Canadian and United States Syndicated Lending Bridget Marsh, EVP & Deputy General Counsel, LSTA Martin Racicot, Partner, Fasken Martineau

Transcription

1 Canadian and United States Syndicated Lending Bridget Marsh, EVP & Deputy General Counsel, LSTA Martin Racicot, Partner, Fasken Martineau Ontario Bar Association Institute Tuesday, February 7, 2017

2 Presentation Overview Introduction Canadian primary market values the borrower/lender relationship Demands of the US primary market gave rise to a robust secondary market Market trends and regulatory pressures (US Leveraged Lending Guidance) Canadian and US Syndication Practices Market flex Drafting, execution, and funding Management of syndicate, including disqualified lender lists US secondary market 25 years and counting: investors, ratings, etc Migrating terms or not? Cov-lite loans Incremental facilities and accordions Call protection Xerox provisions SunGard limited conditionality Amend & Extend provisions 2

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4 Canadian Market Context (continued) Differences compared to U.S. loan market Lenders hold debt until maturity, much less of a secondary market Market is not as transparent No Leveraged Lending Guidance No Canadian market for CLOs or prime rate funds No Canadian equivalent to LSTA 4

5 Canadian Market Context (continued) How do these forces shape the Canadian syndicated loan market? Relationship lenders vs. yield-oriented investors Loans are not actively traded, typically buy and hold Limited secondary market Actively traded TLB market does not exist Less market depth and liquidity vs. US market More conservative terms, lower leverage 5

6 Billions (USD) US Corporate Lending Nearly Quadruples in 20 Years $2,500 I-Grade Leveraged Other $2,000 $1,500 $1,000 $500 $- Source: Thomson Reuters LPC 6

7 Primary Market for Highly Leveraged Loans is Now Dominated by Non-Banks 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Banks & Sec. Firms Non-banks (institutional investors and finance companies) Source: LCD, an offering of S&P Global Market Intelligence 7

8 LLG Seeks to Ensure the Safety and Soundness of Individual Banks and the Financial System Leveraged Lending Guidance (LLG) structured as guidance for banks not regulation - was released by three banking supervisors: the OCC, the Federal Reserve, and the FDIC in March 2013 and had a compliance date of May 21, The Guidance has the potential materially to increase a bank s criticized assets because it: suggests that supervisors are looking for companies to show the ability to fully amortize all senior secured debt or repay 50% of total debt over 5-7 years from base cash flows; states that a leverage level after planned sales of more than 6x total debt/ebitda raises concerns for most industries; and seems to indicate that supervisors are uncomfortable with credit agreements that lack maintenance covenants. 8

9 Canadian and US Borrowers Use Different Tools to Manage Syndicates Drafting, execution, and funding Flex terms: Economics and document flex are standard in the US US borrowers demand flexible terms to manage their business through downturns (eg, increased covenant flexibility around additional debt). US borrowers seek actively to manage the syndicate and often include the disqualified lender list structure. 9

10 Billions U.S. Secondary Loan Market Emerges in the 90s and Continues to Grow $700 Annual Loan Trading Volume $600 $500 $400 $300 $200 $100 $ Source: LSTA, Thomson Reuters LPC 10 September 2015

11 Cov-lite Loans to US Borrowers Offer Greater Flexibility and Fewer Restrictions Covenant-lite loan typically has: no financial maintenance tests (financial maintenance covenants require a borrower to meet certain performance criteria on a monthly or quarterly basis)(this is the technical meaning of cov-lite) covenants similar to those in a high-yield bond deal, including incurrence style negative covenants (i.e., a financial ratio test for covenant compliance that needs to be met at the time a specific action takes place) 11

12 Certain US Credit Agreement Terms Migrate to Canadian Deals Call protection Pricing LIBOR Floors and Negative Interest Rates Lenders in US deals will focus on the inclusion of what is referred to as Xerox protections in acquisition agreements. These include: Seller s sole remedy against the lenders (and buyer) is limited to the payment of the specified break up fee; Proceedings against the lenders will be brought only in New York; and Seller waives its right to a jury trial in all proceedings relating to the financing. 12

13 US Commitment Letters May Include SunGard Clause Which Reduces CPs to Funding In the US market, a SunGard clause refers to a clause for commitment letters for buyers and sponsors in acquisition financings and limits (i) the representations and warranties given by a borrower and (ii) the collateral required on closing. Purpose of SunGard clause is to reduce number and scope of CPs to funding so there is more certainty for the seller that the financing will be available and the acquisition will close. 13

14 Incremental Facility Terms May Be Different From Those of Other Tranches Incremental facility creation of new tranche or increase in existing tranche of term loans. Pricing, payment, and other terms need not be same as those of any other tranche and are documented in a separate short incremental facility agreement. Many credit agreements that provide for incremental facilities will include a MFN clause. Incremental facility lenders may be existing or new lenders, and the loans are typically subject to representations and no defaults. 14

15 Existing and/or New Lenders May Participate in an Accordion Commitment Increase Accordion commitment increase typically used for increases in a revolver and permits the amount of the commitments to go to a specified max if the borrower can convince new lenders to provide the increase or existing ones to increase current commitments. Increase is to the existing outstanding facility so the interest, maturity, etc., are the same as those which apply to the existing revolver. Increase may be subject to conditions (e.g., no default, reps). Commitment increase gives rise to outstanding loans /commitments being held on a nonratable basis clause provides for rebalancing so ratability is then achieved. 15

16 Market Standard Amend and Extend Provision is Included in LSTA MCAPs After the financial crisis, borrowers took advantage of A&Es to extend the maturity of their loans in exchange for a fee and/or better pricing. Although these transactions are not as common as they once were, credit agreements now incorporate A&E mechanics that allow borrowers to complete an A&E at a future date without obtaining lender approval other than the extending lenders. The market has coalesced around the drafting of these A&E mechanics and those market standard provisions were added to the LSTA MCAPs in

17 The Extended Term Loans Are Required To Meet Certain Pro Rata Requirements Under the 2014 MCAPs, all lenders of a particular class must be given an equal opportunity to participate on a pro rata basis and on the same terms and conditions as each other Lender of that class. The terms of the extended loans should not be more favorable than the existing, non-extending loans. The provisions of the 2014 MCAPs require that the extended term loans: Are subject to customary maturity and weighted average life limitations; Rank pari passu with the existing term loans; and Must receive no better than pro rata treatment in connection with prepayments. 17