Leveraged finance in the age of consent

07 Nov 2017


Yet another blow to the immutability of covenants and the sanctity of plain English

The problem with my job is that practically every day I stumble across yet another word or phrase that on first hearing, baffles me. Some capital markets pro or other will casually drop said word or phrase into a sentence, and I will nod sagely and pretend I know exactly what they’re talking about. The reality, of course, is that they might as well be speaking Manx Gaelic.

Instead of asking the question, “what do you mean by blah blah blah?” I resolve instead to find out later. It saves face. And the very last thing I want to do is to look stupid. I am an idiot for taking this approach.

It is my contention that if more journalists had had the gumption to ask the financial masters of the universe: “what do you mean by blah?” in the run up to the financial crisis, there would have been no financial crisis. But I digress. Back to today’s impenetrable phrase that we should all try to understand: consent solicitation.

Quite apart from seeming to describe what movie moguls and lecherous MPs should do a bit more of, consent solicitation refers to a practice that, in the words of one financial dictionary: “is the process by which a security's issuer proposes changes to the material terms of the security agreement, to investors who hold a stake in the security.”

Rather like a husband asking his wife to change their wedding vows to allow for material changes to the adultery clause. Why on earth they cannot just call it ‘asking permission to change the original agreement’ I don’t know. Well, in truth, I do know. Because calling it that would mean calling it as it is. Which is not something people like to do in this day and age. Far easier just to obscure the real meaning by coming up with a phrase that feels grown up and has a legal air about it.

The reason consent solicitation (God I hate that phrase) has hit the news this week is because a private-equity owned Swedish alarms business called Verisure has asked its bondholders to ‘suspend customary protections’ (in other words covenants) so that it can pay its equity holders a fat €1bn dividend. The firm’s lenders had originally agreed that it would not be able to behave in this manner, so it’s had to ask permission. Hence the consent solicitation.

Verisure is majority owned by the US private equity firm Hellman and Friedman and it is looking to borrow €1.8bn. This debt will come in the form of high-yield bonds and leveraged loans and will be used to pay the dividend, plus some existing loans.

What’s in it for the bondholders? I hear you ask: a nice fat fee is the answer. While this practice is not unknown with risky borrowers, it is the first time (according to the FT today) that a private equity firm has sought consent to move the goal posts a bit.

And it marks yet another blow in the steady erosion of covenants in the world of leveraged finance. I’m looking forward to hearing more about what people in the market feel about this – and how it might end - (as well as the brutalisation of our precious language) at the Euromoney Leveraged Finance event in London next Tuesday (14th). More details here:

https://goo.gl/Bd1rLi

#emLevFin


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