1 00:00:18,000 --> 00:00:20,560 Speaker 1: Hello, and welcome to the Credit Edge Weekly Markets podcast. 2 00:00:20,760 --> 00:00:22,880 Speaker 1: My name is James Crombie. I'm a senior editor at 3 00:00:22,880 --> 00:00:24,000 Speaker 1: Bloomberg and I. 4 00:00:24,079 --> 00:00:26,320 Speaker 2: Made in Chessin a senior analyst and head of Credit 5 00:00:26,360 --> 00:00:30,920 Speaker 2: Research Europe for Bloomberg Intelligence. This week, we're very pleased 6 00:00:30,920 --> 00:00:34,320 Speaker 2: to welcome Sabrina Fox, founder of Fox Legal Training and 7 00:00:34,400 --> 00:00:37,559 Speaker 2: former head of the European Leverage Finance Association. How are you, Sabrina, 8 00:00:38,040 --> 00:00:38,920 Speaker 2: I'm very well. 9 00:00:38,960 --> 00:00:40,360 Speaker 3: Thank you so much for having me. 10 00:00:40,680 --> 00:00:43,400 Speaker 2: And Sabrina spends a large amount of time talking to 11 00:00:43,479 --> 00:00:46,760 Speaker 2: lev finn market participants, educating on legal and covenant risks, 12 00:00:46,800 --> 00:00:48,760 Speaker 2: something that we've been talking a lot about on our 13 00:00:48,800 --> 00:00:51,600 Speaker 2: podcasts in the last year or so on names like 14 00:00:51,600 --> 00:00:53,000 Speaker 2: how to cease? Isn't that right? 15 00:00:53,080 --> 00:00:56,320 Speaker 1: James, Yeah, that's right, And we're delighted to have you here. Sabrina, 16 00:00:56,320 --> 00:00:58,520 Speaker 1: thanks so much. Before we get started, I just want 17 00:00:58,520 --> 00:01:01,400 Speaker 1: to say credit markets are looking pretty complacent at the moment, 18 00:01:01,440 --> 00:01:04,479 Speaker 1: with junk bonds trading ever tighter as demand for yield 19 00:01:04,560 --> 00:01:07,720 Speaker 1: rises and supply of corporate debt dries up. Companies are 20 00:01:07,800 --> 00:01:11,080 Speaker 1: taking advantage, however, rushing to reprice tens of billions of 21 00:01:11,120 --> 00:01:14,319 Speaker 1: dollars in leverage loans and high yield bonds so called 22 00:01:14,360 --> 00:01:18,080 Speaker 1: liability management exercises are meanwhile getting ever more aggressive as 23 00:01:18,120 --> 00:01:20,440 Speaker 1: those with too much debt try to buy some time 24 00:01:20,480 --> 00:01:23,160 Speaker 1: to turn things around. The situation in Europe doesn't seem 25 00:01:23,200 --> 00:01:25,120 Speaker 1: as extreme as what we've seen in the US, where 26 00:01:25,120 --> 00:01:26,720 Speaker 1: there's the sense that some of the law firms and 27 00:01:26,760 --> 00:01:29,000 Speaker 1: other advisors in those deals are taking a bit of 28 00:01:29,040 --> 00:01:32,160 Speaker 1: a pause, fearing reputational risk if they push too hard. 29 00:01:32,440 --> 00:01:34,479 Speaker 1: But Sabrina, before we get to the covenants, first of all, 30 00:01:34,480 --> 00:01:37,160 Speaker 1: on the rush to market, what's your take. Why is 31 00:01:37,200 --> 00:01:39,360 Speaker 1: everyone trying to get deals done now? And is the 32 00:01:39,480 --> 00:01:41,040 Speaker 1: risk being properly priced? 33 00:01:41,560 --> 00:01:46,000 Speaker 3: Well, I leave the question of pricing risk to the experts. 34 00:01:46,280 --> 00:01:48,440 Speaker 3: I have my own views about that, but I'm not 35 00:01:48,840 --> 00:01:52,280 Speaker 3: put in that position. I certainly don't envy them. It's 36 00:01:52,320 --> 00:01:55,640 Speaker 3: a difficult market right now. There is such a you know, 37 00:01:55,720 --> 00:01:57,800 Speaker 3: a rush to get things done. Part of that is 38 00:01:58,320 --> 00:02:02,920 Speaker 3: because the windows can be shorter than you might predict. 39 00:02:03,120 --> 00:02:09,240 Speaker 3: They're particularly unpredictable leaders across the world that can cause 40 00:02:09,480 --> 00:02:13,520 Speaker 3: markets to shut within a day, which we saw recently, 41 00:02:13,760 --> 00:02:17,240 Speaker 3: and I think that has caused you know, bar wars 42 00:02:17,240 --> 00:02:21,399 Speaker 3: to become more and their advisors to become more opportunistic 43 00:02:21,480 --> 00:02:23,920 Speaker 3: and get the deal done while they can, which of 44 00:02:23,919 --> 00:02:28,440 Speaker 3: course does then squeeze lenders ever tighter. Whilst they you know, 45 00:02:28,480 --> 00:02:30,320 Speaker 3: they want the deals to come and they've got the 46 00:02:30,840 --> 00:02:35,640 