We have recently seen a trend of the term B loan market converging with the high yield bond market. This trend can be explained, in large part, by institutional investors, who invest in high yield debt, also increasingly dominating the term B loan market.
One recent debt financing on which we acted began as a term B loan and closed as a high yield bond offering. The investors who purchased the bond also were prepared to lend by way of a term B loan. The deal converted for reasons unrelated to the type of debt product preferred by the investors because the bond had many of the same structural elements as the term B loan had before conversion.
On another recent debt financing on which we acted, the borrower’s new CFO felt more comfortable with a term B loan than a bond offering based on his experience and, accordingly, the borrower refinanced with a term B loan made by, generally, the same institutional investors that were prepared to purchase the borrower’s bonds.
How specifically has the convergence of these two debt products been manifested? We have seen the following features of bonds in term loans:
- the concept of restricted subsidiaries, which limits the application of covenants and events of default to the borrower and certain designated subsidiaries;
- the absence of an annual cash flow sweep;
- the absence of financial maintenance covenants;
- builder baskets which allow borrowers more flexibility to allocate their excess cash flow; and
- increasingly similar events of default.
We foresee the trend of the term B loan and bond markets increasingly converging so long as institutional investor demand for term B loans is strong.