28 May 2007
Part 1 of this note focuses on the debate about non-bank Lenders, and the techniques available to Borrowers wishing to control and manage their syndicate membership. Part 2 focuses on the influence of credit derivatives on syndicated loans.
The climate for raising syndicated debt in the UK is currently more favourable to Borrowers, especially in the leveraged market, than at any time over the last 10 years. Factors include low interest rates, the growth in the appetite of collateralised loan obligation vehicles (“CLOs”) and hedge funds, the private equity boom, the immense growth in the secondary loan markets, the hedging and arbitrage capabilities of credit derivatives, and the development of synthetic securitisation techniques. All these have combined to bring significant benefits to Borrowers, in terms of facility size, pricing and covenants. “Covenant mulligans”, which allow a breach on a covenant testing date to be ignored unless repeated on the next, have been succeeded by the arrival from the US of so-called “covenant-lite” deals, without the tight financial controls that have traditionally typified syndicated lending.
The value of the global credit derivatives market has increased massively over the last few years, to $26,000 bn in July 2006, according to ISDA. This development is one of the factors which has created the currently friendly climate for Borrowers in the UK. Along with low interest rates, the growth in the appetite of CLOs and hedge funds, and the development of the secondary loan markets, the hedging and arbitrage capabilities of credit derivatives have fuelled an increasingly Borrower-friendly market, especially in the leveraged sector. There has been extensive press coverage of the ease with which it is currently possible to raise substantial amounts of syndicated debt with tight pricing and loose covenants.