Speaker 3: cash to deploy, they've also got tighter timelines during which 47 00:02:35,680 --> 00:02:40,360 Speaker 3: they have to absorb and digest pages and pages and 48 00:02:40,360 --> 00:02:44,359 Speaker 3: pages of documentation that they are now seeing before their 49 00:02:44,480 --> 00:02:49,600 Speaker 3: very eyes the consequences of these additional flexibilities because of 50 00:02:49,639 --> 00:02:52,000 Speaker 3: the enemies that are happening. So we're in this very 51 00:02:52,120 --> 00:02:55,720 Speaker 3: unique time in the market that I have not lived 52 00:02:55,720 --> 00:03:00,240 Speaker 3: through before, where you see both negotiating for you know, 53 00:03:00,360 --> 00:03:04,000 Speaker 3: flexibility that seems to be getting ever wider as if 54 00:03:04,040 --> 00:03:08,480 Speaker 3: there is no limit to it, and alongside the actual 55 00:03:08,639 --> 00:03:13,440 Speaker 3: cost that this results in due to the liability management 56 00:03:13,440 --> 00:03:18,240 Speaker 3: exercises and also restructurings and bankruptcies and et cetera. It's 57 00:03:18,320 --> 00:03:21,120 Speaker 3: kind of all playing out before us. And you would 58 00:03:21,160 --> 00:03:23,840 Speaker 3: think one would cause the other, you know, would influence 59 00:03:23,840 --> 00:03:26,440 Speaker 3: the other to some degree, but it really doesn't seem 60 00:03:26,520 --> 00:03:27,440 Speaker 3: to be the case at all. 61 00:03:27,880 --> 00:03:30,760 Speaker 2: I remember early in my cell side career, we used 62 00:03:30,800 --> 00:03:34,240 Speaker 2: to have weeks of a leading into a new issue. 63 00:03:34,280 --> 00:03:37,560 Speaker 2: We'd be writing new issue research and going around and 64 00:03:37,600 --> 00:03:39,880 Speaker 2: seeing clients and talking to them about the new issue 65 00:03:39,880 --> 00:03:42,840 Speaker 2: that was coming some way down the road. Now it's 66 00:03:42,880 --> 00:03:45,720 Speaker 2: all done and dusted in a day. The investors that 67 00:03:45,800 --> 00:03:48,680 Speaker 2: you speak to, how do they cope with that, particularly 68 00:03:49,000 --> 00:03:51,119 Speaker 2: when it's a new name that they might be less 69 00:03:51,160 --> 00:03:51,640 Speaker 2: familiar with. 70 00:03:52,000 --> 00:03:54,920 Speaker 3: I there's a lot of heavy lifting that happens, and 71 00:03:55,160 --> 00:04:00,800 Speaker 3: it becomes the best you can do under the circle ccumstances. 72 00:04:01,400 --> 00:04:07,520 Speaker 3: It's supported. They do have access to resources that provide 73 00:04:07,600 --> 00:04:10,520 Speaker 3: summaries on things, but even those providers I know, having 74 00:04:10,560 --> 00:04:14,760 Speaker 3: worked for them, struggle with the timeline, so those summaries 75 00:04:14,880 --> 00:04:18,560 Speaker 3: might not be out in time for lenders to make 76 00:04:18,600 --> 00:04:21,640 Speaker 3: their decisions on that basis. So no matter how excellent 77 00:04:21,680 --> 00:04:23,880 Speaker 3: they are, if they don't come out in time, they're 78 00:04:23,880 --> 00:04:27,120 Speaker 3: not really going to help folks make decisions. Which is 79 00:04:27,160 --> 00:04:32,960 Speaker 3: why Fox Legal Training is offering training to bring lenders 80 00:04:33,000 --> 00:04:35,599 Speaker 3: and other market participants up to speed on how to 81 00:04:35,640 --> 00:04:39,120 Speaker 3: review documentation quickly. And it's actually something that I take 82 00:04:39,160 --> 00:04:41,960 Speaker 3: great pride in doing and in teaching people how to 83 00:04:42,000 --> 00:04:46,000 Speaker 3: do because it is actually possible. And I have lots 84 00:04:46,000 --> 00:04:49,200 Speaker 3: of videos on YouTube for Fox Legal Training where I 85 00:04:49,279 --> 00:04:52,039 Speaker 3: do just that I take a deal and I say, Okay, 86 00:04:52,040 --> 00:04:53,840 Speaker 3: we're going to go through and look at it right now, 87 00:04:53,880 --> 00:04:55,880 Speaker 3: and it could be the first time I've seen the deal. 88 00:04:56,200 --> 00:04:58,680 Speaker 3: So I'm taking people through step by step. Okay, this 89 00:04:58,720 --> 00:05:02,080 Speaker 3: is how I would do it. But the biggest obstacle 90 00:05:02,200 --> 00:05:06,839 Speaker 3: for most people is actually lack of confidence. They don't 91 00:05:06,880 --> 00:05:09,920 Speaker 3: believe that they