Mon 01/29/2024 04:00 AM
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Legal Analysts: Ian Chin, Brian Conway
Data Visualizations: Elisabeth Campbell

Welcome to Reorg’s inaugural covenant pushback digest on European leveraged loans.

Beginning with this article, we will publish a quarterly digest outlining the changes made to covenants in European leveraged loans during syndication. This first article will focus on pushback seen over the course of 2023.

For more on the nitty gritty of the tracker, see the FAQs at the end of this article. Contact us at with any questions on how to use this tracker, or if you have any suggestions on how to improve it further.

This tracker is a companion to Reorg’s existing Covenant Pushback tracker for high-yield bonds published monthly.
2023: Pushback Frequency on Loans Increases, Tensions Simmer Going Into 2024

In 2023, more than a majority of European leveraged loans had their terms changed during syndication. As we saw in part 1 of our 2023 European leveraged loans wrap, we identified pushback from investors during syndication in 51% of 2023 European leveraged loan deals, compared with 56% and 44% of 2022 and 2021 European leveraged loans, respectively.

But if we exclude add-on financings, we find that 67% of 2023 deals saw pushback during syndication. Excluding add-ons gives us a more representative picture, as the structure of add-on deals don’t lend themselves well to pushback on covenant terms (especially if the add-on is intended to be fungible with the existing term loan B tranches).

If we look at leveraged buyouts (i.e. excluding bolt-on acquisitions) and full refinancings (i.e. excluding add-ons used to refinance other debt) only, a staggering 81% of those 2023 deals featured pushback in syndication.

We do acknowledge that reviewing pushback on LBOs and full refinancings only does not give a complete picture - as we know from our regular A&E Insights reports, some amend-and-extend deals do see changes to documentary terms during syndication, with SUSE and EG Group being two publicly reported instances (both summarized here). But that leaves us with an estimate of between 67% and 81% of deals with pushback in 2023 - which is significant.

Investors were most active with pushback in the third quarter of 2023 . We measure this by noting changes from the term sheet score to the final senior facilities agreement scores in our proprietary loan scoring system.
Breakdown of Pushback Across the SFA

It will come as no surprise to see investors push back on terms concentrated on those relating to value leakage in 2023. Private equity sponsors aim to maximize their returns and those of their limited partners through their investments. However, 2023’s message from the term loan B market suggests that this maximization should not be to the detriment of TLB investors.

Tied with value leakage on pushback frequency is pushback against pricing terms. This segment covers pushback against margin ratchet step-downs, margin ratchet holiday periods and ticking-fee profiles.

Pushback against borrowers’ ability to increase their debt (including priming debt) comes third, with pushback relating to margin and yield protection terms also featuring in around half of all 2023 deals (excluding add-ons).

We cover each of these segments and more in greater detail below.
Value Leakage: Ratio-Based and General RP Baskets Scrutinized, J Crew Blockers Wanted

Ratio-Based Restricted Payment and Permitted Investment Baskets

Ratio-based restricted payment and investment baskets were pushed back most frequently, featured in 33% of deals with pushback (39% if add-ons are excluded).

Where present, pushbacks resulted in ratio tests being reduced by approximately 0.5x of leverage on average, with the resulting tests set inside opening leverage in just over three-quarters of deals with ratio restricted payment baskets.

For permitted investment ratio baskets, just under half were set at or inside the opening ratio.

For credits perceived as more challenging, the ratio-based baskets were deleted altogether.

The leverage ratio tests for “Available Amount” or “Cumulative Credit” baskets, as well as ratio-based subordinated debt payment baskets, were also correspondingly reduced or deleted.

General Restricted Payment Basket

The general restricted payment baskets also came under investor scrutiny - 17% of deals with pushback resulted in tightening of this basket (19% if excluding add-ons).

The typical change is a reduction in the size of the basket (typically resulting in the basket decreasing by the equivalent of 10-20% of EBITDA).

Some deals came to market proposing per annum general restricted payment baskets (as opposed to the more typical lifetime basket), which would typically be palatable for TLB investors if the aggregate of the basket spread out over the life of the facilities is market standard (or within market range). However, that was not the case on a number of deals, and TLB investors pushed back strongly against per annum general RP baskets that lead to significantly above market average capacities over the life of the facilities.

Consolidated Net Income Build-Up Basket: A&Es

It would be hard to discuss leveraged loans in 2023 without mentioning amend-and-extend transactions, or A&Es. Seventeen percent of deals with pushback (19% if excluding add-ons) resulted in the start date of consolidated net income builder baskets being reset to the A&E date - essentially resetting the basket to zero. Considering not all deals with pushback are A&Es, that is a significant figure.

For more on why TLB investors prefer to have this reset upon A&E, see HERE.

J. Crew Blockers

J. Crew blockers were also required frequently, and were successfully included following investor requests in 31% of all deals featuring pushback (36% if excluding add-ons). See HERE and HERE for our primers on the provision.

As we discuss in part 2 of our European leveraged loans wrap, J. Crew blockers now feature in just under one-third of deals in 2023, a sharp increase compared with 2021 and 2022. Investors’ focus on this provision demonstrates heightened investor sensitivity to “creditor-on-creditor” violence type transactions. We expect their focus will continue going into 2024.
Leverage Risk: Ratio-Based and ”Free And Clear” Baskets Pared Back, Non-Obligor Caps and Chewy Protection Added

Ratio-Based Debt Baskets

In a similar vein to pushback against value leakage-related terms, 36% of deals with pushback in 2023 (42% if excluding add-ons) involved making ratio-based debt baskets less permissive.

For the most part, where pushback was present, the leverage ratio test was reduced so as to be set at or inside opening leverage.

However, two other forms of pushback are notable. First, in a handful of deals, the 2x FCCR test for incurrence of unsecured debt or debt secured on non-collateral was removed. The 2x FCCR test is generally still seen as a permissive test, even with the increase in interest rates seen in the last year and a half - with rates potentially coming back down, that view is likely to be widely held.

Second, the alternative “no worse than” test was removed in a number of deals . That test allows borrowers to incur debt under the ratio debt basket, provided that pro forma leverage or FCCR is not worse than before the transaction (and regardless of actual leverage or FCCR). As our Americas Covenants colleagues highlighted, the “no worse than” test can be extremely permissive in scenarios where the borrower’s EBITDA is close to zero or negative.

Non-Obligor Debt Cap

Many TLB lenders had to consider how troubled credits in 2023 might raise priming debt. One of those ways in which this can be done is the raising of debt at a non-guarantor, structurally senior level to the existing TLB.

Perhaps cognizant of that risk, TLB lenders sought to limit the risk of structurally senior priming debt coming into the debt structure, by requiring a cap on the amount of debt non-obligors can incur. This risk is particularly high for deals that have high-yield bond style 2x FCCR ratio debt tests (although some deals also had the 2x FCCR test removed, as discussed above).

Non-obligor debt caps were introduced (or reduced in size) during syndication in 12% of deals that had pushback (14% if excluding add-ons) .

For more on the resulting range and median of the non-obligor debt caps seen in 2023, see part 2 of our 2023 leveraged loans wrap.

Chewy Protection

The increased prevalence of Chewy protection in 2023, which we discussed in part 2 of our full- year leveraged loans wrap, was also due to investor action - Chewy protection was added to documentation in 7% of 2023 deals that had pushback.

“Free and Clear” Debt Basket

TLB investors also pushed back frequently against the size of “free and clear” debt baskets, seen in 12% of 2023 deals that had pushback (14% if excluding add-ons) . The typical pushback resulted in the basket being reduced by the equivalent of 20-32% of EBITDA.
Pricing Terms: Forget the Ratchet and Let’s Have a Holiday

Margin Ratchet Step-Downs

As always, investors focused on the margin ratchet - 31% of deals with pushback (36% if excluding add-ons) saw changes to the number of margin ratchet step-downs . The changes were primarily to limit the number of step-downs to no more than two, with some deals requiring greater deleveraging before the ratchet could be accessed. The result is clear: Of deals in 2023 with margin ratchets, 93% have two or fewer step-downs, whereas only 7% had three or more step-downs.

Margin Ratchet Holiday Periods

The length of margin ratchet holidays also mattered; 36% of deals with pushback (42% if excluding add-ons) saw introductions of or extensions of margin ratchet holidays. The typical holiday remains at six months, seen in 65% of 2023 deals with a margin ratchet, but nine-month (15%) and 12-month (20%) holidays were in a substantial minority of deals.
Margin / Yield Protection

101 Soft Call Protection

The main form of pushback in this category relates to the soft-call protection period. Given the prevalence of soft-call protection in 2023 (seen in 82% of all deals, including add-ons), it’s no surprise that where TLB investors required it, borrowers caved in. In some cases, TLB investors required longer 12-month sunsets (as opposed to the typical six-month sunset).

We saw in part 2 of our leveraged loans wrap that there was a noticeably higher proportion of deals with 12-month sunsets in the first half of 2023 (11%) compared with the second half of 2023 (2%). Borrowers may have been insisting on the shortest possible 101 soft call sunsets with one eye on a repricing in 2024 if central bank interest rates do come down. For precisely the same reason TLB investors might also be considering 12-month or longer sunsets for deals in 2024.

MFN Protection

The same can be said for MFN protection (though to a lesser extent). TLB investors required inclusion of MFN protection, or a reduction in the permissible margin/yield differential (e.g. to 50 bps from 100 bps), successfully in 17% of deals with pushback (19% if excluding add-ons). The MFN sunset period was also of concern: Extension of the MFN sunset was seen in 10% of deals with pushback.
Calculation Flexibilities: New Money Deals Open Door to Pushback

Pushback relating to calculation flexibilities featured in 17% of deals with successful pushback (19% if excluding add-ons).

If we had been given that statistic at the start of 2023, we would certainly have been surprised. However, this may be in part due to borrowers coming to market with terms that are largely consistent with the market in the first place, thus obviating the need for pushback.

The main area for pushback was on cost savings and synergies addbacks. A handful of (mostly new money) deals came to market proposing uncapped cost savings and synergies addbacks, but nearly always resulted in successful pushback. As seen in part 2 of our full year leveraged loans wrap, only a small proportion of deals in 2023 allow for uncapped cost savings and synergies addbacks. Taken together, that indicates fewer borrowers coming to market with the aggressive term in the first place.
Other Notable Pushback Areas

Information Undertakings: Lender Presentations

With choppier markets in 2023 arguably increasing the need for careful portfolio management, TLB investors were more focused on information flows from borrowers. Twenty-four percent of deals with pushback in 2023 (28% if add-ons are excluded) resulted in lender presentations being required annually (and even quarterly, in some cases).

In some cases, borrowers did not agree to TLB investor requests, but simply offered a soft, nonbinding promise to hold lender presentations. The consequence of not delivering on that non-binding promise will be reputational only.

Transfer Provisions

Two staples of the transfer provision were subject of investor pushback in 2023: The requirement that borrowers act reasonably in considering lender requests to transfers (7% of 2023 deals with pushback), and the deemed consent period (5% of 2023 deals with pushback). We discussed previously the fundamentals of both provisions HERE.

Leverage Test for Covenant Suspension

One provision that came under more scrutiny in 2023 is the suspension of covenants. If certain conditions are met, key covenants (for example, the restricted payments and debt covenants) are suspended.

The most common condition for covenant suspension is where the borrower achieves an investment grade rating.

Alternatively, covenant suspension may apply where an IPO has occurred and the leverage ratio is lower than a pre-agreed level. However, a small minority of leveraged loans provide that covenants will be suspended subject only to a leverage ratio test, i.e. there is no IPO requirement. For those deals, the leverage level is particularly important - if set too close to effective date leverage, then TLB investors may be in for a nasty surprise if the borrower is able to deleverage slightly post-closing. For that reason, TLB investors pushed back on the leverage test level, i.e. to require greater deleveraging before covenants are suspended.
Pushback Frequency

Percentages listed below refers to the frequency of pushback relative to the number of European leveraged loans with pushback in the relevant year. For example, if 10 deals in 2023 had successful pushback in syndication, and provision X was introduced as a result of syndication pushback in two of those deals, this would be listed as 20% in the table below.
Value Leakage 2022 2023 2023 (Excl. Add-Ons)
Ratio-Based Restricted Payments / Investments Baskets Tightened / Deleted 47% 33% 39%
J. Crew Blocker Added 13% 31% 36%
General Restricted Payments Basket Tightened / Deleted 27% 17% 19%
For A&Es Only: CNI Builder Basket Start Date Reset N/A 17% 19%
“Available Amount” / “Cumulative Credit” Baskets Tightened / Deleted 13% 14% 17%
CNI Builder Basket Tightened (including tightening of ratio test, default blocker, or deletion of starter amount or zero floors) 13% 12% 14%
Subordinated Debt Payment Baskets Tightened / Deleted 33% 12% 14%
Specified Asset Sale Basket: Separate basket for Permitted Payments using proceeds of specified asset sales tightened / deleted 20% 2% 3%
Default blockers added or tightened in respect of certain Permitted Payments (other than CNI builder basket) 20% 2% 3%
Leverage Risk 2022 2023 2023 (Excl. Add-Ons)
Ratio-Based Debt Basket Tightened / Deleted 40% 36% 42%
“Free and Clear” Amount Reduced / Deleted 27% 12% 14%
Non-Obligor Debt Cap Added / Tightened N/A 12% 14%
Inside Maturity Basket Tightened / Deleted 20% 7% 8%
Acquired/Acquisition Debt Basket: ‘‘No worse’’ ratio test removed 7% 7% 8%
2x Contribution Debt Basket Reduced to 1x 40% 2% 3%
Dividend-to-Debt Toggle (aka “pick your poison”) Tightened / Deleted 13% 2% 3%
Permitted Liens General Basket Tightened / Deleted 13% 2% 3%
Pricing 2022 2023 2023 (Excl. Add-Ons)
Margin Ratchet: Ratchet Deleted / Number of Stepdowns Reduced 40% 31% 36%
Margin Ratchet: Holiday Added / Extended 47% 36% 42%
Ticking Fee Added or Time Period Shortened 27% 7% 8%
Calculation Flexibilities 2022 2023 2023 (Excl. Add-Ons)
Synergies & Cost-Savings: Cap Introduced / Reduced 47% 10% 11%
Synergies & Cost-Savings: Time Limit Reduced or Extended 33% 12% 14%
“Super Grower” (aka “High Watermark” Baskets) Removed 7% 2% 3%
Ratio Calculations: Exclusion of Revolving Facilities From Calculations Capped / Removed 7% N/A N/A
Margin/Yield Protection 2022 2023 2023 (Excl. Add-Ons)
Soft Call Protection Added / Sunset Extended 33% 24% 28%
MFN Protection Added N/A 17% 19%
MFN Sunset Period Extended 13% 10% 11%
MFN Cap Changed From Margin-Based Cap to Yield-Based Cap 33% 5% 6%
MFN Cap Reduced to 0.5% From 1%  7% 2% 3%
MFN: Scope of Protection Extended to Other Debt Baskets 13% N/A N/A
MFN De Minimis Threshold Reduced / Deleted 13% N/A N/A
MFN Outside Maturity Carve-Out Removed 7% N/A N/A
Asset Disposals 2022 2023 2023 (Excl. Add-Ons)
Asset Sale Leverage Step-Down Levels Reduced, or Exception Otherwise Tightened 7% 12% 14%
75% Cash Consideration Requirement in FMV Basket Introduced / Tightened 13% 2% 3%
Disposal Proceeds Reinvestment Period Tightened 13% N/A N/A
Transfer Provisions 2022 2023 2023 (Excl. Add-Ons)
Reasonableness Requirement to Borrower Consents Added. 7% 5% 6%
Deemed Consent Period Added / Shortened 27% 7% 8%
Restriction on Lenders Holding More Than Specified % of Total Commitments Deleted 13% N/A N/A
Restriction on Transfers to "Net Short Lenders" Removed 13% N/A N/A
Advance Notice Requirement for All Transfers Removed 7% N/A N/A
Other Significant Changes 2022 2023 2023 (Excl. Add-Ons)
Lender Presentation: Required / Tightened (Including Where Required More Frequently) 33% 24% 28%
Chewy Protection Added N/A 7% 8%
Covenant Suspension Provisions Tightened 7% 5% 6%
Change-of-Control Portability Removed 7% 2% 3%
Sunset on Calling Defaults Provision Removed 7% N/A N/A

How is pushback measured?

Borrowers typically approach the market with their proposed headline terms in a term sheet. However, that’s not the final, legally binding document. The terms are eventually memorialized in a senior facilities agreement, or SFA, which is then signed.

To measure pushback, we compare the final terms in an SFA to the term sheet. Provisions that change indicate the presence of investor pushback. In most broadly syndicated deals, the most material changes to terms are often also set out in a transaction update memo - those are useful guides which we use to supplement our analysis.

Does this tracker capture ALL changes from term sheet to SFA?

Unfortunately, no. SFAs are sizable documents with many different parts, some of which are less commercially significant than others from a covenants-standpoint. This tracker purports to capture material changes to covenant terms only. In addition, deal-specific changes will not be tracked.

Why not publish more frequently?

Investor pushback does not always occur regularly, especially in the frothier markets pre-2022. The data being published involves anonymisation and aggregation of data. We believe quarterly updates will help give the market a good balance of the big picture and the detail of pushback that may be useful for future deal negotiation and understanding of the current market.

Contact us at with any questions, if you have any suggestions on how to improve it further or if you would like the EMEA Covenants to discuss these findings with your team.
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