Fine print in leveraged loans sparks market backlash


The market for leveraged loans has roughly doubled in size over the past decade as investors looking for higher returns piled into riskier debt. Borrowers have been able to chip away at traditional investor protections amid the surging demand for deals. That has left some of the largest private equity firms in a tug of war with their own credit arms over deal terms.

Loans for buyouts are typically marketed to investors over a two-week period that begins with a presentation from the arranging banks and ends with a commitment deadline, by which time investors need to submit their orders for a chunk of the debt.

One of the proposals under consideration calls for a draft of the credit agreement to be shared with investors when a new syndication launches, similar to what happens with bond offering prospectuses, the people said.

Interested buyers now usually receive only a marketing term sheet when deals launch, which contain an outline of the loan’s key terms but often lack details around specific provisions, where loopholes can be hidden.

Some of the group members regard the proposal as too ambitious, and have expressed skepticism that any new guidelines could be effective without including private equity firms in the discussions, the people said.

Credit Suisse Group, Eaton Vance Corp., Octagon Credit Investors, HPS Investment Partners and the credit arm of buyout giant Apollo Global Management Inc. are also part of the GSO-led group, the people said.

“As part of our ongoing efforts to assess and enhance market standards, we’re continuously working to achieve consensus among all market participants and update guidance in this particular area,” Lee Shaiman, the LSTA’s executive director, said in an emailed statement.

Representatives for Credit Suisse, HPS and Apollo declined to comment, while Eaton Vance and Octagon weren’t available to comment.


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