can do it. They believe, because they're 92 00:05:09,920 --> 00:05:14,120 Speaker 3: not lawyers, that actually this legal documentation is too complex 93 00:05:14,520 --> 00:05:18,240 Speaker 3: or somehow outside of their ability to grasp. But it's 94 00:05:18,400 --> 00:05:21,600 Speaker 3: just not true. I want to get a mug on 95 00:05:21,680 --> 00:05:24,800 Speaker 3: my desk that says covenants are complicated, but they're not 96 00:05:24,960 --> 00:05:29,040 Speaker 3: rocket science, because that's that's the reality a contract. Once 97 00:05:29,040 --> 00:05:31,960 Speaker 3: you learn how it's created, you know how it's how 98 00:05:31,960 --> 00:05:34,720 Speaker 3: it's put together, and how to navigate it. It is 99 00:05:34,880 --> 00:05:38,920 Speaker 3: actually designed to be navigated. It's got a table of contents, 100 00:05:39,080 --> 00:05:41,720 Speaker 3: it's got to find terms. It tells you how to 101 00:05:41,760 --> 00:05:45,400 Speaker 3: interpret certain words. So if you can get a basic 102 00:05:45,480 --> 00:05:47,120 Speaker 3: sense of how to do that, and we've heard this 103 00:05:47,160 --> 00:05:50,400 Speaker 3: from our clients, the process does get easier and it 104 00:05:50,480 --> 00:05:53,560 Speaker 3: goes a bit faster. So credit analysts can focus on 105 00:05:53,640 --> 00:05:56,240 Speaker 3: what they do well, which is analysing credit. 106 00:05:56,839 --> 00:05:58,200 Speaker 1: But I think you know, to Aiden's point, you know 107 00:05:58,200 --> 00:06:01,120 Speaker 1: there is such volume coming through. We've seen over sixty 108 00:06:01,120 --> 00:06:04,039 Speaker 1: billion dollars worth of just leverage loans in the US 109 00:06:04,120 --> 00:06:07,520 Speaker 1: coming in one week, which is you know, very very unpresent. 110 00:06:07,560 --> 00:06:10,480 Speaker 1: I mean, it's not common at all. So even if 111 00:06:10,520 --> 00:06:12,560 Speaker 1: you are confident, I'm confident I can get through this, 112 00:06:12,600 --> 00:06:13,480 Speaker 1: but I haven't got the time. 113 00:06:13,600 --> 00:06:16,240 Speaker 2: What do I do you read Bloomberg Research. 114 00:06:15,880 --> 00:06:20,000 Speaker 3: James, I think that I think that's why you're starting 115 00:06:20,000 --> 00:06:24,120 Speaker 3: to see some sort of specific terms come in that 116 00:06:24,240 --> 00:06:28,520 Speaker 3: lenders are requesting in documentation, like LEM blockers that go 117 00:06:28,640 --> 00:06:31,640 Speaker 3: to the heart of some of the most aggressive lemies 118 00:06:31,720 --> 00:06:35,200 Speaker 3: that we've seen. Most notably, I would say the omni blocker, 119 00:06:35,320 --> 00:06:40,120 Speaker 3: which is an an anti lem language that applies in 120 00:06:40,160 --> 00:06:43,640 Speaker 3: a number of different circumstances, in which I wrote for 121 00:06:43,720 --> 00:06:46,560 Speaker 3: the Ft quite passionately that they should be used in 122 00:06:46,640 --> 00:06:50,440 Speaker 3: every deal, that in my ideal world, every deal has 123 00:06:50,480 --> 00:06:58,640 Speaker 3: an omniblocker. But it's it is a way to perhaps 124 00:06:58,720 --> 00:07:04,800 Speaker 3: guard against the worst excesses of the potential future outcomes, 125 00:07:05,240 --> 00:07:08,920 Speaker 3: and so I'm not surprised to see that the appearance 126 00:07:09,200 --> 00:07:12,640 Speaker 3: of these types of protections has increased. It's the natural 127 00:07:12,680 --> 00:07:14,920 Speaker 3: evolution of the market up to this point, I think. 128 00:07:15,200 --> 00:07:17,240 Speaker 1: So break it down for as omniblocker. You might have 129 00:07:17,280 --> 00:07:19,440 Speaker 1: already lost some listeners there. So what does it actually mean? 130 00:07:19,920 --> 00:07:20,680 Speaker 1: Basic terms? 