The credit crunch has sparked a row between US and UK firms as sponsor and lender banking lawyers haggle over the secondary market for leveraged loans.
The sponsor and lender communities and their lawyers are embroiled in a standoff over sponsor rights to buy back debt from syndicate banks at a cheaper rate.
The lender community and its advisers at UK firms such as Allen & Overy, Ashurst and Clifford Chance argue that loan buy-backs are prohibited under the terms of the Loan Market Association standard loan form. The sponsors and their advisers at US firms such as Kirkland & Ellis and Simpson Thacher & Bartlett claim they are valid. Robin Dicker QC of 3-4 South ;Square ;advised Clifford Chance on a paper it distributed to its banking clients highlighting the issues of principle that may prohibit a loan buy-back. Kirkland has also taken the advice of leading counsel.
Kirkland finance partner Stephen Gillespie said: “These sorts of debt purchase are totally legitimate providing the provisions of the loan documentation permit the purchase and there are no adverse tax or regulatory consequences.
“It’s ;about ;supply and demand. The lack of liquidity in the leveraged loans market has driven pricing down, even for perfectly good credits, and borrowers and sponsors have been considering whether it makes sense for them to use available cash to purchase debt at a discount to par, either to hold it for yield or to retire it.”
There are currently three transactions in the public domain where the sponsors have opted to benefit from a loan buy-back arrangement.
Danish telecoms company TDC, owned by Simpson Thacher clients Apax Partners and Kohlberg Kravis Roberts, bought back e200m (£156.6m) of its senior debt in March; Wilkie Farr & Gallagher advised PAi when it bought back second-lien debt associated with the e1.96bn (£1.53bn) acquisition of the roof construction business from French company Lafarge; and US borrower Citadel Broadcasting went to its bank syndicate last month with the aim of buying ;back ;$200m (£100.51m) of debt at a price less than par.
A magic circle partner said: “The question is whether this is completely legitimate ;given ;that borrowers tend not to be financial institutions. In UK law there are a number of legal restraints that make this process questionable.”