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
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
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
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
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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