131 00:07:21,080 --> 00:07:24,280 Speaker 3: Yeah, okay, so on the meaning you know, kind of 132 00:07:24,440 --> 00:07:30,040 Speaker 3: overall multiple it goes in the document. It basically says 133 00:07:30,080 --> 00:07:34,680 Speaker 3: that the barber will not use its terms to structurally 134 00:07:34,960 --> 00:07:40,400 Speaker 3: or effectively subordinate lenders. So it won't use the terms 135 00:07:40,440 --> 00:07:45,000 Speaker 3: it's negotiated for things like priming debt capacity or you know, 136 00:07:45,200 --> 00:07:51,920 Speaker 3: drop downs to opportunistically rejig the capital structure to the 137 00:07:51,960 --> 00:07:57,280 Speaker 3: disadvantage of some creditors over others. So it is taking 138 00:07:57,320 --> 00:08:00,000 Speaker 3: into account a sort of an umbrella protection overall whole 139 00:08:00,200 --> 00:08:05,640 Speaker 3: range of different potential ls which allows for maybe some 140 00:08:05,760 --> 00:08:08,800 Speaker 3: peace of mind. You know, it's not perfect. No one 141 00:08:08,840 --> 00:08:12,720 Speaker 3: of these protections is perfect, but it is better. I'm 142 00:08:12,720 --> 00:08:13,880 Speaker 3: certainly better than nothing. 143 00:08:14,600 --> 00:08:16,240 Speaker 1: Is it actually a phrase that would show up in 144 00:08:16,240 --> 00:08:19,080 Speaker 1: the documentation when I see a new debt deal coming through? 145 00:08:19,160 --> 00:08:20,760 Speaker 1: Is that how easy it is to spot? 146 00:08:21,400 --> 00:08:24,680 Speaker 3: No, it wouldn't be that easy. I think you could 147 00:08:24,760 --> 00:08:28,280 Speaker 3: search for liability management and you might get there. I'm 148 00:08:28,320 --> 00:08:31,760 Speaker 3: a big fan of control f so I'm constantly giving 149 00:08:31,800 --> 00:08:34,560 Speaker 3: my clients control F hacks for things so that they 150 00:08:34,600 --> 00:08:39,319 Speaker 3: can get to the you know, the juicy stuff quickly. Yeah, 151 00:08:39,360 --> 00:08:40,760 Speaker 3: I think that will probably get you there. 152 00:08:41,320 --> 00:08:45,240 Speaker 1: And Alloway's using other phrases, other terms to avoid being 153 00:08:45,280 --> 00:08:46,920 Speaker 1: spotted in these documents. 154 00:08:47,320 --> 00:08:51,880 Speaker 3: I don't think they are actively true. I know this, 155 00:08:52,160 --> 00:08:54,559 Speaker 3: Maybe people will disagree with me, but I don't think 156 00:08:54,559 --> 00:08:58,040 Speaker 3: they're actively trying to hide things, you know. I do 157 00:08:58,120 --> 00:09:01,400 Speaker 3: think it can be hard to find things. And of course, 158 00:09:01,440 --> 00:09:04,040 Speaker 3: when you talk about the word loophole, the whole idea 159 00:09:04,080 --> 00:09:06,800 Speaker 3: is that it is a way of getting through what 160 00:09:07,000 --> 00:09:12,040 Speaker 3: would be considered an established protection. So, yes, there are loopholes, 161 00:09:12,040 --> 00:09:13,840 Speaker 3: but if you know where to look for the protection, 162 00:09:14,360 --> 00:09:16,960 Speaker 3: then you know where to look for the loophole because 163 00:09:16,960 --> 00:09:19,640 Speaker 3: it will be more or less in the same place. 164 00:09:19,880 --> 00:09:21,839 Speaker 1: And it can be found with a control F search 165 00:09:22,080 --> 00:09:22,680 Speaker 1: on the document. 166 00:09:23,320 --> 00:09:26,440 Speaker 3: I control F can do a lot, definitely, But I 167 00:09:26,440 --> 00:09:29,120 Speaker 3: think also having a general sense of how these documents 168 00:09:29,160 --> 00:09:33,040 Speaker 3: are put together really helps. Once you've done that, you 169 00:09:33,160 --> 00:09:37,080 Speaker 3: put in the work to get that foundational knowledge, then 170 00:09:37,360 --> 00:09:39,719 Speaker 3: the fact that you're looking at the documents day in 171 00:09:39,920 --> 00:09:42,920 Speaker 3: and day out, you begin to see the patterns, which 172 00:09:42,960 --> 00:09:45,760 Speaker 3: is where you know, having looked to probably thousands of deals, 173 00:09:45,800 --> 00:09:47,720 Speaker 3: now I feel like I've got to where I sort 174 00:09:47,720 --> 00:09:50,080 Speaker 3: of know. Even if you tell me which law firm 175 00:09:50,480 --> 00:09:52,480 Speaker 3: is you know has written the deal, I could probably 176 00:09:52,520 --> 00:09:54,800 Speaker 3: tell you where the bodies are buried. 