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Lev investors must up deal term vigilance

By Max Bower
12 Jan 2017

In the leveraged loan market, where pricing has plummeted, it was inevitable that issuers would push their luck with the terms of their deals. Investors must push back.

Some investors have grown increasingly concerned over the issue, pulling orders and complaining to arrangers — but not in big enough numbers.

Many of them have accepted the advent of covenant-lite loans in Europe, particularly for larger deals. But certain provisions have been cropping up that go way beyond this.

One that is particularly alarming is an especially restrictive whitelist clause — that puts limitations on trading — as witnessed in Morpho’s €2.1bn loan offering late last year, which Debt Explained said this week was becoming more and more prevalent.

The clause has sharper teeth than a typical whitelist in that its stipulations on who a holder of paper can trade with are still binding in a default, with Morpho’s loan prohibiting a sale that would give the buyer at least 10% of the facility.

Investors are right to call foul on this — but not enough have done so. 

The search for yield shouldn’t be so tough that investors are willing to forgo their right to full ownership over paper they themselves are exposed to.

Sponsors’ loyalties lie with their return targets, not to credit investors, and they will take all the concessions they are offered, even to the detriment of wider market health.

Investors need to toughen up on deal terms, often buried within opaque legalistic jargon, before the market’s already precarious health deteriorates further — leaving everyone with a problem.

By Max Bower
12 Jan 2017