In 2016, global sponsors and their advisers were successful in continuing to export their experiences from financing transactions in the US leveraged loan and global bond markets to the European leveraged loan market and this continued apace in 2017 and into 2018. Momentum behind the continued adoption of US covenantlite terms into European loans is strong as there is now a growing body of European “cov-lite” precedents, demonstrating a growing and now deep market acceptance of cov-lite. This convergence brings a number of documentation issues to consider.
Covenant-lite Loans -
In a covenant-lite loan, either there is no financial maintenance covenant or there is a single financial covenant solely for the benefit of the lenders under the revolving credit facility with no financial maintenance covenant for the term lenders. The covenant benefitting the revolving lenders typically is a “springing” covenant, i.e., tested when the revolver is drawn and such usage exceeds a certain percentage of the revolving credit commitments, often 25–35%, with the applicable levels set with significant EBITDA “cushion” or “headroom” of around 30% or more and no or very few step downs. Associated provisions customary in US covenantlite structures are also now being adopted in Europe and in some cases are being made even less restrictive in Europe. For example, the US-style equity cure, with amounts being added to EBITBA and no requirement for debt pay-down, is now being regularly accepted in European covenant lite, but the US approach of limiting EBITDA overcures currently is a point for negotiation in Europe.
Originally published in ICLG TO: LENDING & SECURED FINANCE 2018.
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