As a result of the economic disruptions caused by the COVID-19 pandemic, many borrowers made full use of their renewable facilities earlier this year to ensure they would be able to meet short-term cash flow needs. In many cases, these withdrawals led to additional financial testing (due to a rising financial covenant) and, as a result, EBITDA additions took center stage in 2020. Borrowers sought to avoid potential breaches of financial covenants by looking for ways to integrate pandemic-related costs and expenses into their existing consolidated adjusted EBITDA additions. For some borrowers, the permissive nature of existing EBITDA calculations and additions has enabled them to comply with the Financial Maintenance Agreement in 2020. This was generally based on the interpretation of unmet additions for “extraordinary”, “unusual”, “one-time” or “extraordinary” losses, costs and expenses. The European market has even coined the term “EBITDAC” (earnings before interest, taxes, depreciation, amortization and coronavirus), which has led to discomfort among lenders about the possible consequences of adding COVID-19-related EBITDA in the future. In fact, while a handful of new European leveraged lending operations in 2020 included “EBITDAC” additions, they were relatively modest and were often limited to a predetermined period of time. [xxi] However, for many borrowers, these additions were not enough to offset the sharp decline in revenues, resulting in a series of changes that replaced leverage testing with liquidity monitoring. Changes related to COVID-19 are discussed in more detail below. In European credit agreements, lenders may assign their rights and obligations under the credit agreement to another creditor or otherwise transfer them through Novation. Typically, lenders try to rely on the transfer mechanism using the standard forms of transfer certificates typically provided for in the loan agreement.

However, in some cases, an assignment may be necessary to avoid problems in some European jurisdictions that would be caused by novation under the transfer mechanics (especially in the context of a secured business using an English-speaking security trust, which may not be recognized in some European jurisdictions). Loan agreements for U.S. large-cap and mid-market borrowers also typically provide for an additional facility that allows the borrower to incur additional debt under the loan agreement (in addition to any obligation originally provided for in the loan agreement) or, instead, additional pari passu or subordinated debt (which may be secured or unsecured) outside of the loan agreement. as part of a separate installation (referred to as “additional equivalent” provisions). Initially, additional facilities were limited to a fixed dollar amount (typically 50% to 100% of consolidated adjusted EBITDA at the balance sheet date), so-called “free and clear” baskets, but now many borrowers can take out an unlimited amount of additional loans as long as a pro forma leverage ratio is reached (which will be a first criterion of privilege, guarantee or total leverage, depending on whether the new debt must be guaranteed pari-passu or junior privilege or if it is not guaranteed). These levels are generally set to require compliance with the leverage ratio at the reporting date or, in the case of unsecured debt, a certain interest coverage ratio (typically 2.0 ×). Some transactions involve increased additional capacity for acquisitions by providing that the borrower can incur additional debt even if the leverage ratio is exceeded on the reporting date, as long as pro forma leverage does not increase as a result of the acquisition. Provisions governing debt buybacks are typically found in U.S. and European loan agreements, but these provisions generally don`t get much attention. However, “Super Priority Uptier scholarships” that can take advantage of these provisions have recently received special attention in the U.S. lending market.

In 2020, a simple majority of lenders with initial privileges under the Serta, Boardriders and TriMark credit facilities approved changes that allow for “super-priority” debt capacity. As part of their willingness to incur such debt, these lenders exchanged their existing loans with an initial collateral period into new “super priority” term loans. Lenders that did not participate ended up with effectively subordinated debt and, in the case of Boardriders and TriMark, they also lost most (if not all) of the positive and negative liabilities. Today`s loans assume an average lifespan of three or four years on average. So, if you buy a loan with a spread of 250 basis points at a price of 101, you can assume that your deviation from the expected lifespan is 250 basis points minus the amortized premium of 100 basis points or libor + 170. Conversely, if you bought the same loan at 99, the deviation from the expected lifespan would be libor +330. Of course, if there is a LIBOR floor, the minimum would apply. U.S. and European loan agreements use a broadly similar concept of credit ring fencing that underpins the construction of their respective terms/obligations.

In U.S. loan agreements, borrowers and guarantors are called “lending parties,” while their European counterparts are called “debtors.” In any case, the credit parties/debtors are in principle free to exchange with each other, as they are all part of the same credit group and are bound by the terms of the loan agreement. However, in order to minimize the risk of credit loss, loan agreements generally restrict transactions between credit parties/debtors and their subsidiaries and other affiliates that are not credit parties/debtors, as well as third parties in general. Pricing of loans to institutional investors is about credit diversification in relation to credit quality and market economy factors. This second category can be divided into liquidity and market technology (i.e. supply and demand). The importance of the design clause should not be underestimated. It is an advantage for all parties to a credit agreement to take the opportunity to clarify the meaning of the terms in order to avoid subsequent disputes and perhaps avoid repetition in a credit agreement. On the other hand, the construction section “qualifies” the rest of the document and contains a specific (or additional) meaning for the words used throughout the loan agreement.

Parties should therefore read this section carefully, taking into account the impact on the rest of the document. In many debt-based institutions, issuers are required to place receivables in a “safe”. This means that the bank lends against the debt, takes possession of it, and then collects it to repay the loan. In most cases, split guarantees refer to cases where the issuer divides the pledge of collateral into asset-based loans and financed term loans. There are a number of similarities in the general approach in terms of preparing and negotiating documents for leveraged loan transactions in Europe and the United States. As a result of the economic disruptions caused by the COVID-19 pandemic, the European and US leveraged loan markets had a turbulent year in 2020. In Europe, the early momentum of the leveraged loan market (characterised by a total transaction volume of €40 billion in January) came to an abrupt halt in mid-February, as the impact of the COVID-19 pandemic was felt across the continent. For much of the summer, leveraged loan issuance in Europe remained well below 2019 levels, down 37.9% year-on-year in the third quarter of 2020.

[i] However, the European credit market has been resilient and an increase in transaction activity in the last three months of the year resulted in a total debt volume of €120.7 billion at the end of the year, an increase of 3.7% compared to 2019. [ii] The U.S. leveraged loan market experienced a year-over-year decline in the volume of leveraged loan issuances and the total volume of institutional lending in the U.S. in 2020. in mid-December 2020, it reached its lowest level in five years, continuing a downward trend since the last increase in 2017. [iii] Low interest rates fueled a record year for high-yield bond issuance – a significant increase from the most recent market peak in 2017 – and this trend further dampened the leveraged loan market in the Us. However, overall institutional lending in the U.S. in 2020 was only 7% below 2019 levels (although investment-grade lending declined by 36%).

[iv] Despite all this, the ratio of high-yield bonds to the issuance of leveraged loans is expected to normalize in 2021,[v] and the volume of leveraged loan issuances is expected to increase by up to 30% from 2020. .