European Leveraged Loan Primary Market Trends | 9/29/2021

After the summer hiatus, the European leveraged loan primary market has come back to life with a steady flow of deals. 2021 has been a strong year so far and, with a strong pipeline in place, the record-breaking pace is looking likely to continue through to the year end.

With more and more bank/bond structures, the convergence of bank and bond covenants has continued apace. Strong demand from investors has emboldened borrowers to push for, and in most cases achieve, increasing flexibility under their credit documentation. Although we have seen some successful pushback from investors resulting in terms being flexed and, in some cases, deals being pulled.

Some of the notable trends that we have seen emerging in the market this year have included the ability to use capacity under one covenant to create capacity under other covenants, upward-only adjustments to grower baskets, autocure features for financial covenants, testing flexibility for ratios and baskets and extensive EBITDA adjustments. The combined effect of these innovations is to muddy the waters for investors trying to determine the capacity for debt incurrence and value leakage. Our European leveraged loan primary market analysis, combining input from our legal and financial analysts, enables us to guide our clients through this minefield.

It will be interesting to see how this increased flexibility will be used by borrowers when the economic cycle turns. Will it allow them to be more nimble in sidestepping potential pitfalls and avoid defaults, or will it tie the hands of investors and result in greater value destruction and reduced recoveries?