April 8, 2019 - On March 28th, Tess Virmani (LSTA) moderated the “Current State of the Syndicated Loan Market” CLE at the ABA Business Law Section’s Spring Meeting in Vancouver, which looked at deal term trends and recent policy developments in the U.S. corporate loan market. On the legal side, she was joined by Maia Sloss Carson (Wells Fargo) Christian Fundo (JPMorgan) and Shafiq Perry (HSBC), as well as Ted Basta (LSTA) and Judith Fishlow Minter (RBC Capital Markets) who offered the market perspective. Panelists highlighted many of the flexible, borrower-friendly terms that have been in the industry press in the last twelve months: borrowers pushing for prospective adjustments to EBITDA as well as larger and more flexible “baskets”; permitted future debt capacity expanding with MFN protection under continued pressure. On the business side, the panel highlighted the performance of the secondary market and how it relates to the primary market and those deal terms. Despite hot market conditions for most of last year, in the fourth quarter of 2018, and in particular December, the secondary market became volatile alongside the broader markets. The secondary market traded down almost 500 basis points over that three-month period. At the same time, the primary market slowed down to a trickle over the last six weeks of the year as deals flexed higher to clear the market and other terms became less flexible for borrowers. But that trend ended quickly as the secondary market rebounded in January and February. As a result, new-issue spreads tightened once again and deal terms shifted to favor borrowers which reflected a much stronger market in early 2019. Despite the dominance of flexible loan terms for borrowers, the panel also described 2018 as a year of increased document awareness. Lenders were keenly focused on the risk of collateral leakage after lenders were unpleasantly surprised with the borrower’s permitted maneuverings in J.Crew, Neiman Marcus and Chewy. The panel believed that such focus would continue in 2019. The discussion then moved away from deal terms to broader credit agreement developments. New LIBOR fallback language was an important development in documentation in 2018. The panel warned attendees that fallback language should seek to minimize any value transfer upon a transition to a successor rate, but that the two rates will not be identical and fallback language should not require that they will be. Because of the inherent challenge in capturing the difference between LIBOR and its successor, originating new non-LIBOR referencing loans over time is a more practical transition plan that relying on fallback language in legacy loans alone. The panel concluded by noting some important spaces to watch. Windstream has shone a light on net short debt in the loan market and the interrelationship of the CDS market and syndicated loans as discussed in DPW’s recent article. We will see how and if credit agreement drafting responds to address these concerns. Finally, the panel highlighted the exciting emergence of sustainable loans in 2018. (For more information on the LSTA’s sustainable lending initiative, contact email@example.com.) For more on market trends, see Practical Law Finance’s “2018 Year-End Trends in Large Cap and Middle Market Loan Terms”.
At the semi-annual meeting the ABA Subcommittee on Syndications and Lender Relations chaired by Tess Virmani, the conversation continued with an update on developments in the U.S. sanctions regime. Presenter Will Schisa (Davis Polk & Wardwell) described the recent new developments with respect to Venezuela (including their state owned oil company, PdVSA, which has been designated an SDN), Iran (including a discussion of the “significant reduction” exception for certain countries that have reduced the purchase of Iranian crude in recent months), and Cuba (earlier this month, the US State Department announced that it would permit actions under the Libertad Act which authorizes US nationals that own claims to property confiscated by the Cuban government to sue for damages any person who traffics in such property). He also recommended that sanctions risks are addressed both through diligence and contractual protections and he highlighted the practical and drafting tips offered in the LSTA’s updated Sanctions Guidance published last month.