In the wake of the “crunch”, it is no secret that bank liquidity, in tandem with market confidence, has drained away. Leveraged loan finance in particular has been hard hit as many of the banks that were active in the London market have either refocused on their local markets, pulled out completely or are now beholden to state shareholders. In addition, tightening regulation means that all lenders have to put increasing amounts of their capital aside, further reducing their ability to lend. Although there are some new players in the market and some of those remaining “in the game” have upped their market share, as yet, there is a significant disparity between the amount of debt falling due for repayment and the number of lenders in the market with both the ability and the appetite to refinance it. This is creating problems for borrowers that have otherwise weathered the recession but are looking to refinance soon.
When it comes to documenting a refinance, in the absence of game changing pricing or an investor or bank led debt restructuring, cost sensitive borrowers usually look to stick with a loan agreement and syndicate they know (the so-called “amend and extend”). Refinancing an existing deal is much less demanding of management time and transaction costs for completing the refinance are greatly reduced, particularly as the existing security package can be relied upon in many jurisdictions. Each loan agreement is different but, typically, an amendment to a syndicated loan agreement only requires the consent of the majority lenders (usually two thirds of the existing lenders) unless the proposed amendment may adversely affect an individual lender, in which case the consent of all lenders is required. It is here that problems arise in the context of any proposed amend and extend because a lender with a relatively small participation in a syndicate, if it does not wish to or cannot extend the maturity of its facilities, can end up blocking the borrower’s most effective route to refinance, with all the attendant increases in transaction costs as a result. In this situation, and when alternative lenders are interested at a price or on terms that are unattractive, CMS has recently been helping borrowers find a novel solution to extend their facilities: the hollow tranche.
With the right legal advice, a hollow tranche amendment can be structured in such a way as to only require majority lender consent. Separate, “hollow”, facilities are created alongside the existing facilities with improved pricing and an extended maturity but which are otherwise treated in the same way as the corresponding existing facilities. Subject to a level of commitments at which the borrower would consider the process successful, each lender is then given the option to share in an extension fee and to roll its participations in its existing debt into the new hollow tranche. Any lenders that do not want to roll their debt into the hollow tranche retain their debt at the existing pricing and with the existing maturity but do not benefit from any fees or the higher margin. This, together with other majority lender amendments necessarily more geared towards the interests of the extending lenders, often has the effect of dragging along the minority who might otherwise have declined a full refinance, leaving behind only those who simply cannot lend.
Any consent needs to be carefully worded and much depends on the exact wording in the relevant loan documentation.