Sistemas de gestión de la calidad — Fundamentos y vocabulario

As a consequence of the sharpening process that banks put in place to reduce their overall risk in highly-leveraged transactions, an increasing number of moneylenders were admitted into the syndicate, along with newer forms of financing. As a matter of fact, many categories of institutional investors got gradually involved in LBOs, becoming leading actors alongside traditional

98 _{Demiroglu, C. and James, C.M. (2011), “The Role of Private Equity Group Reputation in LBO Financing”,} Journal of Financial Economics, Vol. 96, No. 2, pp. 311-313

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bankers in the senior lending process. Technically speaking, the syndicate arranger underwrites a certain amount of Term B and C debt that will later attempt to sell to institutional investors, which will in turn enter the syndicate in this way.

As anticipated above, the decrease in Term A loans was strictly related to the rise of another type of senior loans, called Term B and Term C loans, held by institutional investors such as hedge funds, pension funds and insurance companies99_{. These types of subprime loans have longer maturities (typically from}

seven to ten years) as well as a bullet structure, meaning that they generally get to be repaid in a single tranche at the maturity date, as opposed to the amortizing

structure of Term A loans100_{. Although Term B and C loans started to be used}

during the last years of the 1990s, they thrived enormously only some years later, starting from the early 2000s.

A great deal of research has also focused on the fact that these lower-grade loans usually exhibited a relatively poor covenant framework, obtaining the name of

covenant-lite loans. As such, covenant-lite loans differ from typical covenant- heavy structures of typical banks’ debt by the fact that they only embed incurrence financial covenants, while no maintenance provision is observed. As specified in previous sections, these incurrence clauses are only to be met on a preliminary basis, with the aim of not impairing the lender’s interests by taking potentially harmful actions101_{. Nevertheless, they do not include any traditional financial}

ratios to be abided by on an ongoing basis. Hence, covenant-lite loans exhibit a higher degree of risk, due to the fact that they are far less restrictive than traditional covenant-heavy structures102_.

99 _{Even though Term B and Term C loans are the most usual, bigger syndicates can comprise up to Term} H loans, each level with a decreasing degree of seniority when compared to the upper level.

100 _{The bullet structure, along with the longer maturity, entails that Term B, C and lower loans can be} paid back only after the whole reimbursement of banks’ Term A loans.

101 _{Typical incurrence covenants include dividends lock-up and prohibition of issuing additional debt.} 102 _{For a thorough examination of the covenants issue, see}

Bavaria, S.M. and Lai, A. (2007), “The Leveraging of America: Covenant-Lite Loans Diminish Recovery Prospects”, available at:

http://s3.amazonaws.com/zanran_storage/www2.standardandpoors.com/ContentPages/561145523.pd f (accessed March 2016)

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From an analytical perspective, the rise of these newer types of loans indicates that banks did not modify their risk-averse attitude, rather they took advantage of the willingness of many institutional investors to get involved in LBOs by persuading them into subscribing growing amounts of senior (yet riskier) debt, all in pursue of a higher yield. In other words, banks maintained their traditional “defensive approach” that already experienced during the 1980s. It remains to understand how

investment banks managed to persuade institutional investors to subscribe such huge amounts of debt, thereby replacing traditional bank debt and its correlated risk. As we will describe in the ad-hoc section, that has a lot to do with derivatives.

2.4.2 Subordinated Debt

The advent of institutional investors in LBO financing was not limited to senior debt lending, rather a new form of junior financing tool was introduced, especially from the first years of the 2000s: the second-lien loan. These new type of loans, as the name itself suggests, have a second claim either on a specified pool of the target’s assets or on the company as a whole, that rank behind Term A, B and C loans and working capital facilities, though prioritized compared to mezzanine capital, high-yield bonds and other junior facilities. However, since they rank as junior debt, second-lien loans carry a higher interest rate and are often repayable after a period of eight to ten years in a single tranche (bullet structure). As of their very introduction, these type of loans was not intended to be held by banks, rather they were issued for institutional investors. According to Demiroglu and James103, while issuances of these loans were virtually close to zero until 2004, the second- lien market was $28 billion worth the year after, with 1 out of 2 LBO deals including such a component. Second-lien loans accounted for an average of seven to ten percent, over the whole amount of debt financing in a typical LBO deal.

103 _{Demiroglu, C. and James, C.M. (2010), “The Role of Private Equity Group Reputation in LBO} Financing”, Journal of Financial Economics, Vol. 96, No. 2, pp. 307-309

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As far as typical junior debt financial instruments are concerned, such as mezzanine financing, private placements and high-yield bonds, these are found to have slightly decreased, standing at a 12 to 14 percent over the full debt package.