Banking & Finance around the world—US

14 Aug 2015 | 5 min read

What is the current condition of the US banking and finance sector? We asked Jeff Norton, head of US banking at Linklaters in New York, and Danelle Le Cren, partner at Linklaters in London, about the state of the loan markets and recent market developments in the US as part of our banking and finance markets around the world series.

What is the current state of the loan markets in your jurisdiction?

Jeff Norton (JN): There are deals going on, but it is a down period in terms of pure acquisition finance activity compared to where we were this time last year.

What we are seeing are more of the alternative credit providers, the non-regulated financial players, doing more transactions and climbing up the league table. They seem to be filling the gap for additional leverage. Most of the traditional banking financial institutions are trying to stay below 6x leverage. In the current environment, strategic buyers have some advantage over financial sponsors, as they can pay the earnings before interest, taxes, depreciation and amortisation (EBITDA) purchase price multiples that the buyer wants, with lower leverage.

Have there been any significant recent market developments?

Danelle Le Cren (DLC): There are a number of factors that are affecting the terms of deals. Covenant-lite loans are still in favour, but there have not been so many this year. This is somewhat driven by the leverage lending guidance and the deals being done. Many of the deals have the ability to bring back a covenant, as there is still some uncertainty about how the market will react to certain credits.

JN: We are seeing less leverage in the market—the ratio is just under 6x now. The non-bank regulators are keeping the market competitive for transactions—covenant-lite loans and loose terms are still out there and are pushed by the fact that non-regulated entities are putting out more aggressive term sheets and everyone needs to stay competitive.

Banks are focusing on the EBITDA calculation, which has continued to be more expansive as deals clear the market and precedent is set. We are seeing more of a push for bringing forward synergies and cost savings for longer periods, say 36 months, into EBITDA for year one. This and other changes to the calculation help with leverage and also make financial sponsors a bit more competitive with strategic bidders.

The core financial definition of EBITDA, even if it does not drive financial maintenance covenants, is constantly developing to provide flexibility for the overall leverage profile as well as covenant exceptions, baskets and incurrence tests that make the covenant framework flexible and adaptable going forward from closing. Precedents play a prominent role in developing this—from deal to deal, you have to see what has worked in comparable situations from both a credit and syndication perspective.

DLC: The regulators have started to notice the way EBITDA is defined and the impact on the terms of deals. Sponsors will continue to find ways to maintain higher debt as part of the overall deal capitalisation.

JN: I think everything we are seeing is ‘rounding around the edges’ rather than a fundamental change in approach in terms of the deals that are being done. There is no indication we are going back to traditional bank covenants in this market. The covenant framework is not changing, only that the overall leverage context is being contained right now. If anything, the trend towards incorporation of high-yield concepts for covenants and other key terms has slowed a little, but we are still trending that direction.

DLC: This is the trend of taking the concepts from high-yield and moving them into the leveraged finance world. There are a few concepts that haven’t been embedded yet, but this movement will continue, and products will continue to look more similar over the course of this year.

Are there any forthcoming changes to the law or other upcoming matters that may affect the loan markets?

DLC: We are not expecting anything. There are regulatory laws coming out in jurisdictions all over the world, but specifically, what the banks are dealing with at the moment is the leveraged lending guidance.

JN: What happens here essentially is that every bank’s ongoing relationship and dialogue with the regulators shapes its policy, and hence shapes the market for us. It is not changes in law per se, but more changes in policy that come from that ongoing dialogue.

Do you have any predictions for the remainder of the year?

DLC: We do a lot of cross-border work and over the last couple of years we have seen how these terms in the US market have infiltrated Europe, hit Asia and are encroaching into South America.

JN: People are choosing New York law as their choice of jurisdiction and the US approach to documentation as an alternative to the Loan Market Association approach more and more. We expect this to continue because the US market and the appetite for debt product is important for transactions globally. It’s difficult to predict deal trends going forward. People are focusing on Greek and UK exits from the EU among other possible market-impacting events around the globe—a lot is in flux right now in the macro-economy, and it cannot help but have a chilling effect on deals and appetite for risk.

Interviewed by Duncan Wood.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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