A practical crossborder insight into lending and secured finance2nd EditionAdjurisAli Budiardjo Nugroho ReksodiputroDLA PiperMcMillan LLPLoan Syndications and Trading An Overview of the Syndicated Lo ID: 889333
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1 Lending & Secured Finance 2014The Intern
Lending & Secured Finance 2014The International Comparative Legal Guide to:Published by Global Legal Group, with contributions from: A practical cross-border insight into lending and secured finance2nd Edition AdjurisAli Budiardjo, Nugroho, ReksodiputroDLA PiperMcMillan LLP Loan Syndications and Trading: An Overview of the Syndicated Loan MarketTed Basta, The Loan Syndications and Trading Association1Loan Market Association … An Overview … Nigel Houghton, Loan Market AssociationAsia Pacific Loan Market Association … An Overview … Janet Field, Asia Pacific Loan Market Association11 This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advGlobal Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication.This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720Thomas Mellor, Edmond Atta, BethBassett, Antony Dine,Susan Glinska, Dror Levy,Toni Wyatt59 Tanner StreetTel: +44 20 7367 0720URL: www.glgroup.co.ukF&F Studio DesigniStockphotoFinance 2014 KALO & ASSOCIATES: Nives Shtylla87SRS Advogados in cooperation with Adjuris: Carla Vieira Mesquita & Marval, OFarrell & Mairal: Juan M. Diehl Moreno & Diego A. Chighizola101MJM Limited: Jeremy Leese & Timothy Frith117Criales, Urcullo & Antezana - Abogados: Carlos Raúl Molina Antezana & TozziniFreire Advogados:Antonio Felix de Araujo CintraBritish Virgin IslandsMcMillan LLP:Jeff Rogers & Don Waters Maples and Calder:Alasdair Robertson &Tina MeighDLA Piper: Robert Caldwell & Peter LiCordero & Cordero Abogados: Hernán Cordero Maduro & Ricardo Cordero Baltodano177Andreas Neocleous & Co LLC:Elias Neocleous & George Chrysaphinis184 Continued Overleaf An Introduction to Legal Risk and Structuring Cross-Border Lending Transactions … Thomas Mellor & Marc Rogers Jr., Bingham McCutchen LL
2 P15Global Trends in Leveraged Lending &#
P15Global Trends in Leveraged Lending … Joshua W. Thompson & Caroline Leeds Ruby, Shearman & Sterling LLP Recent Trends in U.S. Term Loan B … Meyer C. Dworkin & Monica Holland, Davis Polk & Wardwell LLP26Yankee Loans … Structural Considerations and Familiar Differences from Across the Pond to ConsiderR. Jake Mincemoyer, White & Case LLPIssues and Challenges in Structuring Asian Cross-Border Transactions … An Introduction Elizabeth Leckie, Allen & Overy LLP36Acquisition Financing in the United States: Outlook and Overview … Geoffrey Peck & Mark Wojciechowski,A Comparative Overview of Transatlantic Intercreditor Agreements … Milbank, Tweed, Hadley & McCloy LLP… Robert Rabalais & Matthew Einbinder, Simpson Thacher & Lending to Health Care Providers in the United States: Key Collateral and Legal Issues … Art Gambill & Kent Walker, McGuireWoods LLP56A Comparison of Key Provisions in U.S. and European Leveraged Loan Agreements …Sarah M. Ward &Mark L. Darley, Skadden, Arps, Slate, Meagher & Flom LLPFinancing in Africa: A New Era … Nicholas George & Pascal Agboyibor, Orrick, Herrington & Sutcliffe LLP67LSTA v. LMA: Comparing and Contrasting Loan Secondary Trading Documentation Used Across the … Kenneth L. Rothenberg &Angelina M. Yearick, Andrews Kurth LLPThe Global Subscription Credit Facility Market … Key Trends and Emerging Developments Majority Rules: Credit Bidding Under a Syndicated Facility … Douglas H. Mannal & Thomas T. Janover, Kramer Levin Naftalis & Frankel LLP Finance 2014J—K, advokátnà kancelá, s.r.o.: Roman —astný & Patrik Müller192 Bruun & Hjejle: Jakob Echwald Sevel & Peter-Andreas BodilsenSkadden, Arps, Slate, Meagher & Flom LLP: Clive Wells & Paul Donnelly 205Freshfields Bruckhaus Deringer LLP: Emmanuel Ringeval & Cristina Radu215Cleary Gottlieb Steen & Hamilton LLP:Dr. Werner Meier & Daniel Ludwig224GreeceKPP Law Offices: George N. Kerameus & Panagiotis MoschonasBingham McCutchen LLP in association with Roome Puhar: Vincent Sum & Ali Budiardjo, Nugroho, Reksodiputro: Theodoor Bakker & Ayik Candrawulan Gunadi259Chioment
3 i Studio Legale: Francesco Ago & Gregori
i Studio Legale: Francesco Ago & Gregorio ConsoliBingham Sakai Mimura Aizawa: Taro Awataguchi & Toshikazu SakaiKoreaLee & Ko: Woo Young Jung & Yong Jae Chang KALO & ASSOCIATES: Vegim KrajaBonn & Schmitt: Alex Schmitt & Philipp Mössner Cornejo Méndez Gonzalez y Duarte S.C.: José Luis Duarte Cabeza & Ana Laura MoroccoHajji & Associés: Amin HajjiSRS Advogados in association with Bhikha & Popat Advogados: Momede Popat & Loyens & Loeff N.V.: Gianluca Kreuze & Sietske van t HooftIkeyi & Arifayan: Nduka Ikeyi & Kenechi EzezikaMiranda & Amado Abogados: Juan Luis Avendaño C. &Jose Miguel Puiggros O. 337SRS Advogados: William Smithson & Gonçalo dos Reis MartinsSingaporeDrew & Napier LLC: Valerie Kwok & Blossom HingBrian Kahn Inc. Attorneys: Brian Kahn & Michelle SteffeniniPestalozzi Attorneys at Law