Although leveraged loan volumes increased 74% YoY in 2023 (though they’re still down considerably on 2021), A&Es dominated volumes and only 8.6% of overall issuance came from LBO deals. New money supply stayed low in H1 24, which was also hit by a wave of repricings.

With A&E and add-on/repricing transactions dominating, new senior facilities documentation, rather than amendments and/or restatements of an existing SFAs, has lagged. 

While many A&E SFAs (with underlying documentation of the 2017-18 vintage) may be considered ‘tight’ by current market standards (and in some cases borrowers have needed to make additional concessions to get a deal over the line), new SFAs over the last year and a half have generally picked up where 2021 left off. 

“Sponsors have tried some are very, very aggressive terms this year, but a lot of it got pushed back, so it’s kind of a yes and no on deterioration,” said one CLO PM.

Some of the new SFAs we saw in 2023 were amongst the most aggressive we’ve seen in the European leveraged loan market. H1 24 largely continued in this vein, if not a bit more restrained (the sample size of new SFAs in 2023 was small, so a few aggressive deals will have had a notable impact on the stats for that year).  

However lenders have been particularly sensitive to docs gaps after the Altice fiasco, according to buysiders, lawyers and bankers speaking with 9fin. (You can read our coverage of said fiasco here.)

“The sentiment used to be: ‘they have the ability to do this in the docs, but I know the sponsor. They won’t,” another CLO PM said. “We now know what a naïve stance that is.”

Rob Davidson, partner at Paul Hastings, said: “Now, the focus is on smooth execution. There's an acknowledgement that issuers don’t want to risk jeopardising pricing by pushing for something that is nice to have, but isn't essential.” 

Below we will look back at a selection of trends in new SFAs in the broadly syndicated European leveraged loan market in H1 24.

Restricted payments

J.Crew in fashion

The trendiest ask from lenders in H1 24 was a J.Crew blocker.

Over 80% of the new H1 2024 SFAs reviewed by us provided for a J.Crew blocker — which limits value leakage through transfers of certain property (e.g. material IP) to unrestricted subsidiaries — compared to around a third of new SFAs in 2023 and only 16% in 2022. (Read our educational on the feature here.)

“There's unquestionably a massive increase in focus on value leakage or value transfer,” said one levfin banker.

But, even if present, the protection may be inadequate — or even illusory. 

“Often one of the key things investors will request is J.Crew protection, but J.Crew protection isn’t binary,” said Chris Medley, partner at Linklaters. “You can ask if a document has J.Crew protection and the answer can be yes, but does that mean it completely covers off the concern? Not necessarily.”

Another lawyer admitted: “It can become a box-ticking exercise.”

Typically the protection is limited to material IP, and in some cases further limited to material IP held by certain entities (e.g. only so long as held by guarantors in limited security jurisdictions). The blocker may limit investment of IP outside of the restricted group, but may not restrict other means of leakage, such as restricted payments or asset sales. In some cases, the blocker only applies where the primary purpose is for an unrestricted subsidiary to raise debt secured by such IP.

“What’s really adversely impacted lenders, is not margin ratchets, and not ticking fees. The real issue is aggressive stripping of assets or value, moving things to unrestricted subsidiaries, dragging existing lenders below par,” said a third CLO PM. “That’s the difference of a recovery of 40 versus 90.”

Leverage tests dip for available amount baskets…

Around three-quarters of new H1 24 SFAs include a further ‘available amount’ (or similar) basket in addition to the CNI based builder basket — similar to 2022 and 2023. 

But leverage tests on these baskets are eroding, particularly where a payment is 100% funded from the available amount. 

Only 56% of available amount baskets in new H1 24 SFAs required a ratio test (usually a senior secured/total net leverage test), consistent with new 2023 SFAs, but notably down on 2022, when ratio tests were required in just over 70% of baskets.

And none of the available amount baskets in new H1 24 SFAs require a ratio test where the basket is used to fund investments (in new SFAs in 2023 only one required a ratio test). By contrast, in 2022 around half of the available amount baskets required a ratio test for investments.

