I had the privilege of moderating an engaging panel discussion on 'Europe vs. US – Similarities and Differences' at AFME’s European Leveraged Finance Conference: Navigating the New Future on 29 September. Many thanks to the panellists, Sabrina Fox, Christian Knitzschke and James McDonald for sharing their valuable insights.
My high level takeaways from the discussion are:
- The European leveraged finance market demonstrated increased depth and resilience following the COVID-induced market disruption during the spring of 2020 compared to the financial crisis in 2008. This was evident from the strong issuance and borrowing volumes in the latter half of the year and the fact that some large deals underwritten prior to the COVID disruption managed to clear the market without much pain being inflicted on the underwriters.
- Competition amongst investment banks is intense in both Europe and the US and, together with the abundance of liquidity, are driving more flexible underwritten terms in favour of the sponsor. The element of trust between the sponsor/issuer and underwriter to do “the right thing” during syndication is therefore increasingly critical.
- Investor cross over is a clear trend evident from robust cross border volumes. This opens up an avenue for US and European issuers/borrowers to tap the cross border markets in an effort to optimise pricing and terms. This also means more debt on an absolute basis can be incurred to support an LBO, increasing the scope of targets that may be subject to LBOs (and supporting increasingly large equity valuations).
- As a result of such increased investor cross over and a commonality of market participants across both markets (including sponsors/issuers, investment banks and law firms) documentary terms in the US and European market are rapidly converging. A few pockets of differences still remain, such as the resistance to portability in the US, but the trend of convergence is evident and likely to continue.
- US issuers/borrowers have been more willing to make use of the increased documentary flexibility, such as the capacity to designate Unrestricted Subsidiaries (which are not considered a part of the credit group and are therefore released from any credit support obligations and not subject to the covenant package) to strip value from the covenant group to the detriment of existing creditors. The adverse investor reaction has resulted in an attempt to tighten documentation to prevent or reduce such flexibility, although significant scope for value leakage still exists given the often narrow drafting of the protective provisions. While Europe has not seen a similar level of high profile cases in this respect, the documentary flexibility does exist and it is only a matter of time before a distressed credit takes advantage of such flexibility.
- ESG has come to the leveraged finance markets in a big way as is evident by the surge of sustainably-linked bonds and loans in 2021. The terms will continue to evolve and a few concerns over transparency remain, but investors are looking at ESG disclosure and provisions from a broader perspective than just pricing and consider these key to assessing future viability of a credit. Europe is leading the way on ESG and the US will likely follow.
- An in person conference is way more engaging than zoom!
Panel discussion: Europe vs. US – Similarities and Differences Moderator: Aditya Khanna, Partner, Ropes & Gray