“Death by a thousand paper cuts” as exceptions flood covenants
The market is holding its breath to see how French telecommunications company Altice’s fight with lenders will play out.
The company carried out a liability management exercise back in March, moving two of its assets, its media business and a majority stake in its data centres, out of the group by designating them as unrestricted subsidiaries. This means they cannot be touched by lenders, as they are now not covered by covenants.
It is a good example of what looser standards can lead to. And it was just eight words that got Altice off the hook, according to Jen Pence, senior credit officer at Moody’s Ratings.
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While in the US there have been a lot of liability management transactions, some of these have gone to court, but judges are usually reluctant to side with lenders who have allowed the flexibility in the first place. As they are considered sophisticated investors, it is difficult for them to make the case that what they have allowed in the documentation should be overturned by a court.
“You have J Crew as the first and everyone watched to see what happened. Some have litigated, others have negotiated outside the courtroom. Altice and Intralot demonstrate that liability management transactions have arrived in Europe as well,” Pence told Alternative Credit Investor.
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Although issuers are reluctant to change their covenant packages, aggressive provisions are still getting through in sponsored deals, according to Pence.
“You still have a lot of flexibility to undergo liability management transactions…The dynamic has really shifted since sponsors have come on the scene. Banks want good relationships with sponsors as there is the potential to do multiple deals so are hesitant to pushback on aggressive covenant provisions,” she noted.
Pence added that last year, eight per cent of deals had some pushback, but this year it has risen to 16 per cent.
She calls it “death by a thousand paper cuts”, because there are so many exceptions in loan documents now. Sometimes, exceptions are introduced just for the sake of having exceptions.
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“Investors might push back to include a ‘J Crew’ blocker, but depending on the drafting, what teeth that has is very questionable,” she said.
Pence added that she is seeing other changes in the market, such as making the bonds portable from issuance. This means that the loan remains essentially the same when the company changes ownership. This has become more important as private equity owners are frantically seeking exits.
