NEW ZEALAND Trends and Developments Contributed by: Josh Cairns, Dominic Toomey, Stuart Evans and Matt Mazenier, Simpson Grierson
Use of shareholder bridge loans on sponsor- backed financings A notable development in the New Zealand finance market over the past 12 months has been the grow - ing use of bridge shareholder loans by offshore pri - vate equity sponsors in acquisition structures for New Zealand assets. Although originally intended as short- term funding pending their refinancing by third-party debt, these loans are increasingly being retained as subordinated, longer-term components of the capital structure; often supported by second-ranking secu - rity. Whilst such subordinated shareholder loan arrange - ments are commonplace in more mature leveraged finance markets such as Australia and the United Kingdom, their long-term use in New Zealand remains relatively new. As a result, they are introducing more complex intercreditor dynamics between lenders and sponsors than previously seen in this market, with some sponsors pushing for intercreditor terms more typical of mezzanine or second-lien financing struc - tures rather than the full subordination traditionally expected of shareholder debt. Deal Terms and Documentation Standards The documentation landscape in New Zealand private credit transactions is evolving but continues to reflect the creditor-friendly nature of domestic bank lending practices. Private credit transactions in New Zealand are typically documented on the basis of either: • APLMA-based precedent documentation; or • short-form in-house templates developed by asset managers. Covenant packages New Zealand continues to be a market where the inclusion of multiple financial maintenance covenants is standard, even for institutional borrowers. “Cov-lite” structures common in the US and increasingly seen in Australia and the United Kingdom remain rare. Typical covenants include:
• senior secured loans, frequently utilising “all asset” security; • second-tier or subordinated debt, including sec - ond-lien facilities or mezzanine-style instruments; and • holdco-level debt, where structural subordination can provide borrowers with additional headroom within existing bank group covenants. The bilateral nature of these loans enables flexibility in both transaction structuring and financing terms. Pri - vate credit lenders are generally receptive to bespoke covenant packages, including financial maintenance tests tailored to the borrower’s business model, cus - tomised operational restrictions and cashflow metrics that fall outside established market norms. Intercreditor arrangements and mixed bank/fund financing structures One of the ongoing challenges faced by the New Zea - land private credit market is the development of the unitranche product and the co-existence of all-bank and mixed-bank/private credit fund financing struc - tures. Issues arise primarily around the absence of a well-established and broadly accepted intercreditor framework for senior/super senior financing struc - tures, with banks and private credit funds yet to settle on a standardised set of principles governing inter - creditor terms such as payment waterfalls, enforce - ment rights and standstill periods. The response of private credit funds to this dilemma has varied across different parts of the New Zealand finance market. At the upper end of the market, banks and credit funds have been able to adopt positions consistent with the senior/super senior intercreditor arrangements that are well-established in other private credit markets. On domestically-focussed mid-market transactions those positions can be watered down and, moving down the scale, it can become neces - sary for credit funds to accommodate less sophisti - cated priority arrangements in order to navigate bank approval channels. This requires asset managers to adopt a flexible approach to priority arrangements across their portfolio or, where possible, provide liquidity facilities themselves.
• leverage ratio tests; • interest cover ratios;
• cashflow or working capital metrics; • minimum EBITDA requirements; and
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