“Value leakage has always been important to investors, but sponsors have become more sophisticated in the permissions which are included to permit leakage,” said Medley. “We’re seeing increasing use of available amount and cumulative credit concepts, which have become prevalent in strong sponsor documents — and these concepts are becoming broader and subject to fewer conditions. The question is whether the market is looking at those in detail.”

Over 40% of Available Amount baskets new H1 24 SFAs included the permitted debt limb — arguably the most controversial.

…and for builder baskets 

We’ve also seen this trend in builder baskets.

50% CNI based builder baskets feature in 95% of H1 24 SFAs, whether the SFA follows the HY bond style covenant package or the more traditional LMA form. 

The vast majority of these baskets require a financial ratio test (typically FCCR and/or total net leverage), with only one new H1 2024 SFA we saw omitting this. 

But in recent years we’ve seen an increase in SFAs lacking a ratio test where the basket is used to fund investments (as opposed to equity RPs or subordinated debt payments) — a little under 40% of builder baskets in H1 24 allow investments without any financial ratio test.

Like previous years, over 80% of these builder baskets are ‘salted’ with a starter amount, available for RPs even before any accumulation of CNI or other amounts in the basket.

Pricing

Death of the ESG ratchet?

Only 5% of new SFAs 9fin reviewed in H1 24 included an ESG ratchet (effective day-1) — a dramatic drop from 2021 and 2022, where it was present in a little under half of new SFAs reviewed.

Instead, nearly a quarter of new H1 24 SFAs provided a framework for the introduction of an ESG ratchet, typically requiring majority lender consent to implement or to otherwise agree the relevant KPIs.

“It can be difficult to reach alignment because there’s not an accepted market practice,” said Davidson. “The ESG conditions can be quite bespoke depending on the sector and the business, so when there are short windows to hit the market, it can be difficult to organise an ESG ratchet that looks right to both lenders and companies.”

Standard margin ratchet holds

The market standard leverage-based margin ratchet hasn’t changed much over the last few years, and provides for two 25bps step-downs at each half turn (approximately) of deleveraging, following a ratchet holiday (usually six months). Deviations from this (e.g. three step-downs) are typically met with pushback:

12-month call protection vanishes

Unlike the last couple of years, no new SFAs extended call protection for a 12-month period (though we did see 12 months in a small number of A&E deals). But all new H1 2024 SFAs provided TLB lenders with the customary six months of 101% soft-call protection (limited, as usual, to repricing transactions, with typical exceptions and limitations). 

Indebtedness

Inside maturity baskets become more common

“Inside maturity baskets” (which allow a certain amount of incremental debt to mature inside the TLB maturity) have been increasing both in prevalence and size over the last few years. 

Such baskets were included in around 80% of new H1 24 SFAs reviewed by us. In 2022 we only saw these baskets in a little over half of the SFAs we reviewed. Half of these baskets in H1 2024 were set at 100% EBITDA, whereas in prior years 50% EBITDA was much more common.

While there is usually a focus on the presence and composition of MFN protection and maturity conditions for incremental facilities, it is often overlooked when such protections do not apply at all where the incremental debt is incurred outside the SFA (e.g. sidecar debt).

Incremental facility 'freebies'

As has been the case for several years now, nearly all SFAs include a ‘freebie’ basket, available in addition to ratio-based incremental debt capacity (and available regardless of whether any ratio test is met). 

This freebie basket is usually a grower basket set at 100% EBITDA, as was the case in around three-quarters of new H1 2024 SFAs (similar to 2023 and a little up on 2022). In a minority of deals we see this basket set at 75% EBITDA or, infrequently, 50% EBITDA.

No move on MFN protection

MFN protection remains a key requirement for TLB investors and is seen in the vast majority of SFAs — though limitations and exceptions (beyond the scope of this piece, but discussed here) often render it of limited practical benefit.

MFN for a euro-denominated TLB is typically set at 100bps, as has been the case in well over 80% of the new SFAs we reviewed in H1 24 and each of the last three years. 

Typically the MFN protection will sunset after a six-month period, as was the case in just over three-quarters of new H1 24 SFAs, with the remainder applying for a 12-month period.

