After several years of the banks calling the shots, the syndicated loan market is now being dominated by borrowers. And corporate treasurers are certainly making the most of it.
With too many banks chasing too few mandates, corporates are now routinely locking their lenders into seven-year, instead of five-year, deals. What’s more, pricing has been in freefall. Virtually all investment banks are taking a bath on fees for investment-grade financing in order to get themselves into the frame for the more lucrative ancillary business.
A few weeks ago, Voda-fone (a Linklaters client, but understood to have been advised largely in-house) secured a £3bn facility on a pricing of around 15 basis points (bps). But just last week, The Lawyer’s sister title Finance Week ran a story on French super-market and longtime Clifford Chance client Carrefour refinancing its e1.5bn (£1bn) credit facility. The facility, syndicated by Fortis Bank, Calyon, BBVA and Société Générale (SocGen), was priced at an astonishing 11.5 bps over Euribor. “It’s a good time to be a borrower, partly in pricing, partly in terms and partly in how much you can raise,” says Freshfields Bruckhaus Deringer banking partner Edward Evans. “Any corporates who refinanced themselves in 2003 will be kicking themselves or doing something about it.”
As the pricing has plummeted, so have financial covenants been watered down, while the material adverse change (MAC) clause has taken a hammering. The MAC is virtually unheard of now within the investment-grade spectrum.
Within this context, it is logical that the borrowers are now driving the documentation like never before. Self-arranged deals have really taken root. Corporate treasurers will no longer rely on the banks to organise the facility, but will organise the entire process themselves, often with a much smaller syndicate. So it follows that, instead of the banks’ lawyers knocking out the first drafts of agreements, the borrowers’ lawyers have started to take control.
This could not have happened without the Loan Market Association (LMA) standard form – painstakingly drafted in 1999 with massive input from the Association of Corporate Treasurers, advised by Andrew Balfour at Slaughter and May.
Clifford Chance partner Mark Stewart says: “The LMA is followed pretty closely as a framework for agreement in the investment-grade market. It means all you’re left with is talking about covenants. The scope of legal discussion is reasonably limited.”
This, of course, is excellent news for Slaughters and Freshfields, which have longstanding reputations for previously unfashionable borrower work. It’s not quite such excellent news for Clifford Chance, and particularly for Allen & Overy (A&O), though, which have both historically built their banking practices on syndicated lending for corporates. In the last year or so, A&O has hoovered up market share in investment-grade financings, while Clifford Chance has focused strongly on big-ticket leveraged deals. But with corporates calling the shots, the legal role on behalf of the banks on refinancings is being increasingly marginalised.
There’s another influential player in the picture, too: JPMorgan Cazenove’s debt advisory group, which has aggressively positioned itself as the borrowers’ champion in the current climate. Francis Burkitt, managing director at JPMorgan Cazenove, clearly sees bank lawyers as clogging up the corporate refinancing process. “It wouldn’t surprise me if lawyers’ practices devoted to the banking side of transactions will start to shrink,” he says. “It’s a commoditised item which the bank can process in-house. Since the LMA agreement it’s not difficult.”
An even more disturbing turn, if you’re a banking lawyer. Not only has the rise of borrower power relegated the banks’ lawyers, but there have been several recent examples of corporates balking at having to pay for the banks’ lawyers at all.
The borrower line here is obvious: that on a refinancing, there is no substantive change in the legal documentation. Given that a law firm will only be earning between £20,000 and £30,000 on that sort of transaction, we’re not talking a huge amount of costs. But any move on this level is highly symbolic.
Take Smith & Nephew, which in September last year secured a $600m (£329.3m) facility with Barclays Capital, Lloyds TSB, Royal Bank of Scotland and SocGen, advised by A&O. Smith & Nephew was advised by Ashurst partner Gonzalo Fernandez, who strongly encouraged his client to suggest that the legal opinion should be given by Ashurst. In the end, A&O did produce an opinion for the banks, but the entire deal was documented by Ashurst as the borrower’s counsel.
“What the corporate wants is to control the documentation,” says Fernandez. “After that, it’s up to the banks and their lawyers to chip away at it rather than the other way round.”
Borrowers’ counsel are having their day in the sun, but pricing can’t get much lower. As Balfour at Slaughters says: “The market will turn – it’s only a question of when. I’d be surprised if we get to the end of the year without things becoming tighter for borrowers.”
Edward Evans, Freshfields: advised Xstrata, Pearson, Invensys, Zurich Insurance and Syngenta on the billion-dollar refinancings.
Marc Palley, Berwin Leighton Paisner: recently active on several big refinancings for borrowers, notably Tesco and GUS.
Specialist borrowers’ counsel are a rare breed. When Allen & Overy (A&O) banking head (and now managing partner) David Morley did a couple of borrower deals back in the boom years of jumbo syndicated loans, the banks – his normal constituency – didn’t like it at all.
At A&O, Trevor Borthwick has a mostly bank client base, but also handles borrower work for Marks & Spencer.
Meanwhile, Clifford Chance borrower specialist Mark Stewart tends to work almost exclusively within the private equity and leveraged finance fields.