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Interesting LMA early evening seminar yesterday hosted by Allen & Overy on ‘Trends impacting loan transfers and debt syndication in the Leveraged Finance Market’. On the panel were Filippo Crosara (Barclays), Matt Moore (A&O),
James Slessenger (Xtract) and Ash Tehrani (J.P. Morgan).
The discussion focused on the increasingly restrictive nature of the transfer provisions in leveraged finance facilities agreements.
The seminar started with setting out a typical market position in the current climate — the Parent is required to consent to assignments and transfers (subject to reasonableness and deemed consent), unless the transfer is made 1) to other Lenders,
Related Funds or Affiliates, 2) to entities named on an Approved Lender List or 3) following certain material Events of Default (typically only insolvency and non-payment). The restriction and exceptions are then subject to an override that, in
any event, there are to be no assignments or transfers to Industrial Competitors, Loan to Own Investors, Distressed Debt Investors or Defaulting Lenders without the Parent’s consent (no obligation to act reasonably or deemed consent).
The speakers highlighted that the inclusion of the override could potentially lead to unexpected results, eg a lender being named on the Approved Lender List but then denied entry into the loan by the sponsor on the basis that it constitutes an Industrial
Competitor, Loan to Own Investor or Distressed Debt Investor. The increasingly wide nature of these categories was also discussed as causing issues for lenders seeking to transfer their participations.
Recent sponsor moves to further restrict sub-participations were also discussed, with a proportion of deals now including silent sub-participations, ie those that do not involve any voting rights, in the transfer restrictions. This was seen as a reflection
of sponsor distrust in the European market that the lender won’t be influenced by the holder of the economic interest. The widening of the definition of sub-participations to include arrangements with a similar economic effect, including
any credit default or total return swap or derivative, was highlighted as a further obstacle to making transfers.
Finally, the panel discussed potential consequences if a transfer is made in breach of restrictions in the facilities agreement. The point was made that provided a credit is relatively healthy, the clause is unlikely to be policed particularly stringently,
either by the sponsor or agent, leaving the door open for transfers to be made in breach. Disenfranchisement of the new lender was seen as the most likely consequence to be implemented in practice, with the Parent seeking specific performance
to unwind the transaction or seeking damages much less likely. Yanking the lender was another possible option for the sponsor, provided a new lender could be found willing to take on the debt.
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