Ratio debt

The ability to incur unlimited debt (either unsecured or junior secured or effectively senior depending on lien permissions) subject only to a FCCR test has become increasingly common over the last few years. We saw it in around 85% of new H1 24 SFAs, compared to just under 80% in 2023 and a little over 60% in 2022 (most of these also include an alternative total net leverage test for such debt incurrence). 

2x FCCR has been and remains the standard test for such debt, and while 1.75x has sometimes been seen in the US market, it remains very rare in the European market (we only saw this in one deal in 2023 and so far in 2024 we have only seen it in one draft SFA).

Sacrificing RP capacity for debt capacity

The ability to sacrifice restricted payment capacity for debt capacity is a feature that has gained momentum since 2018.

We saw this ‘available RP capacity amount’ (as it is often called) in a little over a third of 2021 and 2022 SFAs. This ballooned in new 2023 SFAs (around two-thirds of such SFAs), but given the small number of new deals in 2023, we caution against placing too much weight on this trend. 

“There's been a shift in the comments that we get from lenders that show people are much more focused on this topic where they hadn't been before,” a banker said.

In new H1 24 SFAs, we only saw the available RP capacity amount included in just under a quarter of deals. But many add-on or A&E transactions through 2024 had existing SFAs including this provision. 

Portability in refis, not new money

Portability in leveraged loans remains rare, and we have not seen it included in any new SFAs (including for new LBOs) in H1 2024 or 2023. 

We occasionally see portability included in add-on/refi transactions where portability is added to an existing SFA (typically where the sponsor has owned the company for several years). But as with any novel feature, once it starts to become accepted in deals where there is a strong commercial justification, there’s a risk that it gains momentum and becomes more widely used.

“Lenders are willing to consider portability when the story is there — i.e. where sponsors have flagged that there’s a likely sale in the future and there is an expectation that customary conditions will be included, for example a leverage condition, a whitelist, AUM conditions,” said Reena Gogna, partner at Paul Hastings.

See 9fin’s coverage of the trend here.

Deemed consent erodes 

Over the last couple of years we have seen ‘deemed consent’ provisions — where a borrower’s consent to a transfer will be deemed given if the borrower does not respond to a request within a specified period of time, typically 10 business days — increasingly omitted. 

Over half of the new H1 2024 SFAs we reviewed omitted this traditional leveraged loan provision.

On the other hand, lenders are holding firm in resisting the inclusion of lender holding caps. These caps restrict any lender from holding more than a specified percentage (e.g. 10%) of SFA commitments. We only saw such a cap in one new H1 2024 SFA – while proposed in a handful of others, it was removed during marketing.

EBITDA adjustments

A 25% EBITDA cap on projected add-backs is market standard and was present in around 80% of new H1 24 SFAs — consistent with 2023, but an increase on 2022 and 2021 (when we saw 20% EBITDA caps in a notable minority of deals).

The ability to inflate EBITDA for uncapped projected cost savings and synergies remains unusual (only 5% of new H1 2024 SFAs).

“Even the uncapped position is unpalatable at the moment,” said Gogna. “Lenders are continuing to push back, saying that's not what the market will accept.”

Nearly all SFAs include a look-forward period for realisation (or expected actions towards realisation), typically set at 24 months — as was the case in around 80% of new H1 24 SFAs.

However, most SFAs (regardless of any cap or look-forward period for projected cost savings and synergies more generally) allow uncapped add-backs and adjustments consistent with those reflected in the base case or quality of earnings report in connection with the relevant transaction and/or future acquisitions.

A note on our samples

The stats we present are based on new SFAs reviewed by us (i.e. newly negotiated SFAs, be it for a new LBO, refinancing, or some other purpose), but exclude A&E and add-on transactions where documentation is based on an existing SFA from a prior year.

Our samples are based on European SFAs governed by English law (or, on occasion, the law of another European jurisdiction). We have not included ‘Yankee loans’ (for European borrowers who go stateside and raise debt under NY law governed credit agreements), given market differences.

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