Particular Terms of European Borrower Debt in the U.S. Financial Markets
As our prior post noted, recent uncertainty in the European financial markets has led many European borrowers to look to the U.S. debt markets for liquidity. However, U.S. and European debt markets have developed very different market terms and documentation practices. Below are additional market differences that may surprise European borrowers, and that lenders syndicating the debt of European Borrowers should be aware of. Stay tuned for our final part of this series focusing on restructuring.
Acquisition or CapEx Facilities:
- U.S.: Separate facilities for acquisition and capital expenditures (CapEx) are not seen, but a borrower may seek additional liquidity through an incremental facility (“accordion provision”) permitted by the documents without further lender approval, but which is uncommitted.
- Europe: It is not uncommon for separate acquisition and CapEx facilities, which may be committed or uncommitted.
Amendment and Restatement:
- U.S.: Perfected collateral generally does not have to be re-perfected.
- Europe: Need to take actions to perfect the collateral in the context of an amendment and restatement, and for certain transactions, the collateral will need to be re-pledged entirely.
Currency of Borrowings:
- U.S.: Borrowings (unless a multi-currency facility is requested) will be in USD.
- Europe: Borrowings typically in £ Sterling or Euros, unless there is a specific demand for the facility to be drawn in the local currency.
- U.S.: Representations are repeated (“brought down”) with each new extension of credit and with the delivery of a compliance certificate.
- Europe: Certain representations are also brought down each interest period.
- U.S.: It is typical for a 1 percent prepayment penalty to apply for any repricing or refinancing transaction that lowers the applicable margin (a “soft call”) in highly levered senior debt, with a 3 percent/2 percent/1 percent premium applicable for second lien deals.
- Europe: Prepayment premiums are generally not applicable to senior debt (but are included in second lien and mezzanine debt).
- U.S.: Sponsor debt buybacks are typically subject to limitations on the amount of debt plus restrictions on information received and voting rights.
- Europe: Sponsor affiliates are generally permitted to buy debt in an unlimited amount so long as they are disenfranchised.