Q&A: Leveraged Finance Lawyer here

Not sure if this will be of interest to anyone (if not, I imagine this will quickly fall into darkness), but I am a lev fin lawyer working at a V5 primarily on lender side LBOs/refis/etc (though have done a decent chunk of sponsor side work). If you've ever had any questions that you feel too stupid to ask about the docs, process, etc. feel free to fire. Or if you're curious about the overall transaction process (or any questions for that matter).

 
VanWilder:

Would be interested to hear about your background. Were you a Law person from the jump or did you do finance and make a transition?

I come from a very traditional background--top UG and law school and then straight through to my current role. My end goal has always been buyside in some form. I was always better with words than numbers so considered law and banking equally. In UG I applied for a few banking gigs. Landed an interview at GS for IBD (didn't go well) and a full time offer from a middle of the road boutique (which I turned down). Also did an IBD internship at a boutique. I'd always been a prestige whore and decided that I'd rather pursue law where I felt more confident in developing a stronger pedigree.

Initially it had always been my intention to do PE focused M&A and then eventually transition into buyside in some form. Once I started work, I was put on a few lev fin transactions, loved them and have stuck with it since.

I need a bit more time before I make my next move (probably 1-2 years) and am undecided at this stage on how I'll make that move. Looking at the end game there are some cool roles at PE firms that I think would suit me well. For example, some of the mid-sized PE firms have their sole debt guy deal with all the financing (e.g. negotiating term sheet, high level covenant discussions, managing banking relationships, etc) coupled with another function (e.g. investor relations).

 
200WEST:

This might be an off topic question but do you know what comp is like for legal teams?

Unfortunately I don't have exact numbers as its not something that's quite peaked my interest at this stage. But I can provide a bit more color for you. Put simply, It depends. You have to think in-house at BB as two separate roles. You've got your 'pure in-house' folks who are sat in the back office, working 9-5 doing your KYC, NDAs, sanctions and other compliance-y type stuff. Then you have your legal guys sat directly with the execution teams--these are the guys that are going to be staying up with you overnight negotiating the docs. They tend to be 80/20 legal/commercial. They can make a decent chunk of change and have great career prospects. I have several data points on these types and know one at GS earning well into the mid 000's. You'll usually see these people lateral from senior associate roles at [insert some top law firm]. There's a 50/50 split of those who stay and those who go back to private practice. I've seen the ones who go back to private practice walk straight into partnership.

 

When you're acting by a lending syndicate but you've effectively been chosen by the PE fund/financial sponsor who is acquiring the company (ie you're designated counsel), how much a conflict of interest does your team feel?

For example, some firms are notorious for being forced on the lenders by PE firms and, perhaps due to this conflict, are not particularly vigorous in pursuing the interests of the lenders.

EDIT: Recent press on this http://www.nytimes.com/2016/01/05/business/dealbook/a-growing-conflict-…

The NYT article mentions Paul Hastings. It would not be unfair to say that, when we see Paul Hastings is designated counsel on a deal, our hearts sink as lenders.

EDIT EDIT: The 2 PH (and ex-Cahills) partners that championed the passive approach to designated counsel very recently left PH. This may signal that PH is changing its strategy on this point, particularly after the media attention on the strategy around Jan this year.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 
Best Response
SSits:

When you're acting by a lending syndicate but you've effectively been chosen by the PE fund/financial sponsor who is acquiring the company (ie you're designated counsel), how much a conflict of interest does your team feel? For example, some firms are notorious for being forced on the lenders by PE firms and, perhaps due to this conflict, are not particularly vigorous in pursuing the interests of the lenders. EDIT: Recent press The NYT article mentions Paul Hastings. It would not be unfair to say that, when we see Paul Hastings is designated counsel on a deal, our hearts sink as lenders. EDIT EDIT: The 2 PH (and ex-Cahills) partners that championed the passive approach to designated counsel very recently left PH. This may signal that PH is changing its strategy on this point, particularly after the media attention on the strategy around Jan this year..

You've hit my hot point!

Before I give you my thoughts, I just want to add one extra layer of conflict in there; the lender syndicate itself. Don't forget that within the lending syndicate (especially at bid stage before trees have collapsed) you'll have a range of Tier 1 clients for the law firm. How do you then balance not being too resistant on the sponsor (e.g. making sure the sponsor designates you for the next deal)? Getting the best deal for a target client (e.g. making sure you keep your JPM/BAML/GS and other lev fin lead lefts happy) and giving ample attention to the clients with less focus (e.g. your arrangers who are only ever going to be brought on for their commitments)? The cynical person might ask why it even matters, "sponsors are so aggressive these days that they'll get any terms they want regardless of who's acting as counsel". I try and stay more positive than that!

