Crossing the pond: from US bonds to European loans

This is the first time we are aware of such a provision in a European leveraged loan. We’ve seen similar provisions in US bond offerings, first in the Ancestry.com (Blackstone, GIC) offering in November 2020 (as we described here) as well as in others such as Medline Industries (Blackstone, Carlyle, H&F) and athenahealth (Bain, H&F).

In a nutshell, the provisions in those bonds cap the votes of any single bondholder to a maximum of 20% of the outstanding Notes. Given that most Event of Default triggers in HY bond documentation require holders of at least 30% of the Notes to instruct the Trustee to take action with regards to any Default or Event of Default, this means that no single holder can enforce their contractual covenant protections under the Notes. 

Notes held in excess of the 20% cap will be deemed not outstanding for purposes of calculating voting thresholds under the indenture (i.e., disregarded from both numerator and denominator). However, the issuer has the discretion to increase the voting cap for any individual holder. Essentially, such a provision shifts the balance of power towards the issuer / sponsor, preventing individual funds from taking actions in situations where it would be adverse to the issuer / sponsor (e.g. distressed fund activism) but with the issuer retaining the ability to disapply the cap where it would be in their favour.

Bond / loan distinctions

The Caldic provision is generally similar to the provisions seen in Ancestry.com and the other bonds mentioned above, but with the cap set at 15% rather than 20%. 

As an aside, there are some relevant differences in how bonds and loans operate. In loans, the agent will typically act on the instruction of majority lenders (usually >50%) and often a higher super majority threshold applies to instruct the agent to accelerate. “Yank the bank” provisions, which allow a borrower to remove non-consenting lenders in certain circumstances, are typical in leveraged loans.

It’s also relevant that the loan world has significant restrictions on transferability. Even though we haven’t previously seen a voting cap in a European leveraged loan, we have seen provisions restricting transfers that would result in an individual lender accumulating commitments above a certain threshold (usually 10-20%). In some, but not all cases, this restriction falls away during a payment or insolvency EoD. We are seeing this type of provision marketed in a growing minority of sponsor-backed leveraged loans. 

Further, restrictions on transfers to distressed / loan-to-own investors have become commonplace, falling away only during a payment or insolvency EoD. Restrictions on transfers to, and disenfranchisement of, net short lenders are also becoming increasingly common. Transfers in breach of the restrictions will result in the transfer not being effective and the relevant lender’s commitments being automatically excluded from voting.

In other words, the balance of power in loans is in many respects already more weighted in favour of the issuer / sponsor, particularly with the increasingly punitive transfer provisions. The presence of a voting cap, such as the one seen in Caldic, serves to tilt the scales even further in their favour.