Leveraged-loan borrowers often prefer certain lenders when they hit the market, seeking out familiar names they trust to protect their sensitive, non-public information and to offer flexibility for modifications and waivers.
There are also lenders that borrowers prefer to avoid using. They might include hedge funds that would offer limited flexibility if tough times set in, or banks and finance companies that conduct business with a borrower's market rivals.
That's why, loan market experts say, more corporate borrowers are negotiating for stronger controls over the participations and syndications arrangers work out. One feature that has become more common in loan agreements is the inclusion lists of disqualified institutions, or even a broader blanket prohibition against any competitor or its affiliates involved in a borrower's loan offerings.
Borrowers are not only seeking to keep certain lenders out of the original syndication pool for which such blacklists were developed. They are also expanding the provision to exclude players in the secondary market. Many see this as inhibiting secondary market liquidity by complicating arrangers' task in trading loans, particularly when borrowers seek to keep the blacklist private and limited to underwriters.
The trend is growing quickly, with as many as two-thirds of leveraged loan credit agreements containing them, according to an August report from Xtract Covenant Intelligence.
"These lists are becoming more common and can vary in length and breadth," Bridget Marsh, assistant general counsel of the Loan Syndications & Trading Association, said in an email.
Last summer, the association's primary market committee took up the task of developing guidelines for a more formal process in developing, maintaining and administering blacklists.
Investor demand in recent years has allowed issuers to extract borrower-friendly terms like covenant-lite structures. As a result, companies have been able to wrest more control over the extent of their loan's participants.
The goal, according to a January report on disqualified lenders by law firm Carter Ledyard & Milburn, "is to prevent competitors and other 'unfriendlies' from infiltrating the borrower's senior-most piece of the capital structure," and to prevent "mischief" in the event of a necessary amendment, workout, restructuring or bankruptcy.
The high-profile battle bankruptcy battle over wireless technology company Lightsquared underscored the fears companies have of competitors becoming creditors. Echostar and DISH Network Chairman Charlie Ergen acquired $1 billion of Lightsquared senior loans through a wholly owned investment vehicle, emerging as the primary force in Lightsquared's restructuring. But Lightsquared founder Philip Falcone is seeking to have Ergen's stake voided in federal court, arguing that Ergen's competitive stance violates the terms of Lightsquared's credit agreements.
"The foremost concern for borrowers about competitors [is] because sensitive, non-public information about the company is communicated to lenders, so borrowers want to ensure it stays out of competitors' hands," Marsh said.
"Loans are often preferred by borrowers for their flexibility and the ability to return to the lender group for modifications and waivers over the life of the loan, so borrowers have always paid attention to which institutions are their lenders," Marsh added. "Some borrowers are wary of having certain hedge funds and distressed debt funds as lenders because if the company runs into difficulty, there is a view that these lenders will be less cooperative with the borrower."
These provisions remain "hotly negotiated" with lenders, Marsh said, but the parties generally work out arrangements where lists must be agreed to when the commitment is signed. "It is becoming more common that the originally identified list can be supplemented to include additional competitors."
Marsh did not have information on whether any specific deals have been voided or scuttled because of disagreements over disqualified lists, or the inadvertent participation of a competitor in a loan deal or trade.
About half of existing loan agreements allow for an immutable "blacklist" of potential buyers on or before closing, as well as a "competitor" list that can be subsequently updated, says Robert Blank, head of leveraged loan research at Xtract.
Another 15.5% have allowances to add blacklisted institutions at a later date, or to broaden the scope of barred buyers based on an affiliation with a competitor or connections to industries that might trouble regulators, such as gambling, Blank says.
"We would regard these as the most problematic from the lenders' standpoint, for obvious reasons," Blank says. "They still reflect a relatively small minority, however."
Arrangers have been successful requiring borrowers to specify their disqualified institutions at the time the commitment letter is signed, said Mark Ramsey, a lawyer at Skadden, Arps, Slate, Meagher & Flom.
Sponsors "have requested, and obtained, the right to deliver the list of disqualified institutions up to a number of days after execution of the commitment letter and to update the list on an ongoing basis," Ramsey told Thomson Reuters' Practical Law last year.
Administrative agents on loans have had to fight back against borrowers' demands that they take responsibility of maintaining and administering the blacklist. "They don't in any way wish to be charged with any knowledge in these trades that would somehow come back to bite them," Ramsey said in an interview.
"It's more and more common, especially in top-tier sponsor deals and large-cap deals, for borrowers to be given, in the absence of certain defaults, consent rights over all lenders, including term lenders," Ramsey said.
Borrowers have also been insisting on keeping blacklists under wraps from all lenders, excluding underwriters. That's often because companies "don't want the general lending community to know which institutions they want to keep out if their deals," Ramsey said. "Their views may change over time and they would prefer to have as much flexibility to include or exclude lenders as they deem appropriate at any given time."
In the Loan Syndications & Trading Association's quarterly review newsletter issued earlier this month, the group said it had established a preliminary definition of a "disqualified institution" to allay confusion about borrowers' definitions of a competitor. The association also has a proposal to relieve administrative agents of the responsibility of monitoring trades in the secondary market to ensure compliance with the blacklist.
Those guidelines are now part of model credit agreement provisions from the association that define a disqualified institution as one listed on a schedule provided by the borrower; one serving as a competitor of the borrower; or a subsidiary that the borrower designates in writing to the agent and lenders.
The market committee is still debating what happens when a disqualified institution inadvertently ends up in a trade. "Certain deals have provided that any such trades are void ab initio, but clearly that raises many issues for the secondary market where subsequent downstream trades may have already been done," the newsletter said.
The applicability of blacklists to the secondary market raises liquidity concerns, Marsh said. Markets need certainty that trades will be settled, which means that firms need to know if they are part of a disqualified group before making a trade.
This has led to some difficulty in settling trades because the readily identifiable names of some barred entities were not tethered to the loan. "Sponsors' push for broader definitions and broader applicability of the lists runs counter to the market's desire for specificity," Marsh said.
The article originally appeared in Leveraged Finance News.