Lenders in Europe just love private equity firms, so much so that borrowers read: mainly p.e. firms have made seeming small changes that have resulted in a significant rebalancing of risks, rights and rewards, according to a Standard & Poor’s research report. The report states that as the LBO loan market has matured, the lending process and decisions associated with it have become ever more commoditized and increasingly complex. The result has been a process operating almost at warp speed, with responses to applications coming in days rather than weeks. The S&P report identified several areas of weakening in the process of rebalancing, such as financial covenants requiring companies to deleverage at half the original pace, with borrowing repaying less and lenders accepting 85% of the resulting increase in refinancing risk. S&P says the most striking change regarding financial covenants, based on its study, was how much weaker they have become. Although the number of such covenants per agreement has dipped only from, 4.8 to 4.6, their effectiveness has slipped more significantly, with loan documentation requiring a one-unit deduction of EBITDA every 27 months, up from 18 months. Further, according to the report, the liberal use of margin flexes and margin ratchets which allow interest margins to fall in line with reductions in financial leverage Ð has resulted in the softening of prices. Because of the greater risk, warns S&P, investors ought to be scrutinizing loan agreements more closely to ensure that their expectations for the credit are not undermined by loose documentation.
