Europe may swerve rise in creditor-on-creditor violence
The smaller size of European leveraged loan markets could protect lenders from being pitted against each other, as so-called creditor-on-creditor violence cases increase in the US.
Creditor-on-creditor violence has come under the spotlight over the last year, with lenders being pitted against each other, essentially competing to get a better claim on a borrower’s assets at the expense of others.
This infighting can be a result of borrowers, in many cases sponsors, exploiting loopholes in debt agreements to raise new financing for their struggling portfolio companies.
Read more: Emerging markets offer respite from private debt competition
But it is a much more common occurrence in the US than in Europe, according to Gijs de Reuver, managing director in Houlihan Lokey’s financial restructuring group.
“One reason is that European directors are held to a higher standard of fiduciary duties generally than those in the US,” he said. “You would expect directors to show more resistance to what the shareholder wants because they have other stakeholders’ interests to consider.”
Read more: “Death by a thousand paper cuts” as exceptions flood covenants
The second reason is the size of the capital markets.
“It’s like living in London, people don’t know their neighbours and therefore care less what they do to their neighbours,” de Reuver added. “In Europe, capital markets are much smaller with fewer large credit providers, so it is a village in comparison to the US. They all know each other, are repeatedly in the same credit facilities and are – so far – behaving as good neighbours.”
But when it does occur, it can cause reputational damage to the sponsor, leading some lenders to think twice about lending to that group.
“At some point the creditor either stops lending to these sponsors or decides whether to charge them a premium over what a reputable sponsor would pay,” de Reuver said. “However, in a market where supply of credit exceeds demand to borrow, creditors that need to deploy material amounts of credit may say they will no longer lend to tainted sponsors but in practice concede their principals on the next deal that comes to market.”
US view
Although there have been several high-profile cases in the US, lending continues to feature looser covenants. While some people claim this is unfair, “when it comes to making money, those arguments don’t go far”, according to Michael Fay, partner in the creditor rights, bankruptcy and restructuring practice at Boies Schiller Flexner.
Read more: Lenders introducing more flexibility to loan docs to beat competition
“One of the problems a lot of the times, particularly with secondary market purchasers, is that they don’t even bother to read the documents,” he added.
“It all comes down to ‘were you allowed to do this’.”
While the language in some of the documentation seems to be changing in light of some of the litigation that’s taken place, according to Fay, this will continue to be a feature of the market.
