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
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
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
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.