Ten days ago, at a Loan Market Association (LMA) press conference on the 30th floor at Clifford Chance, sat three wise men of the investment grade market. Tim Ritchie, head of global loans at Barclays Capital, was flanked by Mark Campbell, head of global banking at Clifford Chance, and Mike Duncan, banking partner at Allen & Overy (A&O). But the three weren’t there to talk about investment grade lending, but had come to brief a dozen journalists on a new venture in the leveraged market.
For at long last, the LMA was releasing its standard document for leveraged loans – a document running to 195 pages. The LMA and Clifford Chance helpfully provided copies, but it is fair to say that most of the journalists there ignored them in favour of the canapés and coffee.
Given the growth in the leveraged market, the LMA’s venture seemed inevitable. Statistics from Loanware quoted by the LMA show that the total value of leveraged buyouts (LBOs) increased from €18bn (£12.29bn) in 1999 to €51bn (£34.83bn) in 2003, and in that time the number of deals doubled to 140. “We wanted to get the leveraged document out as quickly as we could,” says Ritchie, speaking to The Lawyer afterwards. “We saw the speed at which the market was developing and we wanted to tap into it before people went ahead with their own standards.”
It was certainly a much quicker gestation than the primary investment grade document in 1999, which took well over 18 months. Part of the reason may lie in the consultation process this time round, which virtually circumvented the borrower community. Despite the LMA’s statement that it has consulted with its institutional investor committee and had made overtures to the British Venture Capital Association (BVCA), one source says that the BVCA dialogue took place pretty late in the day.
On the face of it, this minimal consultation with borrowers is puzzling – not to say controversial. After all, on LMA’s investment grade primary document five years ago, the Association of Corporate Treasurers, advised by Slaughter and May partner Andrew Balfour, had been heavily involved; indeed, one source claims that there were some robust discussions. But this time round, there was little direct input from sponsors. “We’d had prior expertise in developing a standard document, so we involved lawyers who would give us the right feel for the balance [between lender and borrower],” says Ritchie.
There’s an obvious danger here that the LMA may have come up with something that is – even unconsciously – simply too bank-friendly and which will not gain ground among private equity houses.
After all, the exercise was led by a firm whose banking constituency is rivalled only by A&O – whose involvement on this document, by the way, was minor compared with the investment grade project. (That said, by all accounts the meetings weren’t exactly oversubscribed.)
Clifford Chance’s lead role is unsurprising when you consider that its LMA relationship dates back to 1996, after it won a beauty parade to advise the association on par debt, and also that the LMA shares Clifford Chance’s offices in Canary Wharf.
So who did the drafting? Although Clifford Chance’s Campbell has a background in investment grade lending, he has done a number of leveraged deals for Barclays Capital and HSBC in the last couple of years. Ashurst’s Nigel Ward, who has carved out a spectacular niche in leveraged buyouts in the last 18 months, was also on the working party, while the other lawyers involved tended to be from the younger end of the leveraged spectrum. They included Freshfields Bruckhaus Deringer’s Brian Gray, Linklaters’ Nick Syson and A&O senior assistant Clare Calver.
Campbell argues strongly that the document is not a Trojan horse for senior lenders, pointing to a whole menu of options on permitteds and prepayments which on many leveraged deals would not even exist. “Those are the principal areas a borrower is going to be interested in,” he says.
In the meantime, Barclays Capital is certainly going to start using it, says Ritchie. And where BarCap leads, most other banks will probably follow; the bank was the number one bookrunner of European sponsor-driven loans, with a market share of 16.6 per cent last year, according to Loanware.
“I think we’ll be encouraging people to use it as a basis. I think the major banks will start to take this up pretty quickly,” says Ritchie. Indeed, several banking sources assert that the document has already been piloted on one deal in particular, which has not yet closed.
Ritchie is clearly hopeful that this standard will replicate the success of the investment grade document. “With the primary [investment grade] document, the major banks and law firms started using it pretty much instantly,” he notes. “It was very helpful when you had first time borrowers coming in the market in places like Germany, who had bilateral facilities in place and wanted to syndicate the deals – for them it was a godsend.”
The LMA is certainly putting a lot of effort into launching the document on the Continent. Ian Fisher, the Paris-based global head of debt finance at Société Générale, is about to lead the charge in France, while Commerzbank’s Nigel Houghton is doing the same in Germany.
Interestingly, the drafting was done with an eye on the collateralised debt obligation (CDO) market. As one source says: “One of the real drivers is getting institutional lenders into CDOs. You’re trying to compete with the bond market, where everything’s much more standardised.” To this end, the document gives a nod to prepayment issues on loan tranches, something that CDO investors traditionally get exercised over.
But will this drive down legal fees? Not necessarily. Most lawyers chorus that LBO advice is about – all together now – “adding value”, although presumably the document may cut out a couple of lawyers’ preliminary meetings. It may also give a leg-up to smaller firms attacking the debt finance market. As Ritchie says: “The key is that it will focus people on the right issues at an earlier stage in the documentation.”
Campbell agrees. “One of the terrible things lawyers do is send out a first draft weighted towards their own client, but certain things, 99 times out of 100, are not acceptable to the borrower, so why not take account of this the first time?” he asks. “These documents have to be changed before they’re being used, and the clients have to have advice before the documents are used, and that’s what people are paying for.”
Indeed. What’s more, the document doesn’t assume a high yield. Subordination issues, whether structural or contractual, are left for the separate intercreditor agreement. Which is where most of the difficult, interesting – and, let’s face it, remunerative – debates are nowadays.