Goodwin Insights November 17, 2022

Debt Download

November 17, 2022

Welcome to the inaugural edition of Debt Download, Goodwin’s monthly newsletter covering what you need to know in the leveraged finance market.

Note: Some of the links in this newsletter may redirect you to a subscription-only resource.

November 17, 2022
November 17, 2022
November 17, 2022

In the News

  • Covenant Review recently surveyed the loans in the Credit Suisse Leveraged Loan Index for Serta, PetSmart/Chewy and J. Crew “loopholes” and found that 69.5% of the loans included a Serta (or majority consent voting) loophole; 42.2% of the loans included a PetSmart/Chewy (or “phantom guarantee”) loophole; and only 7.4% of the loans included a J. Crew trapdoor (or ability to transfer material IP to unrestricted subsidiaries outside of the credit group). This Covenant Review report analyzes language and trends in recent transactions like Incora and Revlon where companies seeking amendments to approve lien-stripping transactions (but lack the necessary votes) have instead issued new debt to creditors that would vote in favor of the amendment.
  • In an effort to create a standardized environmental, social and governance (ESG) disclosure questionnaire and to promote consistency of ESG data in the loan market, the Loan Syndications and Trading Association (LSTA), together with certain credit investors (including Oak Hill and Apollo) and other trade organizations, have released a new template for borrowers to provide ESG data as part of the launch of the ESG Integrated Disclosure Project.

Goodwin Insights

As of the date of publication of this inaugural Debt Download, the credit markets remain challenging. Nevertheless, we are seeing glimmers of optimism: a hope that with the approaching new year (with its attendant refreshed quotas and mandates for deploying capital) we will see a slow, but steady, improvement of market conditions. By way of recap of current trends we are seeing:

  • The broadly-syndicated market recently has been all but shut, save for a slow trickle of new issue deals, with a backlog of paper on Twitter and other committed deals, and the tortured syndication of Citrix and other deals underwritten during the first half of 2022 before the credit markets deteriorated. As a result of the incredible uncertainty in the economy, the war in Ukraine, raising interest rates and other unprecedented challenges, arrangers have become increasingly hesitant to underwrite big commitments like they did in 2021.
  • For performing companies, by contrast, opportunities continue to exist, but with significantly higher pricing and fees because of the increased risk environment, opportunities for investors to buy term B paper at a steep discount to par in the secondary market and the dearth of existing loan repayments as compared to 2021.
  • In order to fill the gap left by the decreased activity in the syndicated loan market and tighter direct lending market, financial buyers and other market participants have looked to alternative means to raise capital. For example, preferred equity instruments with dividends that are paid “in kind” instead of in cash, which had started to make up an increasing percentage of LBO capital structures prior to the credit market downturn, remain on trend as a way to fill the hole created.
  • Likewise, private credit deals remain popular. But even as borrowers increasingly turn to direct lenders—including mega-unitranche facilities in excess of $1 billion—the private credit markets have similarly seen a significant reduction in overall transaction volume and, while incremental facilities and add-on activity remain a moderate bright spot, they are often accompanied by an increase in fees and interest expense, frequently triggering MFN protection on the initial loans then outstanding. As a result, the fleeting moment where direct lenders eagerly competed to hold mega-unitranche loans on their books is all but past, and where two or three lenders alone could finance an aforementioned mega-unitranche loan in 2021, in the latter half of 2022 these deals are requiring a significant number of lenders to write the necessary checks (if at all).
  • Recurring revenue loans, often with covenant “flip” mechanics—historically provided to rapidly growing, but not yet profitable, businesses—have become more mainstream, in part because top-tier financial sponsors have pivoted away from traditional broadly-syndicated loans to the private credit markets, where lenders are more willing to lend to such businesses. Even still, closing date recurring revenue leverage multiples have decreased meaningfully in recent months and like direct cash flow loans, financial sponsors are chasing an increasing number of lenders on each deal to fill the books on new issuances.
  • Lastly, lower middle market loans have remained almost business as usual, given the traditional low leverage, high amortization, inclusion of financial maintenance covenants and tight documentation terms.

In Case You Missed It – Check out this recent Goodwin publication: Breach of Contract and Implied Covenant of Good Faith Claims Survive Motion to Dismiss in Boardriders Uptier Exchange Dispute


For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Jill Gautier.

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