Equity cure, facility change, yank-the-bank. To non-finance lawyers the jargon all sounds faintly comic. But taken together, it all means one thing: it’s what private equity (PE) houses now expect in their documents. And the banks, desperate for mandates, are rolling over.
In a development that has changed the face of the acquisition finance market, the PE houses are imposing their own term sheets on the banks. KKR has used Tony Keal (now at Simpson Thacher & Bartlett) for years. PAI uses Allen & Overy (A&O) partner Robin Harvey, who drafted its documents, for all financing work. “Investment officers get comfortable with a document and they want to keep using them,” says Harvey. And then there’s the now legendarily robust Permira term sheet, running to 70 pages, drafted last year by Clifford Chance partner Alan Inglis.
“It’s causing a lot of hilarity,” says one magic circle banking partner dryly. “Obviously it has some very aggressive positions on it, but a lot of work has gone into it.”
The UK market is not yet like that of the US, where sponsors will throw their weight around with impunity. Two US big beasts, TPG and Carlyle, have already earned highly aggressive reputations among the UK PE legal community for their approach to documentation over here. But it’s only a matter of degree: PE houses here are increasingly demanding in what they want from their banks.
Part of this is logistics. The documentation process has been speeded up enormously. “The PE houses are being pushed by the vendors, so the whole deal is becoming more front-ended,” comments Clifford Chance finance partner Roderick McGillivray.
McGillivray should know. He is CVC’s borrower finance lawyer of choice, working with private equity partner James Baird. And it was McGillivray, of course, who drafted CVC’s own term sheet.
Sponsor lawyers are firmly in the driving seat. “Certainly, better terms [for the PE houses] are obtained through taking control of the commitment papers and first draft facility agreement,” admits one banking lawyer.
However, it’s not just about who does the drafting, but what’s in the document. Fully fundable term sheets – where the banks are expected to advance cash on the basis of the commitment papers without waiting for the full loan documents – are now a fact of life. Just as in the public arena, it’s all about certain funds.
Sponsor lawyers argue that their clients are under as much pressure as the banks; they have to sign sale and purchase agreements way before the loan documents are put out, all to win the deal. Apart from regulatory clearances, those deals are usually unconditional. Hence the sponsor-led trend towards unconditional funding on the basis of the term sheet alone.
Then there’s the equity cure, whereby a sponsor can stump up additional equity to cure a blip in the cashflow. For sponsors, who are always focused on the exit, it’s a neat solution to a short-term problem.
But several banking lawyers assert that senior lenders are uneasy about the equity cure. “If a company has a problem with its profit, then putting some cash in doesn’t necessarily fix it in the long term,” argues Clifford Chance banking partner Mark Campbell. “The banks do get exercised by it.”
Especially, one imagines, in the increasing number of cases where the documents allow an equity cure to be invoked not just once, but any number of times during the life of the loan facility.
Meanwhile, the yank-the-bank clause, where a sponsor can replace a minority non-consenting lender, has also started to make a regular appearance. One private equity dealmaker says this isn’t really about animosity towards traditional lenders. Rather, yank-the-bank has come about in response to the rise of the infinitely less predictable hedge funds, which he describes waspishly as “toxic”.
The net effect of all this is that sponsor work is more remunerative than ever before for lenders – especially since the fees of the firms instructed by the banks at the commitment paper stage are now rarely reimbursed without a fight.
A handful of firms are already well positioned. The granddaddy of sponsor finance work is, of course, Simpson Thacher’s Keal. While at A&O he became KKR’s financing counsel of choice, where he consolidated his no-holds-barred reputation.
Keal’s protégé Euan Gorrie, who had acted for a variety of lenders at A&O and who jumped ship to Simpson Thacher back in 2003, has subsequently found himself acting on the sponsor side for the firm’s long-term client Blackstone. Simpson Thacher’s third UK finance partner Stephen Short, formerly of Ashurst, is known to have advised TDR Capital on acquisition finance issues.
Simpson Thacher may act institutionally for JPMorgan Chase, but the firm hasn’t been nearly as visible in Europe for lenders as it has been for PE houses. Simpson Thacher’s Keal-Gorrie-Short trio is superlatively well placed in the current market, although it could do with an enhanced UK corporate capability if it really wants to capture full market share.
Clifford Chance has always had a strong sponsor finance practice in tandem with its private equity business. Mark Stewart has been one of the top borrower lawyers in the City for years and has been traditionally close to PPM, for example, while McGillivray has the CVC finance work sewn up. But by drafting in Inglis for Permira – a lawyer who is almost always seen for lenders, in particular Citibank and Goldman Sachs – Clifford Chance appears to be unashamedly targeting sponsor side work.
At other firms it’s more patchy. Despite its lender franchise, A&O has been at a disadvantage by not having a big PE practice in London, although it picked up the VNU deal on the back of its Benelux practice – again, another appearance by Robin Harvey for the sponsors.
Meanwhile, Ashurst’s strong private equity business hasn’t produced specialised borrower finance lawyers who are identified with particular PE clients, although Helen Burton maintains a good balance between sponsor and lender work. This contrasts with Linklaters, where recent banking recruit Adam Freeman has been building a reputation alongside Graham White and Raymond McKeeve’s private equity business. Ditto Freshfields Bruckhaus Deringer, where Sean Pierce has built up a handy borrower track record.
It’s hardly an extensive list, despite the fact that borrower-facing acquisition finance lawyers have never been in greater demand. One can only assume that Clive WellsÃ¢Â€Âš who moved from A&O to Skadden Arps Slate Meagher & Flom last year, will immediately slot into the US firm’s corporate and private equity practice. Kirkland & Ellis desperately needs a bigger finance resource to support its team in London on Bain deals.
And, of course, there’s a new player with a chequebook now: Weil Gotshal & Manges, which last week snared Marco Compagnoni and Jonathan Wood from Lovells. Its five-partner private equity team needs finance lawyers fast.
If PE houses are in the driving seat, then banking lawyers can name their price.