177 00:09:55,360 --> 00:09:57,440 Speaker 2: And presumably you need to know a little bit about 178 00:09:57,480 --> 00:10:02,320 Speaker 2: the company as well, because if company, for example, allows 179 00:10:02,320 --> 00:10:06,839 Speaker 2: you to or allows the issuer to exclude certain subsidiaries 180 00:10:06,920 --> 00:10:10,600 Speaker 2: or assets from the restricted group or move pieces around, 181 00:10:10,960 --> 00:10:12,800 Speaker 2: you need to be able to do your due diligence 182 00:10:12,880 --> 00:10:16,480 Speaker 2: on what the corporate structure looks like and where the 183 00:10:16,520 --> 00:10:17,520 Speaker 2: profits are coming from. 184 00:10:17,520 --> 00:10:20,240 Speaker 3: Too, right, Yes, that's right, And that's what I call 185 00:10:20,360 --> 00:10:25,160 Speaker 3: point A. So whenever I'm teaching covenants to anyone, I 186 00:10:25,240 --> 00:10:27,960 Speaker 3: say to them you will be delighted to hear that 187 00:10:28,080 --> 00:10:30,840 Speaker 3: the first part of your analysis has nothing to do 188 00:10:31,120 --> 00:10:34,840 Speaker 3: with covenance, and in fact, probably the last question you 189 00:10:34,960 --> 00:10:38,360 Speaker 3: ask yourself won't have anything to do with covenants, because 190 00:10:38,400 --> 00:10:41,040 Speaker 3: it's the question is what could the bar we're do, 191 00:10:41,360 --> 00:10:44,240 Speaker 3: What would the bar were be willing to do? And 192 00:10:44,280 --> 00:10:46,920 Speaker 3: how bad would things have to get before they would 193 00:10:46,960 --> 00:10:49,640 Speaker 3: be willing to take advantage of some of this flexibility. 194 00:10:50,080 --> 00:10:53,720 Speaker 3: But the first question is absolutely you know, capital structure, 195 00:10:53,800 --> 00:10:57,439 Speaker 3: basic stuff. Who are the lenders next to you? Do 196 00:10:57,480 --> 00:11:00,720 Speaker 3: they have some advantage? For example, the supersede your RCF 197 00:11:00,840 --> 00:11:04,800 Speaker 3: or an earlier maturing bond or facility that has your 198 00:11:04,960 --> 00:11:08,360 Speaker 3: you know, temporally is senior to you. And then how 199 00:11:08,440 --> 00:11:12,560 Speaker 3: much and where and who who has become very important 200 00:11:12,640 --> 00:11:15,679 Speaker 3: we have seen in recent years. You know the fact 201 00:11:15,679 --> 00:11:20,319 Speaker 3: that there are certain lenders who have raised funds specifically 202 00:11:20,360 --> 00:11:24,880 Speaker 3: to invest in liability management exercises and opportunities tells you 203 00:11:25,080 --> 00:11:27,640 Speaker 3: all you need to know about the importance of the 204 00:11:27,679 --> 00:11:30,760 Speaker 3: identity of the other lenders who are sitting alongside you. 205 00:11:31,280 --> 00:11:34,440 Speaker 3: And then of course, yes, who is the sponsor, what 206 00:11:34,559 --> 00:11:36,839 Speaker 3: have they done in the past, Who is the barrow 207 00:11:36,960 --> 00:11:39,960 Speaker 3: or what has it done in the past? What you know? 208 00:11:40,000 --> 00:11:42,480 Speaker 3: And then you go into the support the credit support. 209 00:11:42,679 --> 00:11:46,480 Speaker 3: What is your collateral? What unencumbered assets are available? Is 210 00:11:46,520 --> 00:11:49,880 Speaker 3: there anything of value that the borrower could offer to 211 00:11:50,040 --> 00:11:52,920 Speaker 3: a third party lender to entice them into the structure. 212 00:11:53,320 --> 00:11:56,800 Speaker 3: What's your guaranteur coverage? If you're in Europe, how much 213 00:11:56,880 --> 00:11:59,360 Speaker 3: is that guaranteur coverage really worth? Because of all the 214 00:11:59,360 --> 00:12:04,439 Speaker 3: local law complexities involved there and that entire analysis there 215 00:12:04,520 --> 00:12:09,520 Speaker 3: is no covenant related information in there at all. It's 216 00:12:09,640 --> 00:12:13,160 Speaker 3: just a basic first step. So now you have point A, 217 00:12:13,760 --> 00:12:16,120 Speaker 3: and once you have point A, you can analyze for 218 00:12:16,240 --> 00:12:21,040 Speaker 3: point B, which is to consider if things got difficult 219 00:12:21,040 --> 00:12:23,080 Speaker 3: for the bar where if they were painted into a 220 00:12:23,120 --> 00:12:26,120 Speaker 3: corner and they needed to look at a way of 221 00:12:26,320 --> 00:12:29,920 Speaker 3: dealing with the capital structure without dealing with their lenders, 222 00:12:30,320 --> 00:12:33,880 Speaker 3: what could they achieve? And I always suggest, I'm not 223 00:12:33,880 --> 00:12:36,480 Speaker 3: sure how many people actually do this, because it might 224 00:12:36,520 --> 00:12:39,760 Speaker 3: be kind of depressing, but I always suggest max out 225 00:12:39,800 --> 00:12:43,760 Speaker 3: all the secure deck capacity, max out all the dividend capacity, 226 00:12:43,800 --> 00:12:47,520 Speaker 3: investments and unrestricted