At the beginning of the 2010s, the bond market exploded and banks were forced to make themselves more attractive to borrowers. As the bond market lost momentum, the expectation was that banks would return to their standard leveraged financed transactions, with their harder terms and senior and mezzanine debt structures.
However, this is proving not to be the case and we are instead seeing a new finance structure emerging. The senior and mezzanine leveraged finance structures are giving way to a hybrid of classic leveraged finance inspired by investment grade financing. We are seeing super senior revolving facilities combined with the relaxed terms of the bond market. This combination is best described as corporate crossover loans, consisting of facilities provided as all "B" or revolving loans made available to borrowers not only for typical working capital purposes but also for acquisitions. Borrowers are given greater leeway in respect of managing external lending, with more flexibility, as loans can be repaid and redrawn without limitations as to availability periods and repayment plans.
Covenants are now fewer and generally kept to leverage and interest cover. In addition, we are seeing more and more creative engineering in respect of financial covenants. The concept of "play" with, for example, EBITDA has been taken to a new level, where some may argue covenant testing is more or less redundant. By inflating EBITDA, for example by taking into account future earnings and excluding costs, borrowers are creating additional headroom.
The changes in the market spring from an increase in lender appetite after years of a buoyant lending market, particularly in Sweden, and the competition for customers from not only other Nordic banks but also European banks and other financial institutions such as debt funds. Banks simply cannot afford to lose the 'big fishes' as returning customers, particularly the private equity sector whose repeat business makes lending on more relaxed terms worthwhile. The larger and sophisticated sponsors take the initiative and control of the process when financing their transactions to ensure they obtain the best terms from competing banks and financial institutions, and arrange the lending syndicate accordingly.
The Nordic financing market truly is a borrowers' market these days. The question is what will happen in the event of a downturn. In the last restructuring waive in 2009-2011, credit agreements provided early warnings, as they typically had a full set of the financial covenants with teeth. Further, even if syndicates were at times large, it was possible to gather all the lenders, the sponsor and the borrower in a conference room and work it all out. This time round, with limited or no financial covenants, warning signals will arrive late, if at all. In addition, structures consisting of both bonds and traditional bank debt could potentially be more difficult to restructure, even if intercreditor agreements today contain more of the tools needed to resolve issues due to the lessons learnt from the last financial slowdown.