Ltd: Oliver Widmer & Urs KlötiTaiwanLee and Li, Attorneys-at-Law: Abe Sung & Hsin-Lan HsuTrinidad & TobagoJ.D. Sellier + Co.: William David Clarke & Donna-Marie JohnsonBingham McCutchen LLP: Thomas Mellor & Rick EisenbieglerVenezuelaRodner, MartÃnez & Asociados: Jaime MartÃnez Estévez Chapter 6 WWW.ICLG.CO.UK© Published and reproduced with kind permission by Global Legal Group Ltd, London 26 LLP There has been much discussion recently in the United Statesfinancial markets about the convergence of terms and features in term). Though typically described as a convergence, the changesare relatively one-sided, with the TLB gravitating toward featureslong familiar to issuers and buyers of HY Bonds. This phenomenonhas been with us for years, but has accelerated recently. In 2013, ayear dominated by strong investor demand and best effortspredictably tested the markets appetite for greater flexibility, whichfrequently meant borrowing even more technology from HY Bonddocuments. In this article, we consider some of the ways in whichU.S. TLB terms have continued to move toward and in some casesexceed the flexibility found in HY Bond terms, and examine theThe U.S. TLB market has its origins in the commercial bank termloan market. In the traditional bank loan model:borrower is experiencing financial difficulty; andAcc
4 ordingly, in this model, upfront covenan
ordingly, in this model, upfront covenant flexibility is limited,accommodating appropriate operational flexibility, but not majoranticipated at closing. Moreover, lenders in that market havepro ratacash flow of the business and other prepayment events. This wasPractitioners active in todays U.S. TLB market will scarcelyrecognise this paradigm. The U.S. TLB market is now dominatedinvestors. These investors tend to view a term loan to a leveragedrelationship. They are often equally comfortable investing in HYcommercial loan market are absent. Accordingly, these lendersoften are not set up to monitor, financial maintenance covenants.documentation. These investors are less focused on deleveragingposition in the capital structure. At the same time, financial buyersborrowers greater flexibility. Over time, this dynamic betweenon U.S. TLB terms. class compared to (generally) fixed-rate HY Bonds. But it isseveral years caused TLB to be fixed-rate instruments accruinginterest at a rate equal to the floor plus the interest rate margin,albeit with significant protection if LIBOR rises in the future. Moresignificantly, during this period, original issue discount (which has long been a feature of HY Bonds, has become a standardcomponent of TLB pricing. In fact, in both initial syndications andprovisions), TLB pricing is now thought of in terms of overallsimply a rate consisting of LIBOR plus an interest rate margin. A second element of economic convergence is the widespreadinclusion of call protection in TLB. In HY Bonds, call protection Monica HollandMeyer C. Dworkin WWW.ICLG.CO.UK ICLG TO: LENDING & SECURED FINANCE 2014 27 LLPRecent Trends in U.S. Term Loan is designed to preserve an investors income stream, by including apremiums that decline over time. In contrast, TLB call protectiontypically 1% payable in connection with repricings of TLBoccurring 6 to 12 months following the closing of the TLB.However, there are examples, particularly in the second lien TLBmarket, of hard calls a prepayment premium of typically 1% tomandatory prepayment of TLB within 1 to 3 years following theno-call periods (often with
5 make-whole calls permitted). A fewtyp
make-whole calls permitted). A fewtypically the sole province of HY Bonds.As the markets focus has shifted from deleveraging over time, itrequirements. Specifically, asset sale prepayment provisions oftenexclude a range of dispositions, include per-transaction and/orSignificantly, as greater flexibility to incur secured indebtednessSimilarly, the calculation of the excess cash flow that is required toprepayment of other indebtedness. Importantly, the ECF sweep willfrequently be reduced dollar-for-dollar by voluntary prepayments orpro-rataamong the TLB lenders.pro-rataparticular class, as it effectively reallocates a borrowers cash flowto particular lenders at the expense of others. Finally, TLB oftenafford lenders the right to reject mandatory payments, therebytraditional offer to repurchase in a HY Bond. Occasionally a negative covenant package for a TLB will beindistinguishable from a related HY Bond, having been copieddirectly from a concurrent or recent bond offering. More often,provisions that are the functional equivalent of the HY Bond termsare included in a more traditional-looking TLB package. Even theentities covered by the typical TLB package bear a strikingresemblance to the typical HY Bond transaction. For example, aTLB document typically no longer limits a borrowers ability toand EBITDA calculations under the TLB) to an overall dollar cap.Rather many TLB, akin to the HY Bond structure, limit the abilityto so designate subsidiaries solely by reference to the borrowerspro formathan HY Bonds, in which a fixed charge coverage ratio (condition typically applies to all such designations. The followingare certain other select areas of covenant convergence. Perhaps the most conspicuous example of the convergence ofTLB toward HY Bonds is the continued presence and evenpredominance in the U.S. TLB market of covenant lite structures.Traditional term loans contained maintenance covenants periodic (typically quarterly) basis. In contrast, HY Bonds wererestricted payments). In a covenant-lite TLB, maintenancerequirements). The deleveraging over time that financial covenantsIn determining complianc
