AUSTRALIA Trends and Developments Contributed by: Alastair Gourlay, Lewis Grimm, Emily Tsoi and Thanasis Dogoritis, Jones Day
majority of unitranche loans still contain a finan - cial covenant to monitor the borrower group’s financial performance, with covenant-lite (cov- lite) loan structures being a rarity offered to top- tier sponsors only. Less common, loans can also be structured as Term Loan B (TLB) facilities, which are sen - ior secured term loans with cov-lite terms and minimal amortisation, which are typically under - written and arranged by institutional banks and then broadly syndicated to institutional inves - tors. In contrast to unitranche loans, TLB loans are structured as being cov-lite. As a result, unitranche lenders (and, in particular, the credit arms of global sponsors) are becoming increas - ingly open to structure unitranche loans to con - tain cov-lite or cov-loose terms, particularly when sponsors run a dual-track process pitching the unitranche and TLB loan structures against one another. While it is observed that some uni - tranche loans have started adopting terms which resemble TLB loan terms, the norm is still for unitranche loans to maintain a level of financial maintenance covenants that differentiate them from the TLB loans. Payment-in-Kind (PIK) Payment-in-kind (PIK) interest terms are becom - ing increasingly prevalent in the Australian pri - vate credit direct lending sector, which is not a common feature in BSLs. PIK typically refers to a form of non-cash interest payment whereby the borrower is allowed to defer interest pay - ments by adding the accrued interest to the loan principal instead of paying the interest in cash. From a borrower’s perspective, PIK is a useful tool for liquidity management, providing debt service flexibility amidst the rising interest and inflation rates. In turn, lenders are compensated economically through a premium (which can
range from being a flat, to a cumulative, or tiered, premium) and the additional interest generated from the PIK amount being included to the prin - cipal. Portability Typically, loan agreements would contain “change-of-control” mechanisms to govern the change in ownership of the borrower group, which triggers mandatory prepayment to the lender/lenders, allowing the lender/lenders to exit from their investment position. Portability forms an exception to this general rule, enabling the borrower group, under certain conditions, to carry over their existing loan when the ownership of the group changes. The inclusion of portability features in the loan market was largely driven by the decline in the volume of M&A activity, due to present macroeconomic factors creating a gap in the pricing expectations between sellers and buyers. A target company with a portable existing loan structure eliminates the need for the buyer to seek new financing arrangements, thus reducing costs, and supports the sale of the target company in the currently challenging market conditions. Historically, portability was a typical feature in the high yield bond market, but was rarely seen in the private credit market. However, in recent years, portability has become increas - ingly prevalent in the US and European private credit markets, and has started to make its way to the Australian private credit market in recent months. For any deals where a portability feature is allowed, the portability provisions usually con - tain a large number of conditions, such as set - ting the criteria for the buyer’s identity, leverage ratio requirements over the borrower, sanctions and know-your-customer (KYC) compliance requirements, and limits on timing and frequency of exercise of the portability feature, etc.
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