subsidiaries, and then look at that business 227 00:12:47,800 --> 00:12:50,320 Speaker 3: and decide if that's something you want to be involved in. 228 00:12:50,760 --> 00:12:54,280 Speaker 2: And do you think there is enough information in documentation 229 00:12:54,440 --> 00:12:56,720 Speaker 2: these days or do you think, particularly on the business 230 00:12:56,800 --> 00:13:00,439 Speaker 2: side of things, that it could be more information or 231 00:13:00,480 --> 00:13:02,959 Speaker 2: there's anything particularly that we miss out. 232 00:13:03,679 --> 00:13:07,640 Speaker 3: I don't think the issue is information provided at the 233 00:13:07,720 --> 00:13:11,760 Speaker 3: time of the offering. I actually think there's good Actually 234 00:13:11,800 --> 00:13:15,240 Speaker 3: they're good regulations around that which are kind of followed 235 00:13:15,360 --> 00:13:19,200 Speaker 3: in terms of market practice in Europe as well, you know, 236 00:13:19,240 --> 00:13:22,439 Speaker 3: having been kind of originated in the US, and folks 237 00:13:22,520 --> 00:13:25,800 Speaker 3: do not want to get sued for misrepresentation or frauds, 238 00:13:25,880 --> 00:13:28,440 Speaker 3: so there is there are some other protections in place. 239 00:13:28,960 --> 00:13:32,800 Speaker 3: I think where you get it gets tricky for a 240 00:13:32,880 --> 00:13:36,720 Speaker 3: lender is the ongoing information. And there are of course 241 00:13:36,800 --> 00:13:41,640 Speaker 3: contractual requirements around borrowers being required to report certain things, 242 00:13:41,920 --> 00:13:44,720 Speaker 3: but as with the rest of the covenant package, those 243 00:13:44,760 --> 00:13:48,800 Speaker 3: contractual requirements have also been watered down over the years, 244 00:13:49,240 --> 00:13:52,240 Speaker 3: and I would say the biggest glaring omission in the 245 00:13:52,280 --> 00:13:55,920 Speaker 3: whole picture for a lender is something that was never 246 00:13:56,120 --> 00:13:59,640 Speaker 3: required to be reported in the first place, but is 247 00:13:59,760 --> 00:14:02,920 Speaker 3: a more critical piece of information now than it ever 248 00:14:03,040 --> 00:14:07,400 Speaker 3: has been, and that is covenant capacity. How much is 249 00:14:07,520 --> 00:14:12,000 Speaker 3: actually there? How much could the barrower use for a 250 00:14:12,080 --> 00:14:16,720 Speaker 3: drop down or priming debt capacity? And because these calculations 251 00:14:16,760 --> 00:14:22,200 Speaker 3: are very complicated, and also barrowers are the only ones 252 00:14:22,280 --> 00:14:24,800 Speaker 3: with access to all of the information that they need 253 00:14:24,800 --> 00:14:29,040 Speaker 3: to conduct the calculation, it would be a huge win 254 00:14:29,160 --> 00:14:32,960 Speaker 3: for the market if they were to report it. But 255 00:14:33,080 --> 00:14:34,880 Speaker 3: they wouldn't do that, and there are a number of 256 00:14:34,920 --> 00:14:37,440 Speaker 3: reasons why they wouldn't do that. Barbers wouldn't want to 257 00:14:37,440 --> 00:14:41,240 Speaker 3: be held to one number. They will always have a 258 00:14:41,360 --> 00:14:44,400 Speaker 3: range and if you asked two law firms to give 259 00:14:44,440 --> 00:14:47,120 Speaker 3: you a calculation of covenant capacity for a barrower, you 260 00:14:47,160 --> 00:14:50,040 Speaker 3: would get three numbers because two of the lawyers and 261 00:14:50,040 --> 00:14:52,440 Speaker 3: one of the law firms are not going to agree. 262 00:14:52,760 --> 00:14:56,560 Speaker 3: So it is notoriously difficult, but it would be a 263 00:14:56,920 --> 00:15:01,600 Speaker 3: very useful exercise for barrowers to they provide even for example, 264 00:15:02,240 --> 00:15:05,960 Speaker 3: their build up basket capacity. There are some borrowers in 265 00:15:06,000 --> 00:15:09,360 Speaker 3: the US who do provide build up basket capacity numbers 266 00:15:09,400 --> 00:15:13,240 Speaker 3: if they are offering a follow on deal and they've 267 00:15:13,240 --> 00:15:16,120 Speaker 3: got built up capacity there. And this is just for 268 00:15:16,200 --> 00:15:18,360 Speaker 3: those who don't know what that means. This is for 269 00:15:18,440 --> 00:15:23,080 Speaker 3: paying dividends, investing in unrestrict subsidiaries, you know the restricted 270 00:15:23,120 --> 00:15:27,400 