Borrowers relinquish freedom for covenant holiday

LONDON, April 30 (LPC) - Several borrowers in Europe’s leveraged loan market are asking banks for covenant holidays to prevent creditors from calling in the debt or seizing control of the assets, and lenders are working out what to ask for in return.

Borrowers such as Israeli plastic furniture maker Keter, which recently secured a covenant holiday from lenders, are looking for ways to manage cashflows that have come under pressure from the effects of the Covid-19 pandemic.

Although a significant number of term loan B financings are covenant-lite, they have a springing covenant in the revolving credit facilities, many of which have been triggered as borrowers draw down for liquidity purposes. Typically, the covenant is triggered when 40% of the RCF is drawn.

As a result, borrowers are now subject to covenants, the most common being a debt-to-Ebitda ratio, which they are likely to breach in the current economic climate. Borrowers are therefore looking for financial covenant holidays in order to have some breathing space and are asking for anywhere between one and four quarters. In some cases, the request is for up to two years.

“Almost everyone is affected by the Covid-19 crisis and wants to avoid a covenant breach so in most cases it can be solved by suspending the current financial covenant or changing it. Most situations will get resolved pretty constructively but it is not as simple as ‘give me a 12-month break’ -- there needs to be a package,” a syndicate head said.

Since covenant-lite became the norm across Europe following the last financial crisis, there hasn’t been an occasion where a large number of borrowers have asked for covenant holidays and there is no industry standard. As such, negotiations between borrowers and lenders are challenging.

“We are in the middle of the storm as people try to figure out where to land. Borrowers are asking for financial covenant holidays, waivers and amendments and lenders are in turn asking for certain tidy ups such as enhanced reporting obligations and increased access rights to learn more about what’s going on inside the four walls of a company,” said Jeremy Duffy, finance partner at law firm White & Case.

WHAT DO I GET? Lenders’ requests depend on various factors including sector and geography. They include minimum liquidity tests, access to management presentations, updated business plans and budgets.

Lenders also want restrictions on dividend payments and cash exits and are often open to switching from a debt-to-ebitda covenant to a minimum liquidity or minimum Ebitda covenant.

“There may be a little bit of a fee or margin increase but nothing material. As the company may come under some stress we are instead asking for additional detailed disclosure and a tightening up of their flexibility to carve out assets and secure new financings,” a second syndicate head said.

Some banks want more concessions than others in return for the covenant holidays, and borrower relationships play a key part in negotiations, with those owned by top-tier sponsors expected to be treated most favourably.

“The strength of relationship with a sponsor and a sponsor’s behaviour does weigh upon banks’ attitude,” a third syndicate head said.

On the whole, banks are looking to be constructive to give companies breathing space to get through the current crisis, take on government debt or make acquisitions to expand Ebitda.

“Most lenders are being cooperative and sensible,” Duffy said. (Editing by Christopher Mangham)