6 e with such incurrence covenants, TLBf
e with such incurrence covenants, TLBfacilities have also adopted a number of other borrower-friendlyfeatures from HY Bonds. These include defining savings and synergies (including costs savings and synergiespro forma basis by, forexample, calculating EBITDA in connection with an acquisition toinclude the acquired entity (and its EBITDA) in the borrowersresults throughout the relevant test period. In addition, many TLB have largely eliminated fixed dollar limitations on aborrowers ability to divest its assets. Instead, assets sales arerights referred to above). In effect, the TLB asset sale covenant hasmake an offer to prepay the loans if not applied first to otherpermitted purposes, similar to what one would find in a HY Bond. The typical 2013 TLB credit facility is crowded with flexibilityincremental indebtedness. This flexibility comes in numerous ICLG TO: LENDING & SECURED FINANCE 2014WWW.ICLG.CO.UK© Published and reproduced with kind permission by Global Legal Group Ltd, London 28 LLPRecent Trends in U.S. Term Loan basis, and inside or outside the credit facility itself. These varioustypes of flexibility have developed independently and in differentoverlapping or inconsistent standards within TLB agreements, andlittle uniformity across the industry. However, they speak to theHY Bonds.First, a limited number of TLB now permit debt incurrence subject2.00x or greater). While in a low interest rate environment thiscreates significant flexibility, there are several mitigants that havesurvived in the TLB market. First, even where a FCCR test for debtsatisfaction of a leverage ratio. This can be contrasted with securedHY Bonds which frequently contain no ratio test for junior lien debtor senior secured debt). Second,maturity, weighted average life, prepayments and, sometimes, moreTLB. The rationales for resisting this are that a borrower that couldrewarded for later improving performance. And, that lenderswater mark of EBITDA performance over the life of the loan as thestarting point for using such fixed dollar baskets. But to a borrower,these arguments contain echoes of a maintenance-covenantconstruct:
7 the debt is stuck in the basket unde
the debt is stuck in the basket under which it wasincurred. Borrowers argue (with varying degrees of success) that,with the markets new, relatively relaxed attitude towardThird, another concept appearing occasionally in TLB isit receives from investors. This originated as a HY Bond concept TLB covenants still tend to differentiate between investments,and prepayments of junior debt, while HY Bonds treat these itemsas part of a single restricted payments covenant. However, asand has been eliminated in a minority of TLB deals.In HY Bonds, restricted payments may be made in the amount of asubject to compliance with FCCR greater than 2.00x. TLB moremay only be used subject to satisfying certain leverage levels. Morerecently, however, the TLB cumulative credit concept has trendedcloser to the HY Bond standard by building based on 50% of CNIAnother common feature of TLB deals is that the leverage ratioinvestments), with the effect of establishing a more lenient set ofconditions than HY Bonds, where the FCCR condition applies to alluses of the builder basket. Relatedly, some recent deals have alsosatisfaction of a leverage ratio. This may be driven, in part, by thedesire to hard-wire dividend recapitalisation capacity into TLB asactivity.Finally, in most HY Bond issuances, the issuer is not limited in the(whether or not guarantors), whereas TLB typically limitsubsidiaries. However, in recent months, a few TLB deals havehas significant non-U.S. operations or a non-U.S. growth strategy.intend to become guarantors of the credit. From the borrowersstructures that may evolve during the life of the loan. Limitationsseem unduly constricting to a borrower. borrowers ability to make acquisitions. This is particularly drivenpositioned to grow opportunistically over time. This manifestsitself in several ways. First, it is now common to allow incrementalfacilities to be utilised on a funds certain basis. Though it takesconditions precedent to a limited SunGard conditionality.agreed ratio or borrowing from HY Bonds again if the leveragepro formaeffect to the acquisition is not worse than itwas immediately before.