Speaker 3: payments covenant, which provides for flexibility based on usually fifty 271 00:15:27,440 --> 00:15:31,720 Speaker 3: percent of a consolidated net income, and that builds over time. 272 00:15:32,440 --> 00:15:36,680 Speaker 3: And because this number is not required to be reported 273 00:15:36,720 --> 00:15:39,720 Speaker 3: and there is no market practice around it being reported, 274 00:15:40,240 --> 00:15:43,280 Speaker 3: it is it is a big blackpool of information. And 275 00:15:43,320 --> 00:15:46,120 Speaker 3: I think Altis France is the perfect example of a 276 00:15:46,160 --> 00:15:49,479 Speaker 3: barrower that was able to use that lack of information 277 00:15:49,560 --> 00:15:53,040 Speaker 3: around that number and around the barrower's ability to utilize 278 00:15:53,440 --> 00:15:56,960 Speaker 3: that capacity very much to its advantage. 279 00:15:57,400 --> 00:16:01,160 Speaker 1: Since you posted up to bring altase huge story for us, 280 00:16:01,200 --> 00:16:03,200 Speaker 1: and Aiden was all over it with his great research 281 00:16:03,240 --> 00:16:05,800 Speaker 1: as well. But what did we learn from that, what 282 00:16:05,960 --> 00:16:07,960 Speaker 1: precedents was set, and what impact does it have on 283 00:16:08,000 --> 00:16:09,040 Speaker 1: the wider market. 284 00:16:09,640 --> 00:16:12,800 Speaker 3: Yeah, so I think there were a number of lessons. 285 00:16:13,280 --> 00:16:16,240 Speaker 3: One of them is co ops can be very useful. 286 00:16:16,320 --> 00:16:20,040 Speaker 3: It was one of the situations where the lenders organizing 287 00:16:20,040 --> 00:16:22,840 Speaker 3: into a co op agreement was a really helpful way 288 00:16:22,880 --> 00:16:26,760 Speaker 3: for them to avoid the worst of these sort of 289 00:16:26,800 --> 00:16:31,720 Speaker 3: onslaught in the negotiation and divide and conquer is much 290 00:16:31,760 --> 00:16:35,840 Speaker 3: easier when lenders aren't organized, So that was really useful. 291 00:16:36,640 --> 00:16:40,080 Speaker 3: Definitely a massive lesson to take away from it is 292 00:16:40,080 --> 00:16:43,080 Speaker 3: that understanding how to read the docs is really important. 293 00:16:43,480 --> 00:16:45,400 Speaker 3: It was a sort of moment where I thought, well, 294 00:16:45,520 --> 00:16:48,560 Speaker 3: this is I really feel for the lenders here, but 295 00:16:48,680 --> 00:16:52,240 Speaker 3: also if there was ever a better example of a 296 00:16:52,280 --> 00:16:55,040 Speaker 3: time when it would have helped to know how the 297 00:16:55,080 --> 00:16:59,520 Speaker 3: docs work, this is it. And it felt quite justifying 298 00:16:59,560 --> 00:17:03,800 Speaker 3: from that respective because of the specific term that they 299 00:17:04,000 --> 00:17:07,959 Speaker 3: used and the fact that this this there's usually conditions. 300 00:17:08,000 --> 00:17:10,880 Speaker 3: There are usually guardrails in place to protect this giant 301 00:17:11,320 --> 00:17:14,159 Speaker 3: bucket of cash from being able to be accessed and 302 00:17:14,280 --> 00:17:19,600 Speaker 3: often require the borrower to test a leverage ratio for example, 303 00:17:19,960 --> 00:17:25,320 Speaker 3: and that requirement specifically was not present in the case 304 00:17:25,359 --> 00:17:27,840 Speaker 3: of Altees. So that is a huge lesson as well. 305 00:17:28,240 --> 00:17:31,720 Speaker 3: Reading the docks and understanding the docks is actually really important. 306 00:17:31,800 --> 00:17:34,600 Speaker 3: It gives you a you know, kind of competitive edge. 307 00:17:34,960 --> 00:17:37,280 Speaker 3: Maybe you wouldn't have traded out at that moment, but 308 00:17:37,440 --> 00:17:39,880 Speaker 3: maybe you would have known that there was a possibility 309 00:17:39,880 --> 00:17:42,359 Speaker 3: for this to happen, and then you would have been 310 00:17:42,359 --> 00:17:45,160 Speaker 3: able to make a more informed decision. 311 00:17:45,680 --> 00:17:48,240 Speaker 1: Do other borrowers try and mimic what went on? There 312 00:17:48,560 --> 00:17:51,480 Speaker 1: were the benefits to Eltis from, you know, the way 313 00:17:51,520 --> 00:17:54,040 Speaker 1: they structured things and the way that they did their documentation. 