With its standardized documents boosting efficiency and liquidity in European investment-grade lending, the Loan Market Association (LMA) now wants to repeat the trick in the burgeoning leveraged market.
On January 28, the LMA unveiled its 195-page leveraged loan primary document. It was produced by a working party of bankers and lawyers, with input from the LMA's institutional investor committee.
Separate launches are planned in France and Germany, although no dates have been set. The leveraged buy-out market in Europe has grown from e18 billion in 1999 to e51 billion last year.
Producing a standard document for leveraged finance deals was a harder job than producing the investment-grade document. Leveraged loans need to be more adaptable than general corporate facilities, because they need to suit whichever target business is being bought out.
"Leveraged loans generally have more tranches, there are ancillary loans, and they are frequently cross-border," says Allen & Overy partner Mike Duncan, who worked with Clifford Chance's head of global finance, Mark Campbell, to draft the document.
Starting point
"The document contains a menu of clauses," says Tim Ritchie, LMA chairman and head of global loans at Barclays Capital. "It is intended to be a sensible starting point."
The document assumes that deals use a combination of senior and mezzanine finance. Although high yield normally takes the place of mezzanine finance on the biggest buy-outs of e500 million or more, a senor/mezzanine combination is more common. "We wanted one document, not two, or even one with a multiplicity of options," says Campbell. "It isn't too difficult to incorporate high yield."
So what will the market make of the leveraged document? The LMA's investment-grade document went down well and is reckoned to have made continental deals easier. A French version was launched in July 2002. In Germany, Bayer used the original investment-grade document as the starting point for a series of loan facilities. And Commerzbank Securities has been very active on the LMA's documentation committee. "The LMA document could be the making of the German market," says one banking lawyer.
But while a market standard is always useful, some leveraged lenders and borrowers feel that they were achieving standardization anyway. "Financial trade associations love standardizing documents. It's their raison d'être," says one mezzanine investor. "When we do deals, these documents are already quite standardized."
Bid to stop confusion
The LMA stresses that the leveraged document is not meant to push the relationship between lenders and borrowers in a particular direction. It simply wants to stop deal documents becoming more diverse as new entrants enter the growing European market. "A market standard will prevent different standards developing," says Ritchie.
Where the standard leveraged document will make a big impact is in the secondary markets, where leveraged loans are increasingly bought, sold, and repackaged.
"Doing due diligence on loans adds to the cost and time spent setting up CDOs," says John Walker, a capital markets partner at law firm Milbank, Tweed, Hadley & McCloy who recently advised on the e3.5 billion Overture CDO. "Investors who buy paper or who just trade loans will find it much easier if there is a standard approach to the original loan documentation."