This designated lender counsel theme can really drive associates who want to get the best deal for their client (the banks!) mad. How the team approaches the bank's representation is entirely driven by the partner running the deal. For example, I know one partner who is happy to drop ethics to ensure he gets repeat representations. Rather than try and fight a particular point, he'll direct everyone to "just get the banks comfortable on this". I've also seen some firms happily toss information across trees (e.g. for JPM). To give you an example of the point I mentioned re: conflicts within the syndicate itself--I've seen partners literally tell some banks to f off and go back to committee if you need certain approvals because X bank is happy to proceed on this basis.

Fortunately, I've positioned myself with a group of associates who are very tuned into these concerns and we try and avoid the partners who are effectively 'sponsor-lender lawyers'.

I know some PE firms that will just absolutely NOT designate certain law firms because said law firms will really put up a good fight for the banks. I even know some lender-side lawyers who get so frustrated by having to always give into sponsor demands because of partner requests, that they just switch to sponsor-side work only to avoid the problem entirely. At the end of the day we are lawyers. We should want to negotiate. We should want to get you a good deal. Some relationship partners forget this.

 

Thanks. Before I read your reply, I original wrote "are being particularly vigorous". I've since corrected to "äre not particularly vigorous". Can you edit your quote too, to avoid confusion?

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

Thanks for the insight. I agree that there's more than one conflict. I'm in the underwriting position, with some long term exposure coming out of the part of the revolver that I'll have to hold. Our focus is more on what we can sell to the market. That largely coincides with what's in the best interests of the lenders, but it's not always a perfect fit.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

Just want to start off by saying thanks for doing this AMA. I got a handful of questions below:

1.) When you say you cover leveraged finance, do you also cover DIP financing? If so could you just briefly go over some similarities/differences mainly in terms of complexity and fees? (I'm guessing 1st lien is still at 2.25% and 2nd lien at 3% - what % fees do DIP facilities earn?) Also how frequently do you see DIP loans issued these days?

2.) These days, the HY markets have tightened significantly - are cov-lite loans still issued these days, or is that now gone?

3.) Have sungard conditionalities become the standard these days with sponsors? Or are they still pretty rare?

4.) What aspects about LevFin (legal advisory) did you find interesting that you chose it over say, M&A legal advisory?

5.) Has the slow down in leveraged finance issuance this year have a significant impact on the dealflow for the legal advisory side? Do you foresee LevFin transactions picking up later this year or does the future seem bleak for LevFin?

Array
 
Highly Leveraged.:
Just want to start off by saying thanks for doing this AMA. I got a handful of questions below:

1.) When you say you cover leveraged finance, do you also cover DIP financing? If so could you just briefly go over some similarities/differences mainly in terms of complexity and fees? (I'm guessing 1st lien is still at 2.25% and 2nd lien at 3% - what % fees do DIP facilities earn?) Also how frequently do you see DIP loans issued these days?

2.) These days, the HY markets have tightened significantly - are cov-lite loans still issued these days, or is that now gone?

3.) Have sungard conditionalities become the standard these days with sponsors? Or are they still pretty rare?

4.) What aspects about LevFin (legal advisory) did you find interesting that you chose it over say, M&A legal advisory?

5.) Has the slow down in leveraged finance issuance this year have a significant impact on the dealflow for the legal advisory side? Do you foresee LevFin transactions picking up later this year or does the future seem bleak for LevFin?

  1. Unfortunately I've never done any DIP financing--so can't really comment on this. Sorry!

  2. Absolutely. Issue volume has been light for a few months now, but sponsor backed loans that are either in the market or forward will most definitely be cov-lite (or loose, etc.). The rationale for this is simple. PE firms these days are only going to make money on targets where they can consolidate, bolt-on, have extreme flexibility etc. Tight maintenance covenants simply do not align with this strategy. Until you see a shift in this strategy, I don't think you'll see cov-lites ever go away.

  3. You'll see them in some form or another and will certainly continue to do so in a seller-friendly environment. As an aside, I personally think the European approach to conditionality is better.

    4.I think the entire process is very neat. In M&A your main doc is a 50 page SPA that tells you the buyer, seller, a few reps, some warranties and maybe some other bits thrown in for good order. You do a ton of DD. This doesn't mean you're 'learning about the company' in the same way you would if Bain was preparing a commercial DD report. It means you're looking at contracts for term, change of control and assignability. Its monotonous.

