Cov-lite’s Europe return stuns market

Author: | Published: 8 Jun 2011
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After months of speculation and overblown predictions, cov-lites have finally made their return in Europe, with Apax Partners adding £150 million of cov-lite debt to Trader Media

"It’s pretty stunning news really," said Clive Wells at Skadden.

"Every other sponsor will be looking at this, and next time their relationship bank is on the phone, I can imagine what the ask might be," added Wells.

IFLR can reveal that Adam Freeman at Linklaters acted for the banks. Sources believe Robin Harvey at Allen & Overy acted for Apax, but the firm would not confirm this.

Apax is said to have deferred £50 million of an expected upcoming dividend strip from Trader Media until the company's gearing falls to below five times.

"But the very fact that someone is fine tuning it, not simply saying: 'you’re fucking kidding’ means they’re all on the same page," said the partner.

The deal was particularly noteworthy due to the high yield construct of 50.1% of lenders needed to give their consent. Bank deals usually require 66% and two thirds.

The deal only comprises a term loan B as opposed to the usual A and B structure. The B loan is held primarily by institutional investors that are less conservative than many banks. A deal with a term loan A and term loan B still needs 66% and two thirds across all those facilities for any consent to be passed as opposed to 50% in the case of Trader Media.

Term A loans are usually entirely owned by traditional bank investors who will be inherently conservative about companies paying large dividends to their shareholders, especially because of the negative publicity.

Many lawyers doubt the Apax deal is the beginning of a trend in cov lite structures.

"The sponsor is strong, and they obviously think it’s viable – though I’m not quite sure what that benchmark is for viable these days," said one London-based partner

"This is out of the blue as far as I’m concerned. It’s a double whammy. As well as the loan being structured with lighter covenants, it’s doing so for a dividend," added another lawyer.

Adam Freeman, a banking partner at Linklaters, does not think the Apax deal will lead to a flood of cov-lite lending as this was an amendment to an existing deal.

"But as financial sponsors get more and more comfortable with the incurrence style covenants of high yield then it might feed into them pushing for more of this in the lending market as they have done in the US," he said.

Despite the media attention, there were very few full cov-lite deals at the height of the credit bubble. "People bandied the term about but they were more covenant loose," said Freeman. Few of the structures actually contained high yield incurrence covenants, but simply omitted certain components from a standard European bank deal, such as some of the financial covenants.

Freeman says that other financial sponsors are considering taking advantage of the relative liquidity in the institutional loan investor market and seeking better terms.

"But no one has started pushing for covenant lite in new bank loan financings," he said. "The most aggressive sponsors in the bank market aren’t pushing for those terms," he added. "But sponsors don’t sit still, and if they can start pushing covenant loose terms again they will."

"Having come out of the chastened experience of the recession and the related negative publicity of poor lending practices, I’m unsure how enthusiastic banks’ credit committees are going to be about doing those sorts of deals in the near term," added Freeman

Bank deals typically include four financial covenants: capital expenditure restriction, a cash flow test, leverage test (debt compared to Ebitda) and an interest cover test.

The starting point in the cov-lite debate was sponsors pushing banks to drop the capital expenditure and cash flow covenants. "I haven’t seen anyone trying to do that in new deals," said one lawyer.