Lender's Legal Fees Are Out Of Control (Proposed Solution)
All,
I am a VP at a MM fund. Sponsors paying for lenders lawyers is a breakdown in the industry. You are paying someone who is incentivized to both screw you on terms and screw you on dollars (as you have to foot the bill).
I am going to start requiring lenders to include a legal bill cap in their term sheets during competitive processes. Something like $100K cap, anything beyond is on them.
Can all the other VPs start doing this? Lets be the change we want to see in the world. Strength in numbers.
Tired of getting nickeled and dimed by a market inefficiency.
Well perhaps just start agreeing to actually tight docs with tight EBITDA and ND definitions, proper covenants, small baskets etc and the whole legal docs process will be a lot shorter :)
Frankly though the whole issue will get better once Al starts reverting the trend in legal cost / billable hours
No
Deal fees are just a part of your financing costs. If you make credit funds pay for their own legal expenses, they’ll just increase margins / OID etc. or not participate in a process (also considering broken deal risk). And frankly spreads are basically as low as they have ever been so overall costs are pretty sponsor friendly.
I think everyone has come to terms with LMEs. But that just means that credit funds need very good counsel for all the different ways in which sponsors can screw them.
Hence the solution - go back to tighter documents with proper definitions and go back to previous norms, i.e. hand over the keys when there’s a default instead of starting legal battles and creating lots of zombie portcos. (And of course fire the people who made bad investments - and create room for all the crowds who want to be promoted).
I don’t expect this to happen like that, but you can see some cracks. If you look at the recent FT articles on K&E, it’s clear that Apollo and others pressured them to give up Altice as their client - and effectively abandon super aggressive tactics that just create legal fees. While some of the LME action will probably shift to boutique law firms, the story suggests to me that large PE players (who also have Credit arms) might reconsider best practices in strongarming lenders. Overall though very difficult to shift norms and close this pandora’s box.
if u wanna play it safe u gotta pay top dollar
K&E sleeper agent spotted
Don’t be cheap.
I want the lenders to be cheap. Not me.
Ha, was literally just talking about this. Totally agree.
And to everyone else above arguing to pay top dollar - this is for the lenders' legal fees, not ours. Sorry I'm not picking up K&E's tab because you used them to negotiate against us.
I was just having this conversation with some friends. It’s insane to me that we have to cover their fees and they have negative incentive to actually spend less because more spend gets them (1) theoretical better counsel and (2) better perks from those lawyers…
I have thought about this and a few ways you can go is (1) cap their expenses or (2) limit their choice of firms to use on your dime to a list you are OK with (usually less expensive)
Only if we all push back will it works it’s way to market…
To add to this, in an ideal world, I think it makes sense to set fixed rates for recurring counsel requests, like an amendment that modifies one short provision in the credit agreement or doc review. It makes no sense that they're charging 6 figures for an edit to the redline.
Just WOW! So then how about LPs having to pay the Fund's legal expenses? LPs have to foot the bill so you can engage K&E and then the LP has to pay another set of (usually cheaper) lawyers to negotiate against the K&E lawyers they also paid for. Talk about an inefficient and lopsided market.
Fair point but that's above my pay grade. In principle it seems like people should be paying for their own lawyers.
Don’t be stupid. If you think you’re getting the most aggressive version while you’re footing the bill you’re wrong. They know who is paying and they want repeat work. I’d rather pay and get better docs
My point is you can get better docs anyway. There is zero transparency here.
I've closed deals where we go pretty detailed during terms sheets and therefore literally do 1 substantial turn of the credit agreement, and then lenders counsel sends us a $200k bill. When I ask to see billable hours they make up a bunch of Attorney client privilege nonsense and refuse.
This is real money we are wasting. And it's being wasted in bad faith, to people who are actively working against our interests. This needs to stop.
Because counsel was engaged for the admittedly “detailed” term sheet.
Have you actually made it clear to the lender that this is a problem? Lenders are (mostly) commoditized and rely almost entirely on relationship-based lending to ensure that they're seeing your deals.
If they think that future deal flow is at risk, they're incentivized to actually monitor (or even negotiate with) their lawyers to ensure that you'll keep bringing them opportunities.
AKA if it's that egregious, I'd have some talk track like "While I'm excited to partner up on this platform, my seniors are giving me a lot of grief over these legal fees. Honestly, it's going to be tough to advocate for you guys for future deals if this keeps happening." Make them sweat and handle pressuring their lawyers more next time.
Go for it. Shops will just increase spread and/or OID to make it up. In fact, higher spread sounds great.
This is a hilarious thread
Genuinely. Watching PE VPs moan about lender legal fees when ultimately the dollars are coming from their LPs and PortCos - as they continue to negotiate credit agreements longer and more borrower-friendly than ever before - shows how tunnel-visioned they are. Loan market spreads are at damn near historic lows and you’re… complaining? Legal fees probably aren’t the sword you want to fall on.
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