With lev fin, you get a lot more responsibility early on because the timeframe is tighter (you need to be ahead of the M&A guys at all times--can't buy without the money!). This means its much faster paced. Everything needs to be done in 3 minutes. M&A is longer and steadier. My weeks are either 95 hours or 30 hours (no in-betweens, which I prefer). M&A never has the same type of downtime but never quite the same intensity. Oddly, I like the rush. Negotiations and approach are far more commercial imo. Will the CFO be able to move cash around the group easily? Can he deal with sub x and sub y if both aren't obligors? Would it be easier to accede the company or can he manage to stay within the obligor/non-obligor basket? Does the Permitted Acquisition definition cover KKR's planned acquisition of Widget next year? The company is a seasonal company so will the excess cash flow sweep need to be adjusted to account for this (e.g. so they aren't prepaying all the money they need to get through half the year)?

  1. Some groups are absolutely dead. I know one lev fin team that hasn't touched a single deal at all this side of Christmas. I've stayed busy with bids up until now and things are definitely slowing down for us. Smaller groups will do better because they can morph into restructuring lawyers. Bankruptcy lawyers are good on the technical complexities of the law but aren't quite the same on re-negotiating docs/full refis, etc.

In terms of the future of lev fin, I'm of the view that things will be dead until summer. The uncertainty of Europe, etc are all contributing factors. I do think that if the macros fall into place around summer, we could be doing the first half of the year's work in 3 months.

 

Thanks for doing the AMA! My questions are:

1) Do you work mostly on credit agreements or HY indentures?

2) What are some of the key provisions that you see sponsors throw into credit docs that are often overlooked by the credit market at time of syndication that later protect or give sponsors optionality by either allowing them to move assets around (between restricted/unrestricted subs) or shore up huge positions in the secondary through a sponsor affiliate? I believe Apollo is notorious for using legalese to its advantage.

3) What are the most important terms you think credit investors should keep a close eye on?

 
MidtownParkAve:

Thanks for doing the AMA! My questions are:

1) Do you work mostly on credit agreements or HY indentures?

2) What are some of the key provisions that you see sponsors throw into credit docs that are often overlooked by the credit market at time of syndication that later protect or give sponsors optionality by either allowing them to move assets around (between restricted/unrestricted subs) or shore up huge positions in the secondary through a sponsor affiliate? I believe Apollo is notorious for using legalese to its advantage.

3) What are the most important terms you think credit investors should keep a close eye on?

Great questions! Just hopping on a plane now, but will answer soon.

 
MidtownParkAve:

Thanks for doing the AMA! My questions are:

1) Do you work mostly on credit agreements or HY indentures?

2) What are some of the key provisions that you see sponsors throw into credit docs that are often overlooked by the credit market at time of syndication that later protect or give sponsors optionality by either allowing them to move assets around (between restricted/unrestricted subs) or shore up huge positions in the secondary through a sponsor affiliate? I believe Apollo is notorious for using legalese to its advantage.

3) What are the most important terms you think credit investors should keep a close eye on?

  1. I work exclusively on credit agreements though do a fair bit of bank/bond deals so know my way around an indenture, OM, etc. On bank/bond deals we have to do a fair bit of work in sync (everything from covenants to coordinating the closing process). There can be some cases where you get a lot of tension between the loan and bond lawyers as communication isn't always perfect and its a struggle of who is driving the process.

2 and 3. I'll tie in your questions below.

-Baskets, baskets and baskets. Check them and think about the way the sponsor can combine them (keeping in mind any freebie basket).

-EBITDA addbacks. Some of them are so aggressive its beyond ridiculous. Your grandma crossed the street? Well that resulted in $300 million in potential growth. When looking at EBITDA addbacks, don't forget that EBITDA is crucial in leverage ratios and certain baskets--so sponsors can really play around with this one.

-Read the definitions and follow through when you're reading tricky bits of the credit agreement. Should the leverage covenant exclude junior debt? Is it intended that the borrower can incur an unlimited amount of junior debt and never breach a covenant by doing so?

-Double counting. Usually the credit agreement will cover any issues that might arise, but sometimes things will slip through the cracks. e.g. equity cure into EBITDA w/o reduction of benefit over each quarter.

-Check for unlimited RPs by meeting certain thresholds and make sure they're sufficient (e.g. a low net leverage ratio).

-Does the group structure work? Is the parent a guarantor outside of the restricted group w/ sufficient protection against upstream leakage? Also is management high enough above the group so you have a clean share pledge over your single point of enforcement?

-On a particularly highly leveraged deal, I'd make sure that you're getting at some security on day 1 rather than waiting 30/60/90 days. For no reason other than peace of mind. On that note, if you're dealing with security in very debtor friendly jurisdictions (e.g. France), make sure you're getting a double luxco in the structure.

-If you're bank is also agent and you know you'll be holding some of the debt long term, check the White List and make sure there aren't any funky funds on there.

-I mentioned this above in another post, but think generally about the way the business operates. I've seen countless times where a deal will use some aggressive sponsor precedent from a manufacturing company for an LBO of a software company with loads of 'leftovers'. Just make sure it works and the borrower will be able to operate.

