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By: Patrick Yingling and Aleksandra Kopec King & Spalding
What is the “middle market” of the U.S. leveraged loan market? While there is no checklist for what constitutes the middle market, the two basic parameters are that the borrower has between $10 million and $100 million of annual earnings before interest, taxes, depreciation, and amortization (EBITDA) and the aggregate loan size is in the range of $30 million to $500 million. As a general matter, there are common characteristics of credit facilities in the middle market:secured by collateral, small lender groups and other club-type deals, and financial covenant and negative covenant packages that are more robust than those for large corporate borrowers.
THERE HAS BEEN A CONTINUED INCREASE IN ACTIVITY THIS year in the middle market. There has also been a loosening of terms and a move toward more borrower-friendly provisions in credit facilities similar to what have historically been present in bond facilities or large-cap loans. This move is most apparent in the provisions that govern mandatory prepayments, incremental facilities, and negative covenants. Additionally, limited condition acquisition provisions have become commonplace in the middle market, unitranche structures have been increasingly featured in middle market deals, and a new LIBOR issue has created uncertainty throughout the financial markets
There is a distinct move this year toward more borrowerfriendly provisions relating to mandatory prepayments resulting from excess cash flow (ECF), asset sales, and extraordinary receipts (i.e., any cash received by or paid to or for the account of any person not in the ordinary course of business).
With respect to ECF mandatory prepayments, thresholds are becoming more commonplace in an increasing number of middle market deals. If there is an ECF threshold in an agreement, a prepayment would be required only after the borrower accumulates a certain dollar amount of ECF in any given fiscal year. In addition, the calculation of ECF continues to be watered down by giving the borrower a dollar-fordollar reduction for prepayments of certain debt. Historically such dollar-for-dollar reductions were limited to optional prepayments of the term loans plus, more recently, voluntary prepayments of revolving loans (if the revolving commitment is also reduced). But that reduction has increasingly been expanded to include incremental loans, incremental equivalent debt, refinancing facilities, and second lien debt. In addition, the time period for when this debt has to have been prepaid in order to benefit from the ECF reduction is often expanded to include not only the prior fiscal year, but also the period from the end of the prior fiscal year to the ECF calculation date and, in some cases, the borrower can still get the benefit of the reduction even if it has not made the prepayment so long as it has committed to make the payment during the succeeding fiscal year.
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Patrick Yingling is a partner in the Charlotte office of King & Spalding, where he is a member of the firm’s Finance Practice Group. Mr. Yingling’s practice focuses primarily on the representation of lead arrangers and agent banks in connection with the structuring and documentation of syndicated credit facilities, including merger and acquisition-related financings, first and second lien credit facilities, investment grade financings, cross-border facilities, financial sponsor leveraged acquisitions, and asset-based lending. Mr. Yingling has experience with a broad range of industry types including business services, healthcare, media/communications, sports and entertainment, defense, real estate investment trusts, and manufacturing. Aleksandra Kopec is a senior associate in King & Spalding’s Global Finance practice group resident in the Charlotte office. Ms. Kopec is active in King & Spalding’s leveraged finance practice.
For additional information on all segments of the loan market, see
> SEGMENTS OF THE LOAN MARKET: INVESTMENT GRADE, LARGE CAP, MIDDLE MARKET AND LEVERAGED FINANCE
RESEARCH PATH: Finance > Fundamentals of Financing Transactions > Credit Facility Basics > Practice Notes
For more on asset-based lending and leveraged finance, see
> COMPARING AND CONTRASTING ASSET-BASED LENDING AND LEVERAGED FINANCE
RESEARCH PATH: Finance > Asset-Based Lending > Introduction to Asset-Based Lending > Practice Notes
For additional details on covenant obligations, see
> RECENT TRENDS IN COVENANT OBLIGATIONS
RESEARCH PATH: Finance > The Credit Agreement > Representations, Warranties and Covenants > Practice Notes
For more about financial covenants generally, see
> FINANCIAL COVENANTS (CREDIT AGREEMENT)