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Debt Advisory Update

I spent seven days in the Numis office before returning to working from home, a little like Bede’s Sparrow.

Our theme this week is Groundhog Day.

 

Debt weekly image
Rishi’s back with another cunning plan; Time to get closer to Sonia; Lenders with fewer rights than shareholders

“I'll give you a winter prediction: It's gonna be cold, it's gonna be grey and it's gonna last you for the rest of your life.”

  • Rishi has another idea of what the Winter Economy holds: the Chancellor today gave his loan guarantee another lease of life, with new schemes to take over in January
  • As of Tuesday, just under £20bn has been extended under the two main corporate loan guarantee schemes.  This is £2bn in the past month, of which £300m to larger borrowers
  • However, the Bank of England Commercial Paper programme is being closed, with no new applicants after December and no purchases after 22 March 2021, (including rollovers of existing borrowings)
  • Repayment terms for all schemes are also being extended, as far as 10 years for bounce-back loans – effectively the Chancellor is taking preferred equity in 1.3m small and micro-businesses

"Television really fails to capture the true excitement of a large squirrel predicting the weather”

  • The transition away from LIBOR is nearly as exciting – the Bank of England sees LIBOR like the creaking and dangerous Hammersmith Bridge!
  • It appears unavoidable that we will replace a useful but fictional benchmark with a less useful but more real number
  • Libor was once described as the rate at which banks don’t lend to each other
  • This week a bank provided us loan terms based on SONIA and not Libor.  As SONIA is typically 15bp lower than Libor, the loan margin had been increased to make this up.  But at times of stress, LIBOR is much higher than SONIA so this may be a change that sometimes works in borrowers’ favour
  • If you have a spare two hours then why not go to the Bank of England’s YouTube channel and watch “Is your Business Prepared for LIBOR?” So far only 1,285 viewers, with the rest probably relying on their banks, lawyers and advisers to grapple with this – you’re welcome!

“I would love to stand here and talk with you...but I'm not going to”

  • However, as the FT noted today, some leveraged finance lenders aren’t able to say this when their borrower is acquired
  • Increasingly in the US, lenders have no right to be repaid on a change of control i.e. the loans are ‘portable’
  • This gives lenders fewer rights than shareholders, similar to the effect of losing financial covenants and collateral protection, as we have written about before
  • This may facilitate private equity M&A but I think it’s unlikely to cross over to the corporate bank debt market: KYC and regulatory scrutiny mean that lenders are unlikely to give this up.  Plus how much more risky can one PE owner be than any other?There are a handful of strong corporate leveraged borrowers that are already here e.g. Virgin Media O2

Notable UK financings this week

  • Covenant waivers: Spire, Playtech and Cineworld (not yet agreed)
  • Extensions: John Lewis, Kingfisher – but note that for both, not all banks agreed to the +1 option
  • New / increased facilities: Pure Gym added £50m to its revolver (but still hasn’t refinanced its acquisition bridge), TI Automotive raised c. €1bn equivalent leveraged loans at L+375bp

Mike Beadle

Managing Director, Debt Advisory

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