 

Great responses, thank you! Just a few follow-ups / clarifications below:

1) Can you elaborate more on is mgmt high enough above group so you have a clean share of pledge?

2) How does double luxco mechanically protect creditors more in borrower-friendly jurisdictions?

3) I didn't quit get the "leftover" comment at the end so was hoping you could talk about that a bit more

4) Any key points you'd recommend to look out for in indentures? Incurrence tests and ability to get primed are things to typically look out for but was wondering about others. What about ability to transfer assets between subs? I think that's a huge point of contention on the Caesars deal

5) It's a bit impractical for credit investors to spin through every page of a legal doc and many times we rely on a third party such as xtract. Do you have an opinion on these types of vendors (only 2 that I know of)?

 

Thanks for answering all our questions! Here is mine:

As a new hire in a Lev Fin group that will start this summer, what are some of the biggest ideas, obviously on the legal side of deals, that I should be aware of that might not be evident in IBD training? It could be either the technical nature of the deal or even clarification about the actual role lawyers play in the deal process.

Thanks again.

 
BuytheDip:
Thanks for answering all our questions! Here is mine:

As a new hire in a Lev Fin group that will start this summer, what are some of the biggest ideas, obviously on the legal side of deals, that I should be aware of that might not be evident in IBD training? It could be either the technical nature of the deal or even clarification about the actual role lawyers play in the deal process.

Thanks again.

Are you an analyst? I could be wrong, but my observation from working with banks is that so much of the lawyer/bank discussions are handled entirely by MDs. I've never understood why. It makes sense for some of the techy bits, but there is no reason for the MD to be coordinating with the lawyers on say, KYC, for example. If you can take charge of the legal process between the bank and the law firm at the junior level, you'll be of huge help. This includes things like commercial deliverables, getting timeline updates from the lawyers, process updates, coordinating your sanctions/tax (if its complicated like Italy)/KYC/AML teams, etc. One tip I think worth noting is finding out who the main process guy is at your law firm. Have one off emails with him--you'll get your information much quicker.

In terms of tips to think about as a junior, I would focus on the overall concepts and have a really good idea of each debt product and their practicalities. Its easy to get caught up in the modelling and treat each product as a mere name and number. Think about the key themes in their basic shells--what are the differences between maintenance and incurrence covenants? How do you actually drawdown on the RCF? When can you do it and how often? What can you use the RCF for? What about the capex facility? L/CS? Not sure what they teach you guys in training, so this could be too basic--but you'd be surprised how many people miss out the fundamentals.

In terms of role we play--I suppose I'll give you an idea of process. Let's say Bain wants to make a bid for X in 5 days. Bain will have been in touch with 5-6 banks to have very high level discussions. Bain will then assign designated lender counsel (let's assume us). We'll get in touch with all banks at once with an idea of timing and how we see the transaction playing out. The legal team will usually have juniors dealing with all ancillaries (CPs, security documents, etc.) and the seniors will deal with the commitment docs. We'll prepare an issues list for each bank. If each bank chats with us for 1.5 hours and there are 5-6 banks, we literally cannot start drafting until COB. Even 10 minute follow up phone calls to each bank will take an hour of our time. There will probably be about another 2-3 turns over the few days before Bain tells all lenders "right, we're done--here are the docs. take it or leave it". Let's presume this happens on a Thursday. There will be 1-2 major outstanding issues (usually around title allocation, KYC, or some other nit picky point)--we might draft a side letter to solve for the problem, or Bain's debt guy might get on the phone and yell at your MD (which I've seen plenty of times). Most major communications from Bain to lenders will go via lawyers (e.g. commitments, who can be fronting bank on some complicated L/C setup, etc.)

Whenever you get a newbie lawyer asking "won't it take forever to negotiate all of these terms?", the simple answer is "you can sign whenever you want". Presume Bain wins the bid. You'll then go to full docs. How much work this involves depends on the length of the term sheet. It could be a copy + paste or a whole new can of worms. I've done commitment papers to full docs in less than a week. Its not fun.

 

Would be great to have some recommended reading.

And how do you approach reading a new doc. Lets say someone asks you review an intercreditor and facility agreement / indenture, what's your process? where do you start?

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

thanks for doing this. a few questions for you

  1. Banks have been unwilling to place second liens for the past few months and have shift that burden towards sponsors. Do you believe that sponsors will continue to place second liens in the market given that they have become accustomed to the process?

  2. Can you discuss key point consideration you discuss with clients when issuing fungible add-on?

  3. It's imminent that we will see a lot bankruptcies in the coming months, how do you suppose attorney's are advising clients to prepare for filing for this process? And are you seeing bankers seeking to perfect their liens on the reserves.

When luck shuts the door you gotta come in through the window - Doyle Brunson
 

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