8 Third, call protection in TLB now oftenp
Third, call protection in TLB now oftenpay a prepayment premium to the existing lenders. HY Bonds arenot so generous. Finally, permitted acquisition baskets are typicallypro formawith a leverage ratio. Taken together with negative covenant WWW.ICLG.CO.UK ICLG TO: LENDING & SECURED FINANCE 2014 29 LLPRecent Trends in U.S. Term Loan baskets that grow as total assets or EBITDA grow and expansivepro formaIn many respects, the changing makeup of the investors in TLB hasbeen reflected in provisions that alter, in sometimes dramatic ways, One of the clearest remaining distinctions between the TLB and HYBond markets is that a borrowers consent to assignments is stillrequired in TLB. In contrast, free transferability is a hallmark ofHY Bonds, subject to applicable securities law restrictions. Itshould be noted, however, that a borrowers consent in TLB isliquidity of TLB. continued to expand, akin to the affected holder standard in HYBonds. In todays TLB, individual lenders frequently may modifylender approval. Borrowers may also incur additional tranches ofdebt or fungible incremental debt under TLB. In addition, borrowerpro-and without offering to all lenders as has always been true ofHY Bonds. In another change conforming to HY Bonds, affiliates of borrowersoutside the consolidated group may buy TLB on the open market.borrowers realised that, unlike HY Bonds, their TLB did notbalance sheet. Borrower and affiliates buyback provisions havenow become standard in TLB transactions, though they haveevolved in a way that is not identical to HY Bonds. There is usuallya cap on the aggregate holdings of such affiliates of 20-30% of theaffecting their interests as lenders, with restrictions on receivinglender-only information and attending lender-only meetings. Debtfund affiliates of borrowers are typically not subject to thepurposes of voting). In HY Bonds, affiliates of an issuer maypurchase notes without cap, but the Trust Indenture Act (the terms of most HY Bonds even if not TIA-governed, provide thatsuch affiliates have no voting rights. Thus, this is another areawhere the evolution of the TLB market has gone past
9 the traditionalflexibility of HY Bonds,
the traditionalflexibility of HY Bonds, as affiliated lenders now have a greatervoice than affiliated noteholders.As noted above, a principal driver of the evolution of the TLBmarket toward that of HY Bonds has been the changes in therelevant lender base. While commercial banks and other private-bank loans, the TLB market is today largely driven by debt fundsand other public-side investors. As a result, there has been a shiftin the TLB origination process from a lend-and-hold model, inloans to maturity, to an originate to sell model, in which arrangingbanks syndicate the TLB to public-side investors and do not expectto hold those loans. Arranging banks have been under pressure,particularly in the context of best efforts transactions whichattractive to public-side investors. Given that these institutionsissuer-friendly features included in HY Bonds, it is no surprise thatthese terms have increasingly found acceptance in the TLB they arewilling to buy. ICLG TO: LENDING & SECURED FINANCE 2014WWW.ICLG.CO.UK© Published and reproduced with kind permission by Global Legal Group Ltd, London 30 LLPRecent Trends in U.S. Term Loan Tel:+1 212 450 4382Fax:+1 212 701 5382Email:meyer.dworkin@davispolk.comURL:www.davispolk.com Tel:+1 212 450 4307Fax:+1 212 701 5307Email:monica.holland@davispolk.comURL:www.davispolk.com bridge loans, recapitalizations and many other types of transactions involving the use of credit. We are also the leading advi www.iclg.co.uk59 Tanner Street, London SE1 3PL, United KingdomTel: +44 20 7367 0720 / Fax: +44 20 7407 5255 Email: sales@glgroup.co.uk Other titles in the ICLG series include:Alternative Investment FundsAviation LawCartels & LeniencyClass & Group ActionsConstruction & Engineering LawCorporate GovernanceCorporate ImmigrationCorporate Recovery & InsolvencyCorporate TaxData ProtectionEnvironment & Climate Change LawFranchiseInsurance & Reinsurance International Arbitration Litigation & Dispute ResolutionMerger ControlMergers & AcquisitionsOil & Gas RegulationPatentsPharmaceutical AdvertisingProduct LiabilityProject FinancePublic ProcurementReal EstateShipping LawTelecoms, Media & InternetTrad