The Effect of the Financial Crisis on Middle Market Loan Terms

Part 1. Loan Buybacks -

In addition to providing an object lesson in the dangers of lax lending standards, the global financial crisis of 2008 gave rise to a host of new borrower/lender issues. This three-part series will address three now-common credit agreement provisions that were developed to solve problems born of the financial crisis and that since their development have gained traction in the middle market: Loan Buybacks, Amend and Extend and Equity Cures. Like many sponsor-friendly credit agreement provisions, these terms were first developed in the "big-sponsor" market but are now generally accepted by most middlemarket lenders.

Loan Buybacks -

As markets slowed and revenues fell through 2008 and into 2009, borrowers and sponsors became frustrated that certain provisions in their credit agreements prohibited opportunistic debt buyback. The credit crisis created attractive pricing (from a buyer's perspective) in the secondary market and offered an opportunity, even for relatively strong borrowers, to de-lever at a significant discount. Such was the downward pressure in the loan-trading market that a company, even though it had enough unrestricted balance sheet cash to consider buying back its debt (and thus was presumably a relatively healthy company) saw its outstanding loans trade a significant discount to par. The benefits of a buyback to borrowers and sponsors were obvious: a chance to reduce interest payments and increase covenant compliance at a discounted rate when compared to at-par optional prepayments.