The buoyant leveraged finance market in Europe has been continuing to develop in sophistication and depth this year, particularly as regards sponsor friendly terms, as global sponsors and their advisers apply their experiences from financing transactions in the US leveraged loan and global bond markets to the European leveraged loan markets. Current investor appetite means the most attractive terms potentially can be selected from both markets and across product lines, with the result that European based loan arrangers, investors and advisers are seeing more US market derived provisions than ever before. This convergence brings a number of new documentation issues to consider.

Covenant-lite loans –

In the European leveraged loan market there historically have been relatively few covenant-lite loans, but over the last twelve months there has been a much more pronounced trend in that direction as the US model of covenant-lite is increasingly being adopted here. As is often the case with new market products, there has been a lack of clarity over what is meant by the term ‘covenant-lite’. The easiest identifier of a covenant-lite loan is that there is no financial maintenance covenant or that there is a single financial covenant, in either case only for the benefit of the lenders under the revolving credit facility and no maintenance covenant for the term lenders. Moreover, it typically is a ‘springing’ covenant, i.e., tested when drawn or only when usage exceeds a certain percentage of the revolving credit facility, often 30%, with significant EBITDA ‘cushion’ or ‘headroom’ of 30% and no or very few step downs. It is worth noting that associated provisions have not necessarily been adopted wholesale. For example, the US style equity cure, with amounts being added to EBITBA, is still resisted by some lenders in Europe. The European market generally permits over-cures, whereas the US market does not.