The continuing global credit market tumult has caused financiers to reassess the terms on which they are prepared to provide finance. This reassessment has had a significant impact on the terms and conditions of finance documents. Some of these changes include the following:
- As a general rule, the balance of negotiating power has tipped in favour of the lender and, within the banks, away from the relationship managers / deal originators in favour of the bank's credit departments.
- Lenders are seeking tighter financial and general covenants and more security (the days of 30% headroom on the financial covenants and a 70% group guarantee and security coverage are now gone for most deals). Whatever 'covenant lite' deals were prevalent in the market before the current market turmoil have disappeared.
- Lenders are shying away from finance transactions that involve heavy structuring – simplicity is the key (although mezzanine debt is returning to the market).
- Lenders are looking to shorten availability periods, so as to be able to respond to any credit issues that impact on the lender's access to capital.
- The tendency is towards club deals rather than syndicated finance transactions.
- If the financing is to be syndicated, lenders are seeking broader market flex rights to review pricing and fees as well as the facility structure and covenants so as to ensure a successful syndication.
- From a borrower / sponsor perspective, solid commitments and choice of lender have become critical issues. Market, borrower and target MAC (material adverse change) carve-outs to lenders' commitments are common (although heavily negotiated).
- The mismatch between the banks' funding costs and market based reference rates (such as LIBOR) has led to banks revisiting their standard market disruption clause (which allows lenders to adjust the relevant interest rate under a facility agreement to take account of adverse changes to the lender's cost of funds as a result of a market disruption event). Loan markets associations around the world have been reviewing the current market disruption provision in their standard facility agreements. In particular, the Asia Pacific Loan Markets Association (APLMA) has been considering:
- whether to lower the current threshold levels at which a lender can invoke the operation of the market disruption clause;
- the facility agent's role in implementing the market disruption provisions;
- confidentiality issues in relation to syndicate banks' funding costs (some banks are understandably not keen for this sensitive information to be made available); and
- whether all lenders (or only the affected lenders) can pass on their increased funding costs.
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