2015 Annual Review

Debt for growth

The options for financing growth are proliferating as debt markets continue to globalize, reducing differences among markets that formerly hewed to either a US or European model.


Convergence of global debt markets continues despite dip

The trend toward convergence of US and European leveraged loan and high yield bond markets proceeded at a slower rate in 2015, after surging in 2014.

Historically, European lenders resisted the aggressive loosening of covenants for leveraged loans and high yield bonds that is more common in the United States. But in 2014, there was a significant shift in the willingness of European lenders to offer more flexible, borrower-friendly terms. In particular, there was a marked increase in the number of cov-lite loans in Europe; and bonds, favoring issuers, increasingly incorporated leveraged loan pricing norms while call protections eroded.

In 2015, the value of leveraged loans issued in Europe fell to €73 billion, from €116 billion in 2014; the value of high yield bonds fell to €97 billion, from €122 billion in 2014. In part, this was due to jitters arising from inauspicious macroeconomic, geopolitical and industry-specific events. But the dip was also a reality check for issuers that may have gotten ahead of the trend.

Innovation is likely to continue in 2016, with issuers working with their advisers to develop new ways of raising capital that work for them, including continuing to import technology from the US markets. Moreover, term loan B may be increasingly attractive as a cov-lite alternative in the European loan market, with New York and English law becoming increasingly interchangeable alternatives within product groups.


Tough-to-navigate European high yield bond defaults loom

There have been record levels of issuances in Europe's high yield market in recent years, with high yield debt clearly established in 2015 as a preferred source of funding in the international markets. As a result, European corporate structures have become more complex, often involving both legacy senior bank and high yield bond components, resulting in capital structures with multiple creditor groups in multiple jurisdictions under multiple choices of law.

In a default scenario, finding the proper balance between corporate, shareholder and creditor interests becomes all the more difficult given these complexities, as well as wide variations in local insolvency laws and the relatively untested restructuring alternatives available. A viable solution is the "UK Scheme of Arrangement," which provides a balanced alternative to a US chapter 11 or other local proceeding.

Recently, White & Case represented European coal mining group New World Resources (NWR) in its bank/bond restructuring, and similarly led successful recent restructuring efforts for Invitel in Hungary, Cognor in Poland and the cornerstone restructuring in the European market, Wind Hellas, in each case employing various debt-for-equity exchange mechanisms successfully implemented by means of Schemes. In the NWR transaction, for example, to keep the process on track, a "toggle" or "dual-track" Scheme was introduced whereby the consensual deal agreed to by all stakeholders automatically "toggled" or flipped to a senior bondholder-led enforcement plan if certain conditions were not met.

Given the record level of recent issuances, complex restructurings involving high yield bonds, senior lending and other diverse creditor groups will only grow in the future. But restructurings successfully utilizing UK Schemes demonstrate that solutions exist in even the most complex situations.


ECB considers new leveraged lending policy

In May 2015, the European Central Bank (ECB) asked Eurozone banks to provide detailed information about their leveraged loan practices, prompting speculation that the ECB might follow the United States and issue stricter guidelines or regulations for leveraged loans.

US guidelines were revised in 2013, requiring US lenders to set clearer policies regarding leveraged loans and holding them more accountable for adhering to their policies. This includes more clearly articulating their risk appetites and indicating how much debt they are willing to underwrite and hold on their books. The US revisions were prompted by a perception among regulators that prudent underwriting practices had begun to deteriorate as leveraged lending volumes rose again in 2009, following significant declines during the economic crisis.

Stricter ECB guidelines could erase the current advantage that some European lenders enjoy in Europe, which can enable them to meet borrowers' demands and beat out US lenders at a time when competition is stiff. But some European lenders would welcome stricter requirements if they reduced the pressure to agree to unattractive terms to win business. The ECB is currently reviewing the information banks provided in 2015, and its intentions for leveraged loans should become clearer in 2016.