You Can Take it With You

Years ago the humorist Robert Benchley was traveling in Italy on summer vacation. Upon arriving in Venice, he cabled his agent: “Streets flooded. Please advise.”

In a similar vein, leveraged loan investors should not be surprised at effects of ample liquidity flowing through credit markets today.

As we head into the second quarter’s final weeks, it’s clear sponsors and lenders aren’t slowing down in their drive to deploy dollars. It’s evident competitive juices haven’t dried up either. Whatever structure, term, price, spread, or covenant that needs to be stretched to win a deal, will get stretched.

In some cases, features typically reserved for the best and biggest issuers are coming down market to smaller mid-cap companies. In others, even issuer-friendly elements not often found in broadly syndicated loans are surfacing as frothy conditions continue.

One ingenious concept from the pre-crisis era making a comeback is portability. The idea is simple: Offer a financing structure to a sponsor that can be passed along to the next buyer without triggering a change of control provision in the credit agreement. Providing the borrower is in compliance with all covenants, a new private equity owner can carry on, dragging lenders along whether they like the new owner or not.