Loan transfers: 102 | McDermott Will & Emery
Despite many similarities, high yield bonds remain liquid and freely transferable instruments under US securities law, while leveraged loans become increasingly difficult to trade, especially during periods of stress, affecting secondary market liquidity. For some time now, the private debt space has imposed strict transfer restrictions on lenders as borrowers, and sponsors have expected a “take and hold” approach from their lenders. Such provisions are now also present in the space of large caps. As the debate continues over when (or if) secondary markets will open fully to allow for high trading levels, and whether such a market will be open for a longer period of time than at the start of the pandemic, we summarize a few the main transfer elements to consider when buying and selling loans.
Consent of the borrower is generally required for transfers and assignments subject to a set of exceptions where no consent is required. A very common exception is transfers between affiliates, existing lenders and associated funds. Likewise, the majority of European loans include a “white” list or a list of “approved lenders”: a previously agreed list of banks and funds that can redeem loans. This differs from the concept of a disqualified lender list (DQ List) seen in the United States, which specifically defines which institutions cannot become lenders. Recently, larger credits have included a combination of these two concepts, with the DQ list only applying to specific bands of dollars marketed in the United States. Lenders should conduct a regular whitelist review, given the typical ability of borrowers to remove a limited number of names from the list on an annual basis.
Among the most controversial points is the treatment of cases of default. Historically, a loan has become freely transferable during any event of continuing default. Now, as borrowers seek greater certainty over their union in times of stress, that freedom is limited to a subset of defaults, namely defaults and insolvency (and related to insolvency). This prevents lenders from buying or selling loans at the first signs of stress or for minor defaults. With respect to agreements with a financial covenant, whether a violation of that covenant should be included is a matter of debate. In some cases, delaying the ability of investors to purchase loans until such short time frames is not in the best interests of any stakeholder, because waiting until that point means that the value of the group will likely have already started. to erode.
Recently, there has been a trend to require lenders to notify transfers to the borrower whether or not consent is required and in some cases such notice be given before the transfer takes effect. . This highlights the desire to have information and control over a union to maximize its option value in all times of distress or even in a restructuring.
It is customary that consent is not unreasonably withheld or delayed, and most documents will include a period of time after which the deemed consent is given, although this has been waived for some credits.
General prohibitions and other restrictions
Certain groups of assignees may be prevented from holding liabilities. Business competitors and their shareholders are a group, and the market has accepted that competitors seeking debt will only do so with malicious intent. Private equity firms holding the loans can also be included in this group.
Ready-to-own investors are a second group that borrowers and sponsors strive to exclude in order to reduce the risk of hasty or dishonest manufacturing defaults and / or ultimately seeking to take equity. How these ready-to-wear investors are defined is a critical point in the negotiation, to properly ensure that performing credit funds and CLOs are not limited in buying debt. Whether this ban continues to take effect while a default event (or the subset of default events as above) continues is a point of commercial negotiation, but an analysis of the transfer arrangements should be undertaken to to confirm.
Recent developments include restrictions on any individual lender (and affiliates) holding more than 10% (or 20%) of total liabilities. This restriction has generally been reserved for jumbo transactions, making it unlikely that a lender (especially institutional investors with concentration limits) will approach this number, but it acts as a barrier to building up potential holdings. . It can also make it more difficult to complete a restructuring with a large number of lenders.
In some credits, lenders are also required to declare that, through any interest in a total return swap, credit default swap, or other derivative contract, they are not a net short lender. Failure to make (or do correctly) such a statement may result in disqualification or voting of the liabilities of that lender in the same proportion as non-net overdraft lenders. Alternatively, loans may allow such transfers but expressly deprive that lender of the right to vote. The net short disqualification is unlikely to work significantly in high yield bonds due to the underlying mechanics of aggregate ratings versus loans, but this does not appear to have been tested by the courts for this. day.
The ability to take out loans through some form of voting sub-participation is now generally regulated in accordance with transfers. Sub-participations without voting rights are generally permitted provided that the voting rights are not transferred in the present or the future, and declarations from lenders may be required. To the extent that this new lender is considering a sub-participation, the terms of the loan agreement should be carefully reviewed by that lender to see what restrictions might apply.
In any transaction, it is worth considering the minimum holdback amounts (including ensuring that these holdback amounts are aggregated between affiliates and associated funds) and minimum transfer amounts, as well as any requirement for rating for renewable commitments. Many true revolving credit facilities require lenders to have an investment rating to ensure that counterparties will accept letters of credit issued by these institutions. For those looking to transfer into a revolving credit facility because of its seniority in the capital structure, this can work as a blockage for distressed investors. Finally, given the large number of lenders who will lend from leveraged funds, it is also prudent to verify that lenders can create security, in favor of these leverage providers, over their rights under the debt documents. funding.