Cov-lite, cov-loose and even now cov-lame – in some pockets of the finance market we are back to the boom days. All we need is a couple of headstrong private equity partners to quit Linklaters for a more sponsor-facing platform and we’ll be right back to 2006. On second thoughts…
As our cover feature this month makes clear, the debt markets are going through not only a substantive revival but the non-investment sector is rapidly being dragged towards a US-style dynamic. This means European borrowers increasingly tapping capital markets and the role of banks reducing amid competition from other debt providers. The related vogue for upper mid-market and larger buyouts to be backed by high-yield bonds and US loans has obvious implications for City advisers since it tilts the playing field heavily in favour of New York law and US advisers.
It has also fuelled a rapid return of borrower-friendly terms, with the European loans market being forced to drastically water down traditional covenants to avoid the choice financing drifting stateside – seen in the spread of cov-loose loans in Europe. Most strikingly in March French group Ceva Sante Animale pulled off a €818m English law financing, hailed as Europe’s first fully cov-lite loan since 2008.
Such trends come alongside a shifting structured products sector, which is increasingly blurring with the leverage and infra finance sectors in more creative use of securitisation. There is a common thread with deal finance: such structures achieve a closer dialogue between borrowers and investors, widen the pool of market participants and reduce the dominance of banks.
Understandably, this is being talked up by US advisers, rather glossing over the fact that junk bonds and US loans are well established tools, not cutting-edge structures. But no matter, business is business and if you’ve got an edge, you’re going to play it for all it’s worth.
And there is no doubt that the disruption of the banking hierarchy in the City is bad news for the Magic Circle. As the top-tier players, they have the least to gain and most to lose in an upset status quo.
But there will be opportunity for everyone: the next few years look set to be the most energising time to be a banking lawyer in the Square Mile for ages, especially for the practitioner long on creativity and client skills and short on hyper-specialisation.
For the City elite the big win would be to convert these structures into English law equivalents or turn bespoke financing tools into market standards. Linklaters, for example, is working on a template inter-creditor agreement for complex ‘multi-source’ platforms where borrowers want the flexibility to rapidly move between funding tools.
How this will play out in the long term is far from assured but the fading dominance of banks may be no bad thing. Tactical conflict engagements, aggressive secondment demands and increasingly bureaucratic panels – such clients come with so many strings attached these days.
What may hold back City law firms in the end isn’t the irreplaceable loss of banking fees or the impenetrability of New York law financing – it will be a lack of imagination. A bank-lite world is not a place every lawyer can get their head around.
For more analysis on the renaissance of the ‘finance machine’, see ‘Back in the machine – opportunity and threats amid much-changed debt markets‘