EMEA Covenants Monthly

During a year of many economic uncertainties, it was reassuring to see the usual ‘‘summer slowdown’’ of the European high-yield and loans primary market. Activity was limited to loans with a few add-ons and amend and extends, or A&Es, as expected.

At Reorg, we used the summer sluggishness as an opportunity to reflect on new developments in 2023, such as the “snooze drag” technique to facilitate A&Es in leveraged loans and the drive to enhance transparency in the realm of ESG.

In our continuing 101 education series, we explained the basics of a liability management exercise, or LME, and U.S. originated “lender-on-lender violence” technology in the European context. LMEs have many purposes, one of them being for companies to creatively manage their financial stress, sometimes by pitting one set of their creditors against another to attract new financing.

This 101 installment came at a convenient moment as news emerged that spandex maker Lycra’s creative LME in the form of a variation of a ‘‘J.Crew’’ style drop-down transaction was short-lived. Shareholders, creditors and Lycra agreed to unwind the drop-down transaction and to provide protections to prevent it happening in the future.

ESG Monitor/Covenant Trends

H1 2023 Sustainability-Linked Loans Wrap

Sustainability-linked loan issuance in the first half of 2023 was stifled through the dominance of A&Es in the European leveraged loan market, which tends to recycle existing terms and be cautious in inserting new terms such as ESG-linked margin ratchets.

However, when A&Es are stripped out, issuance levels in the first half of 2023 for sustainability-linked loans are consistent with the previous years.

One of the more positive signs emerging from trends we examined in the first half of 2023 is the drive to improve transparency. More fulsome information in the form of sustainability reports and external verification from independent third parties is required in nearly all sustainability-linked loans in the first half of 2023.

Read the full article here.

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