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Europe’s leveraged loan extension wave gives lenders an opportunity to tighten docs, after years during which the trend in primary has been towards looser terms. But demand — especially for the more modest tickets — is enough to limit amendments in many cases, just as recent events once again highlight longstanding investor complaints around areas such as whitelists.

Size matters when it comes to loan extensions, and in a market where new-money supply is thin there is more than enough demand to carry the majority of requests without — or at least with only a minimal — stub. This support comes from both new-money and existing accounts reallocating commitments to make up from the typical 15%-20% dropout rate from those unwilling or unable to extend.

But there is still room for lenders to improve on other terms. Documents remain in focus, and lenders have taken the opportunity to take back some of the more unpopular concessions given over the past couple of years — even if these are around the edges for many deals. “In the main these are tweaks, and I stress that word,” said a legal source.

This push includes blocking the so-called 'J-Crew Trapdoor', a provision named after the eponymous American clothing retailer that allows sponsors to transfer intellectual property out of a restricted group. This blocker has also been added to deals that don’t present an immediately obvious risk for lenders. In early July, for example, R&D engineering outsourcer Expleo included the feature, according to sources, as part of the €485 million three-year extension of its term loan B.

Other areas of focus include tightening RP baskets around such things as dividends and other cash holes, while reducing the ability to add debt or prime existing lenders. That said, sources point out, rising interest rates limit options when it comes to extracting value. “The pressure from higher interest-rate costs reduces the room for cash leakage,” said one manager, who added he is generally happy with the direction of docs.

Ringing the changes
Larger deals that have to carry a much bigger portion of the market offer the opportunity to bring more significant changes. EG Group, for example, is understood to have made comprehensive changes to docs as part of the extension of $6.1 billion of term loans across euro, dollar, sterling and Aussie dollar tranches that closed at the end of June.

These included requirements to put 100% of proceeds from asset disposals towards debt repayments until the firm meets its 4.5x leverage target from a 50% requirement previously, market sources (away from the borrower) explain. Even after this, at least 25% of disposals must be used to repay debt, these sources added. “Lenders were keen to hold the company to its word on deleveraging,” said one account. In addition, the margin ratchet was amended to one step down and baskets and fixed-charge cover ratios were also tightened, sources said.

In the case of a debt complex the size of EG's, managers agree there are limits to the scale of interest costs that can be put on the business, which makes the doc package of greater importance. In the event, the euros on this deal priced at the wider end of talk of E+550 and 96 but were extended in full, which left just a $70 million stub split roughly equally between sterling and Aussie dollars to address. 

EG is not the only big-ticket maturity to be dealt with recently, as Upfield extended tranches of €1.872 billion, $797 million and £468 million of its €3.9 billion term loan pile by 2.5 years to January 2028. This translated into more than 80% in aggregate extended across the senior facilities and left stubs of €527 million, $40 million and £164 million that are tipped, according to investor sources, to be dealt through the bond market at a later date. Non-extending lenders also received a roughly 25% repayment, market sources add.

The deal closed with doc changes including on the J-Crew blocker, adjustments to the margin ratchet, and other changes such as the tightening of various RP baskets. The plant-based spreads maker had come under pressure in the wake of the war in Ukraine, given feared disruption to crop production, with the euro loans dipping into the 70s last year. Since then, investors note the company has recovered as wider food inflation including milk prices rose faster than vegetable oil inflation. This in turn has allowed the company to maintain pricing power and has supported margins — and hence deleveraging. Even so, the depth of last year’s secondary slump meant some lenders were more reluctant to extend, lender sources explain.

Also in July, Ammega wrapped a €1.015 billion extension and second lien refinancing with doc changes and just a €70 million stub. Ammega’s first lien loan stood at €980 million, meaning the firm could have extended the facility in full. Instead the group opted to clean-down its $86 million second lien which sponsor Partners Group had already reduced through revolver drawdowns. “Doc improvements from a B3 name that has already made use of available flexibility is a quid-pro-quo for an extension of this size,” said one lender.

Whitelists in focus
There are still areas of concern for lenders that sponsors are loathe to address. Whitelists, for example, are back in focus following the move to Chapter 11 of GenesisCare, the cancer-care group owned by doctors and management, China Resources, and KKR. Loans backing the firm had been in the 60s and 70s in secondary until the latter mid-part of last year, but with little liquidity given the only bid available was from distressed buyers outside the whitelist.

This left CLO funds stuck in the loans as they drifted lower, and the firm burned through cash before filing for bankruptcy on June 1 in the Houston Court. Then the loans slumped from the mid-20s to the low-teens, crystalising losses for many lenders that had been attempting to exit the name for the past year. “Whitelists don’t exist in high yield and they should not exist in loans,” said one manager. “If sponsors want to control their syndicate then the payback is they should come up with solutions while there is still value in the business,” another manager said. “This obviously didn’t happen in this case.” 

Managers also concede that part of the attraction for sponsors to loans is their flexibility, and that includes flexibility around the syndicate and document terms. And with some large new-money tickets — most notably from WorldPay — working their way towards global markets, sources say it is an open question as to how many of the document gains seen over recent months will make their way into new deals. “There is still strong competition among banks and that’s not just among themselves, but also with direct lenders,” concluded one manager.

Featured image by EpicStockMedia/Shutterstock
 

This article originally appeared on PitchBook News