Canada: Recent Developments In U.S. Leveraged Finance – November 2017

The fourth quarter of 2017 has given rise to at least three developments of interest to the U.S. leveraged lending community:  (1) the  taking of steps now to address the expected discontinuation of the London interbank offered rate (LIBOR) after 2021; (2) the Republican House tax plan proposal to limit the deductibility of interest on debt; and (3) the temporary procedural invalidation (and possible permanent rejection) of the U.S. Leveraged Lending Guidance.

Discontinuation of LIBOR after 2021

LIBOR is an interest rate at which banks in London are able to obtain unsecured funding for an agreed period and currency. LIBOR underpins trillions of dollars of financial contracts, including bonds, loans and derivatives. Past scandals associated with the setting of LIBOR prompted the administration of LIBOR to be moved from the British Bankers Association to its current administrator, Intercontinental Exchange, operating through ICE Benchmark Administration Limited - hence the current moniker, "ICE" LIBOR.  In July of 2017, the U.K.'s Financial Conduct Authority announced that it will no longer support LIBOR after 2021, and directed the finance industry to come up with an alternative to LIBOR. Although working groups have proposed various alternatives to LIBOR such as, for U.S. dollars, SOFR or Secured Overnight Funding Rate (also known as the "broad Treasuries repo financing rate" or BTFR) – it will be some time before industry and regulatory stakeholders coalesce around a viable LIBOR replacement. Of course, in the current hotly oversubscribed U.S. leveraged loan market, it is common for the tenor of loans made now to extend well past 2021. Late October 2017 saw the first widely known instances of arrangers including language in credit agreements allowing administrative agents to select a LIBOR replacement.1 In some cases, administrative agents have been given the right to make this selection without lender consent; while in others, a so-called "negative consent" approach (giving lenders a short period of time to object to the administrative agent's selection) has been adopted. Market participants will want to continue to stay tuned in this area – both for the emergence of an ultimate successor to LIBOR by 2021, and in the interim, for the development of market standard credit agreement language dealing with LIBOR's expected discontinuation.

Republican tax plan proposal to limit the deductibility of interest on debt

The Republican House tax plan released on Thursday, November 1, included a proposal to cap the deductibility of interest on debt at 30% of a company's earnings before interest, taxes, depreciation and amortization (EBITDA). Needless to say, this could seriously impact highly levered financings such as those used in leveraged buyouts. Private equity firms have already objected to the House tax plan as upending their entire business model (or at least, decreasing return on equity)2. With a wide array of other lobbyists lining up to oppose other aspects of the House tax plan, the Senate expected to propose its own tax plan, and President Trump's approval rating seemingly reaching new lows on a daily basis, it remains to be seen whether U.S. tax reform will pass at all, let alone whether specific areas of reform (such as caps on interest deductibility) will be enacted.  Developments in this area too will be of keen interest to U.S. leveraged loan market participants.

Leveraged Lending Guidance

Regular readers of Osler Updates will be familiar with the Leveraged Lending Guidance (LLG) published in 2013 by U.S. regulators (See here for a reminder.)  Among other things, the LLG provided that a leverage level after planned asset sales (that is, the amount of debt that must be serviced from operating cash flow) in excess of six  times EBITDA will raise supervisory concerns for most industries – subjecting regulated lenders who make such loans to regulatory scrutiny and even sanction. Not surprisingly (in retrospect at least), the LLG has resulted in the origination of highly levered loans moving away from regulated lenders (such as banks) toward unregulated lenders.  Recall that the LLG was issued as a "guidance" rather than a formal "rule."  As recently noted by the Loan Syndication and Trading Association3, on October 19, the U.S. Government Accountability Office (GAO) issued an opinion that the LLG was in fact a "rule" subject to review by the U.S. Congress. The submission of the GAO opinion to Congress on October 20 started the running of a 60-day clock, during which Congress and President Trump can reject the LLG. What's more, pending the regulators' submission of the LLG itself to Congress, the LLG is technically not in force. This too will be a key area of focus for U.S. leveraged loan market participants, given that rejection of the LLG by Congress and President Trump (if this occurs) could re-level the playing field among regulated and unregulated lenders.

Footnotes

1 Debtwire, October 25, 2017, "Banks take upper hand over lenders in crafting Libor replacement plans."

2 Wall Street Journal, November 3, 2017, "Private-Equity Firms Have a Beef with Tax Bill—but Things Could Be Worse."

3 LSTA "Week in Review", October 27, 2017:  "GOA on LLG:  What Now?"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions