True impact of covenant lite
Every treasurer knows it is essential to read the small print on any deal. And one set of small print that seems to be causing a lot of angst is that relating to so-called ‘covenant-lite’ provisions. This new development, perhaps predictably, emanated from the highly leveraged markets in the US, but has been seen increasingly in the UK – for example, in the successful KKR bid for Alliance Boots (see The Treasurer, June 2007, page 08).
It may be tempting to worry about the emergence of covenant lite at a time when highly leveraged deals are so prevalent both in terms of numbers and size. But it is reasonable to ask how much the phenomenon is being talked about as opposed to how much lenders and investors are actually allowing issuers to remove traditional financial safeguards.
Following the Treasury Select Committee’s public hearings into private equity, the ACT pointed out in June in a letter to the Chairman of the committee that although covenant-lite loan agreements may be more relaxed than previous practice for highly leveraged loans, significant covenants and restrictions continued to apply. These deals are in some ways more like those associated with (high yield) bonds rather than with bank loans. Many of the non-banks now making such loans are longstanding bond investors and accustomed to that level of provision. The agreements are competitively negotiated.
On the other hand caution would be sensible. So far, 2007 has been a peak year for corporate mergers and acquisitions by private equity. The appetite for deals seems undiminished and as KKR/Alliance Boots is Britain’s biggest private equity deal to date it can hardly be dismissed as an irrelevance.
In a recent speech, Paul Tucker, the Bank of England’s Executive Director for Markets and a member of the Monetary Policy Committee, pointed to the Bank’s financial stability reports, which have drawn a distinction between a ‘fast fuse’ risk, in which credit is abruptly repriced, and a ‘slow fuse’ risk, in which cheap credit leads over time to overleveraged borrowers and so to vulnerability to a deterioration in the global economy.
He noted: “As time passes, attention has perhaps been shifting to the longer-fuse risk, given signs of a pick-up in aggregate corporate sector leverage and gradual dilution of covenants in loan terms and conditions, most obviously recently in so-called ‘covenant-lite’ transactions in the leveraged loan market.”
Treasurers might perhaps agree with Tucker’s analysis. For a long time treasurers have benefited from a benign debt market, with banks aggressively offering debt which historically is cheap and on high multiples. It doesn’t necessarily follow that these credit conditions will lead to disruption in the overall markets but everyone involved in leveraged deals needs to be aware of the potential impact of adding covenant lite to the mix.
PETER WILLIAMS
Editor
Corporates flee SOX and US stock markets
A host of non-US companies have announced plans to discontinue their US stock market listing o that they can deregister under the Securities and Exchange Act and avoid the requirements of the Sarbanes-Oxley Act.
Davies disclosure report disappoints
The Davies review into issuers’ liability for false or misleading statements has reported, raising the prospect of more onerous burdens being placed on company disclosures.
The hybrid bond, which has been the height of fashion in continental Europe, has finally come to the London market.
US pharmaceutical giant Pfizer, rated Aa1/AAA, offered diversification through an extremely rare foray into the euro market. The issuer placed €900m of 10-year bonds through sole lead manager JPMorgan. Investor demand was very strong, with books oversubscribed within an hour of announcement, and the deal priced in line with guidance at mid-swaps plus 10bp.
To buy adequate protection on large pension schemes you are talking about spending hundreds of millions of pounds.
Business continuity management (BCM) is a significant management issue and a critical component of effective risk anagement. Most organisations have taken steps to implement BCM in some shape or form but few can claim to have implemented it consistently and effectively.
Corporate treasurers are familiar with the benefits of leasing as just one of the financing tools available to maximise the efficiency of the corporate balance sheet and as part of the overall mix of appropriate financing solutions.
He began his career in the building industry and recently returned as group treasurer of sector giant Barratt Developments. Bob Williams talks to Graham Buck about the journey that led him there.
Asizeable cash surplus presents companies with significant medium-term and long-term choices. The obvious option of sitting on the cash may also be the most logical when a company anticipates attractive acquisitions shortly becoming available. In a period of weaker economic growth, it may be able to snap up a struggling rival and strengthen its position in the market. The low cost of borrowing in recent years has also seen many UK companies deliberately accumulate cash for use at a later date.
1 January 2008 marks the start of the Single Euro Payments Area (SEPA). The current impetus among corporates to control risks and reduce costs has led to a greater centralisation of cash management structures and SEPA will accelerate this trend. There are changes that corporates need to make immediately in preparation for the SEPA live date. Although SEPA has many advantages, there are also some drawbacks. It is limited from a geographical perspective, as it does not cover the whole of Europe, or incorporate all its currencies. And it is limited from a technological perspective, as it does not support all payments instruments or deal with corporate-to-bank connectivity, which is a critical issue in the payments world.
During May 2007, Mercer Human Resource Consulting and the ACT approached chief financial officers (CFOs) and treasurers for the third annual survey on managing pension financial risk. As in previous years, the survey sought to determine the extent to which this group viewed pension schemes and their deficits as significant corporate risk issues, and their perception of stakeholder attitudes towards such risks.
Corporates would have been foolish not to take advantage of liquidity and pricing in the bank market in the last few years but would now be prudent to diversify their funding sources ahead of the credit cycle turning.
The difference between the assets and liabilities of the Boots pension scheme has been variously estimated as £20m in surplus (according to IAS 19) and £1bn in deficit (according to John Watson, chairman of the Boots scheme trustees). This article explains how such a large difference can arise and looks at the powers that trustees have to demand cash to make up any deficit from the sponsoring company with the support of the Pensions Regulator.
Since Sarbanes-Oxley was introduced in 2002 to curb the corporate excesses of the Enron era, its requirements have sparked a chorus of complaints. The main bone of contention lies in its requirement on company management to assess and document the effectiveness of internal controls for financial reporting. The SEC is set to replace the rule-based regime with more of a risk-based regime, but in the meantime many of the 1,145 foreign companies listed in the US are checking out.
Paul Gaukrodger and Nathaniel Mead explain how Australian retail property group Westfield uses spreadsheet technology to meet the challenge of long-term treasury forecasting.
Atrust is not a legal body such as an individual or company but a set of rights and obligations that attaches to property in its widest sense. Property can either be physical (such as a house) or intangible, such as in the bond markets, a promise to pay.
So-called covenant-lite credit agreements have made an impact in the leveraged finance market. Stephen Kensell reviews their development and outlines the covenants to be found in the typical high-yield bond.
In recent years, what are now dubbed the emerging ‘BRIC’ economies (those of Brazil, Russia, India and China) have all demonstrated a dazzling pace of economic growth. Consumerism is on the rise in each of the four countries, and reflects in a growing demand for consumer items taken for granted in the West.
Chris Bunton, Adrian Buckley and Catherine Adair-Faulkner analyse the results of the April 2007 sitting of the MCT, AMCT and ICM examinations. included is a list of names of all students who passed.
Now that results are out from the recent round of act examinations, Jennifer Carruth and Graham Buck ask past students what motivated them – and whether it was all worth it.
