Ashurst Global Loans Market Update: the need for increased innovation

The loan market has always been a relationship driven, largely negotiated market which lends itself (sorry) to innovation.

None more so than in times of stress where lenders and borrowers have evolved structures and solutions that reflect the particular circumstances the market finds itself in. Many such structures and solutions have survived the choppier markets which they were originally designed to serve and have become mainstream features in the market. Others may well make a comeback - see more below on an old favourite, the forward start facility. Finally, given we are about to move into an era of high underlying rates, we may see new structures evolving especially around covenants.??

Examples of innovations which are now very much part of the mainstream market are amend & extends, acquisition spikes, accordions and +1s.

Utilisation fee structures came to the fore as liquidity became constrained during the global financial crisis with first draw structures establishing a nice balance between classic backstop facilities and a borrower's need to draw them down occasionally.

Bridges to bonds with duration fees and step ups in margins have also become a regular feature, particularly for acquisitions.?The bond markets, corporate and high yield, are experiencing their own issues (sorry again) presently so I would expect structuring of bridges to such takeout markets will become more imaginative in 2023.

All of the above and plenty of other structural changes will be key components of how the loan markets remain at the forefront of corporate financing as economic headwinds persist.

A more recent development has been the rise and rise of the sustainability linked loan – a welcome evolution designed to reward borrowers for being more sustainable. We have seen more and more borrowers incorporate sustainability linked elements into their core financing and the structure is effectively already a mainstream feature of the market. I am not convinced they are perfect or that they drive sustainable behaviours as opposed to reflect them but they are a welcome step and with the markets ability to innovate, I see the probability that they will eventually be seen as driving behaviours and contributing to the fight against climate change and other social issues.???????

The final innovation I would like to touch upon is probably my favourite – the forward start facility (FSF).?A structure that gained prominence in the global financial crisis, it enables borrowers to lock in liquidity from supportive banks, often extending the tenor of their financing. Those banks committing to the FSF are rewarded with enhanced pricing and controls. Those banks who do not commit are effectively left with the existing facility with pricing and controls more than likely out of the market. A very effective structure in a rising pricing environment when liquidity may well be tight, it made a brief comeback during COVID. With the market set for a sustained period of instability, my bet is we will see many more FSFs in the next 12-24 months. For further details, please see the attached more in depth look at the structure – Forward Start Facilities – back on the horizon…again.

With choppy markets comes more negotiation. With more negotiation comes innovation.

Ashurst Global Loans is at the forefront of the loan markets across all credit grades, all asset classes and all structures.

Why not call the Most Innovative Law Firm in Europe??