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Investors Fight Back on Private Equity Buyout Loans

Natalie Harrison

(Bloomberg) -- Private equity firms are pushing for increasingly aggressive terms in finance backing their leveraged buyouts. But loan investors are giving them a greater run for their money, according to Covenant Review.

A number of recent leveraged loans to finance buyouts -- including for Whataburger Restaurants, Teneo Holdings, MyEyeDr and SnapAV -- got major overhauls to investor protections known as covenants, according to the debt research firm. That’s a stark contrast to prior periods this year when the balance of power appeared to rest with the private equity sponsors.

Investors are insisting on more changes amid volatility sparked by trade tensions and recession fears. Investors yanked cash from loan funds for a 38th straight week last week, and a loan for Life Time Inc., owned by Leonard Green & Partners LP and TPG Capital, was pulled. While private equity firms often deemed a culprit behind weaker terms continue to push for aggressive provisions, investor resistance is stymieing the erosion.

“Issuers are reaching for more aggressive terms than ever before and managers are vigorously pushing back against these proposals,” said Covenant Review data analyst Steve Miller. “The net result is that covenant terms have trended sideways in recent months.”

Buyers Win

Covenant Review surveyed new leveraged loans in the three months to Aug. 7. It found that while loans launched during this time had the least investor-friendly covenant packages on record, investors managed to claw back some ground while the loans were in syndication.

Based on its loan document scoring system, it found loans launched with an average score of 3.86 in that period, where a 5 represents the worst possible scenario for buyers. After investors successfully fought for changes, that average score fell to 3.57.

Investors’ biggest revolt was against uncapped adjustments to a measure of earnings known as Ebitda. These are often the among the most egregious terms -- usually hidden in the fine print of bulky loan documents -- because they make a company’s earnings projections appear rosier by including future cost savings.

Asset Sales

Another provision where investors reclaimed ground concerned terms that allow borrowers to sell assets without having to reinvest the proceeds in the business within a specified time period, or to pay down debt dollar-for-dollar if leverage falls below predetermined thresholds.

In a more recent example of investor resistance, CityMD’s $900 million borrowing for a buyout launched with a covenant score of 4.8 -- one of the highest Covenant Review has ever assigned. That score improved after a number of investor-friendly changes, including capping Ebitda adjustments from cost savings, to 25% for two years from uncapped for three years.

Still, amid the tussle, some borrowers were able to win better pricing after bowing to investor pressure on loan terms. BDT Capital Partners reduced the premium it needed to pay during the sale of its $1.33 billion loan financing the buyout of Whataburger.

“Until the late summer hiatus kicks in, participants expect the combination of volatility in the broader capital market and ongoing outflows from loan mutual funds to allow managers to successfully resist the most aggressive proposed documentation terms,” Miller said.

To contact the reporter on this story: Natalie Harrison in New York at nharrison73@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net, Sally Bakewell, Christopher DeReza

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