June 21, 2018 - On June 13th Linda Filardi (Capital One), Alex Spiro (PNC) and Jane Summers (Latham & Watkins) delivered a webcast presentation on Current Deal Terms for Corporate Borrowers and Other Hot Topics. Before highlighting some current market issues, the presenters compared deal terms across the “pro rata”/Term Loan A (TLA) and Term Loan B (TLB) products noting that many of the differences in terms are a result of the different institutions that act as lenders (banks in the case of TLAs and institutional investors in the case of the TLBs) as well as the need for liquidity in the TLB product. TLAs are packaged with a revolver and typically provided by banks looking for other revenue opportunities and are not typically seen in sponsored, broadly syndicated transactions. TLAs tend to be cheaper and shorter in maturity than TLBs with a more rapid amortization. The lower spread together with the fact that these “relationship lenders” do not typically sell out of these loans results in borrowers having less covenant and leverage flexibility. Two maintenance covenants (with tighter cushions and step-downs than might be seen in TLBs) are customary. TLAs may have another feature absent in TLBs – collateral release and reinstatement provisions. This provision, which is more common for companies that have had unsecured facilities in the past, allows for the collateral securing the loan to be released when a borrower achieves investment grade status (sometimes as well as reinstated if investment grade status is lost).
The discussion of terms seen in loans to corporate borrowers set the stage for some of the new regulatory and compliance issues banks face in the loan market: 1) LIBOR replacement, 2) FinCen’s new customer due diligence requirements, 3) lending to the cannabis and gun industries and 4) the EU’s new Global Data Privacy Regulations (GDPR). As has been widely reported, the loan market is grappling with what a transition away from LIBOR may look like. In response, new credit agreements are including new amendment language to allow for the selection of a LIBOR replacement throughout the large cap and middle markets. (For a discussion of recent developments in LIBOR replacement language, click here.) FinCen’s new customer due diligence requirements implemented on May 11, 2018 generally provide for banks to identify and verify the identity of the beneficial owners of certain legal entity customers (e.g. non-publicly traded borrowers). While the methods of distributing the required information to syndicate members are still taking shape, there has so far not been a disruption in the loan market. (For more information on the new rule and the LSTA’s BOC form, please click here.) The speakers noted the challenges that marijuana-related businesses pose for banks given that marijuana has been legalized in certain states (and under different regimes) but remains a “Schedule 1” federal drug. They also flagged the private and local legislative developments around servicing the gun industry. Finally, the speakers warned loan market participants to be aware of the scope and requirements of the newly-effective GDPR, which may have direct consequences for US entities if personal data of EU data subjects is processed.