September 15, 2017 - At the ABA Business Law Section Annual Meeting in Chicago, the Syndications and Lender Relations Subcommittee sponsored two excellent programs on the middle market. The Subcommittee, led by Maria Barclay (Chair, Practical Law) and Tess Virmani (Vice-Chair, LSTA) invited Jane Summers and Andrew Fayé, partners at Latham & Watkins, and Kate Grimm, Associate General Counsel at Antares Capital, to present “It’s Always Better to Be Direct: A Guide to Direct Lending”. The speakers noted that the business model of direct lenders which primarily focuses on return from actual lending is very different from a distribution model and this has implications for the deal terms that they will accept. Given that many direct lenders are “buy and hold”, their credit discipline can be conservative. Some of the terms in the larger syndicated market have met resistance in the direct lending space. For instance, senior lenders largely remain disinclined to forgo a financial maintenance covenant or to adopt more incurrence-based covenants. Direct lenders will also carefully consider cash netting and often include caps or other limitations. EBITDA add backs also tend to be more conservative than in large cap transactions with caps on adjustments being common. However, as competition has increased and sophisticated sponsors have played further down market, there has been increased convergence of terms in other areas. For more information, see Practical Law’s Expert Q&A.
At the Subcommittee meeting, Geoffrey Peck, partner at Morrison & Foerster, demystified unitranche financings. The popularity of the unitranche product continues to grow and with it so has the complexity of the financings. What had traditionally been a single tranche term loan has now evolved. Many transactions now include revolvers as well and some transactions (like RadioShack) can be multi-facility arrangements with more than one Agreement Among Lenders (AAL). Focusing on the key terms in the AAL, he noted some of the alternatives seen in the market and highlighted potential pitfalls for the unwary. Tess Virmani, SVP & Associate General Counsel, introduced the new LSTA AAL form (still in development) which would be circulated for committee review shortly. For a summary of unitranche trends, see Practical Law’s Unitranche Developments.