![]() ![]() It must not be reproduced or circulated to any other party without prior permission of Fidelity. This document is provided for information purposes only and is intended only for the person or entity to which it is sent. This document is for Investment Professionals only and should not be relied on by private investors. But the renegotiations offer an exciting opportunity to rethink the borrower-lender relationship, and – at the risk of crystal ball gazing - a shift in that dynamic could offer investors a brighter future in 2023. Elsewhere, terms that favour issuers such as ticking fees, margin ratchets, and dividend buckets have in recent years made deals riskier for lenders and chipped away at the strength of the product.Īlthough more and more borrowers are likely to approach their existing lenders to update outstanding loans this year, even a tsunami of A&E deals over the next few months would not be enough to fix the terms on every deal in the leveraged loan market. In 2022, around 97 per cent of the deals that were newly priced in the European market were done on a covenant-lite basis with little to no maintenance protections available to lenders. This is a crucial development after several years of investors having to take what they can. ![]() Sponsors are also getting creative to entice lenders to extend existing deals, for example by putting in additional preference shares to make leverage ratios more attractive. ![]() After a long period of cheap capital in which borrowers held the upper hand, these new deals provide investors with a fresh look at all terms – including the language in the documentation and even covenants. The upcoming wave of amend-to-extend (A&E) transactions does not just present investors with an opportunity to pick up a substantial chunk of yield or a few basis points on a fee. The ability to differentiate between these two categories of borrowers will be key in the coming year: although most amendments are potentially lucrative exercises for investors, others could offer little more than the rearrangement of deckchairs on a ship bound for default. Holders were paid another eight basis points fee to agree to the exchange.Īlthough stronger companies will be able to swallow these higher spreads and fees, more marginal companies may struggle – particularly as the larger maturity wall in 2025 begins to creep closer. In the high yield bond market a similar trend is underway, and single-B rated German pharmaceutical firm Stada recently completed a liability management exercise that saw it replace its 3.5 per cent secured bonds with a 2024 maturity for new bonds due in 2026 priced with a 7.5 per cent coupon. Lenders were also offered two basis points in upfront fees for committing to the new deal. The resulting yield was 7.25 per cent despite no significant change in credit quality. One of the company’s previous euro-denominated loans had been priced at 300 basis points over Euribor, while the new deal offered investors an additional 175 basis points of margin with an original issue discount on top. In the loan market late last year for example, Sebia, a clinical equipment manufacturer, completed a €900 million deal to extend the maturity of its financing to December 2027 from September 2024. The deals frequently come with an attractive fee for investors, while terms are updated to reflect market conditions more accurately. This way companies can negotiate directly with their investors and avoid the vagaries of the primary markets. However, given the treacherous issuance conditions and spiralling costs in the primary markets, borrowers are instead looking to refinance this maturing debt privately, arranging amendments and extensions of their outstanding loans with existing lenders. But while the maturity wall has mostly been dealt with, a handful of 2024 deals still need to be replaced and issuers are beginning to look cautiously at their loans due in 2025. ![]()
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