By Jonathan Schwarzberg and Lisa Lee
NEW YORK (Reuters) - US investors are pushing back on some of the more aggressive features in leveraged loan credit agreements that allow private equity-owned companies to increase debt in a volatile economic environment.
Features that allow companies to boost the size of existing loans by adding extra debt without consulting lenders are in the firing line, as difficult market conditions give lenders an excuse to roll back many of the borrower-friendly provisions that have been introduced in the last few years.
Investors are now objecting to growing free-and-clear incremental baskets that allow companies to add more debt over time, after winning concessions on several other aggressive features of loan documents after the US leveraged loan market seized up in the fourth quarter of 2015.
They are having some success. Software maker Solera Holdings was forced to remove a floating option to raise additional debt for acquisitions or dividends in early March, after investors demanded that the growing part of the free-and-clear basket was removed as a condition of lending.
The baskets give private equity-owned companies flexibility to make bolt-on acquisitions or pay dividends, which increase leverage levels and can significantly increase the risk of default in an economic or business downturn.
Newer performance-based incremental baskets are known as ‘growers’ and can increase if companies perform well.
In the floating option, the amount of additional debt is tied to performance including earnings before interest, taxes, depreciation and amortization (EBITDA), which grow and allow companies to add more debt as EBITDA increases and are capped by a ceiling. Earlier baskets allowed companies to add a fixed amount of debt without asking lenders.
Investors are regaining the upper hand after months of depressed oil and commodity prices and gyrating equity markets have dented confidence and liquidity in the US leveraged loan market and are becoming far more vocal about aggressive documentation in an environment of declining credit quality.
Chipmaker ON Semiconductor decided not to include performance-linked baskets in a US$2bn term loan backing its purchase of Fairchild Semiconductor, which is currently in the market, and opted for a fixed option for future incremental term loans instead.
Investors have also won concessions on other fronts, including removing most favored nation sunset clauses, which allow companies to sweeten pricing on existing term loans if any new debt is issued with more favorable terms, and extending call protection on newly syndicated term loans.
(Editing By Tessa Walsh and Michelle Sierra) OLUSECON Reuters US Online Report Economy 20160311T160250+0000