up to a document’s construction clause. Having said that, particular provisions that are additional been added to allow borrowers to possess increased freedom in attaining their functional objectives and/or avoiding any inhibitions to their company. This includes an elevated range exceptions to covenants that are applicable provide for extra actions which may otherwise have now been prohibited by way of example, extra forms of financial obligation that could be incurred and safety awarded in preference of other creditors.
A 3rd cause for the extra provisions may be the development of paperwork. In older papers, there is frequently extremely scope that is limited extra indebtedness (in particular, pari passu secured indebtedness) when you look at the capital framework. Aided by the prevalence of high yield bond-style incurrence covenants and both extra facilities and sidecar debt being introduced, the parameters with this financial obligation should be specified, including any “most favoured country” conditions (which dictate specific parameters for key financial regards to such sidecar financial obligation vis-Г -vis the initial loan). Most of these additional conditions require careful drafting (and therefore, enhance the documents).
Below, we look closer at some parts in loan agreements which were lengthened according to the above principles.
The construction clause aids the interpretation of specific terms and conditions within the loan contract. By way of example, it might make clear that every recommendations to times are to “London time” to prevent clarifications throughout a document, or that a mention of a”person that is particular includes its successors in name. Nevertheless, as loan agreements have grown to be more complicated, the construction clause has dramatically lengthened to incorporate a number of extra clarifications and/or interpretative provisions addressing points such as for example what amounts outstanding under various instruments is highly recommended become “debt” (in other words. remedy for hedging), foreign exchange and conversions, and particular extra specs on just just how particular terms such as “knowledge” should always be evaluated in training.
the significance of the construction clause must not be underestimated. It really is a advantage to all the events to that loan contract to use the chance to make clear definitions of terms to avoid disputes that are later possibly to prevent repetition throughout that loan contract. The construction section “qualifies” the rest of the document, and incorporates particular (or additional) meaning to words used throughout the loan agreement on the other hand. Events consequently want to look at this part very very carefully, allowing for the effect on the remainder document.
Extra facilities clause
Extra indebtedness conditions are now actually fairly long and are also crucial elements of loan documents. Formerly, there clearly was small range for additional tranches of financial obligation plus the expectation ended up being that this could be supplied on comparable terms towards the current facility and frequently because of the exact same loan providers. In sponsor-driven leveraged finance papers, in-built freedom was dramatically increased. This gives the debtor with an efficient document structure to raise brand brand brand new indebtedness utilizing the initial deal architecture, but calls for extra drafting to permit the mechanics to the office, along with make sure that lenders will always be protected to your degree for the negotiated deal.
There was some irony that certain regarding the sections that is longer in loan agreements could be the economic covenants part, given that most leveraged loan agreements are now actually cov-lite. Nonetheless, since many visitors is supposed to be mindful, there clearly was normally a liquidity revolving credit center within the money framework, that may add a web leverage ratio test that may use limited to the benefit of the loan providers beneath the revolving credit facility. This may incorporate a quantity of complex definitions and parameters all over monetary definitions calculations, which as above can generally be categorised into language associated with experience that is practical flexibility and development of this covenant plus the complexity of money structures. In addition, the monetary covenants part typically provides the concept of “Excess CashflowвЂќ, which will be employed for the surplus cashflow sweep which can be usually a required mandatory prepayment. Again, this definition (and relevant definitions) now comprises a lot more substance than either historic or “standard type” variations of this covenants.