314 00:17:54,560 --> 00:17:57,480 Speaker 3: There definitely was Altis Friends was a name that I 315 00:17:57,560 --> 00:18:01,119 Speaker 3: covered for a long time, so I actually want how 316 00:18:01,160 --> 00:18:06,159 Speaker 3: they were able to craft this provision over time and 317 00:18:06,280 --> 00:18:09,600 Speaker 3: to ensure that it was always backdated. And it was 318 00:18:09,640 --> 00:18:12,040 Speaker 3: a risk that I flagged a number of times as 319 00:18:12,040 --> 00:18:15,640 Speaker 3: a covenant analyst, just saying, you know, I remember there 320 00:18:15,680 --> 00:18:19,159 Speaker 3: was a particular bond that they refinanced which unlocked a 321 00:18:19,240 --> 00:18:22,920 Speaker 3: whole load of value for them due to it kind 322 00:18:22,960 --> 00:18:25,880 Speaker 3: of having one of the leverage ratio requirements that fell 323 00:18:25,920 --> 00:18:28,880 Speaker 3: away from that point on. So from that point when 324 00:18:28,880 --> 00:18:32,680 Speaker 3: that deal was refinanced, this suddenly this capacity was available 325 00:18:32,720 --> 00:18:34,919 Speaker 3: to them. Up to that point, I was arguing that 326 00:18:34,960 --> 00:18:37,040 Speaker 3: this bond was a really great deal because if they 327 00:18:37,080 --> 00:18:39,800 Speaker 3: ever wanted to use that capacity, that was the only 328 00:18:39,880 --> 00:18:43,359 Speaker 3: bond that would have, you know, a consent solicitation potentially 329 00:18:43,480 --> 00:18:47,320 Speaker 3: used to amend it so that they could get to 330 00:18:47,359 --> 00:18:51,399 Speaker 3: that capacity. So I think it's it's unusual that you 331 00:18:51,560 --> 00:18:57,040 Speaker 3: see backdated builder baskets to that extent, but I think 332 00:18:57,080 --> 00:18:59,000 Speaker 3: that now that it's been done that way, there is 333 00:18:59,080 --> 00:19:01,800 Speaker 3: definitely more of a foot focus on it, so lenders 334 00:19:01,840 --> 00:19:05,639 Speaker 3: are aware, and it does often take big situations like 335 00:19:05,720 --> 00:19:11,160 Speaker 3: this for lenders to see the potential damage that one 336 00:19:11,320 --> 00:19:16,040 Speaker 3: provision can do. And provisions these days, they are drafted 337 00:19:16,080 --> 00:19:20,760 Speaker 3: in a way that they are very much departures from reality. 338 00:19:21,240 --> 00:19:25,320 Speaker 3: They do not reflect the bar wars economic reality, and 339 00:19:25,320 --> 00:19:27,880 Speaker 3: that to me is one of the biggest red flags 340 00:19:27,920 --> 00:19:32,639 Speaker 3: because you're seeing provisions that allow specifically builder baskets to 341 00:19:32,760 --> 00:19:36,040 Speaker 3: only go up. So normally they would be measured from 342 00:19:36,080 --> 00:19:39,640 Speaker 3: fifty percent of consolidated aat income, but they would deduct 343 00:19:39,680 --> 00:19:42,720 Speaker 3: one hundred percent of losses and they could go below zero. 344 00:19:42,840 --> 00:19:47,440 Speaker 3: That was the standard formulation, but in these days the 345 00:19:47,840 --> 00:19:51,280 Speaker 3: numbers only go up fifty percent CNI and then maybe 346 00:19:51,280 --> 00:19:53,600 Speaker 3: there's a zero floor, which means that it will never 347 00:19:53,640 --> 00:19:56,479 Speaker 3: go below zero. Once it hits zero, it doesn't go below. 348 00:19:56,840 --> 00:20:00,520 Speaker 3: But there are also new versions that will not count 349 00:20:00,680 --> 00:20:05,240 Speaker 3: negative numbers at all, so literally the numbers never go down, 350 00:20:05,600 --> 00:20:09,919 Speaker 3: and that creates an kind of alternate universe like La 351 00:20:10,040 --> 00:20:12,720 Speaker 3: La Land that we're operating in, where the numbers don't 352 00:20:12,760 --> 00:20:16,200 Speaker 3: match the performance of the business, which to me goes 353 00:20:16,240 --> 00:20:19,680 Speaker 3: against the fundamental nature and purpose of these covenants in 354 00:20:19,720 --> 00:20:23,040 Speaker 3: the first place. But of course that's what's going to happen, 355 00:20:23,080 --> 00:20:26,040 Speaker 3: because the negotiating power has then in the hands of 356 00:20:26,119 --> 00:20:29,160 Speaker 3: the folks who want more flexibilly for a long. 357 00:20:28,960 --> 00:20:31,720 Speaker 1: Long time and sorry, build a baskets can explain what 358 00:20:31,760 --> 00:20:34,720 Speaker 1: they are to our broadly listenership, Yes. 359 00:20:34,600 --> 00:20:39,000 Speaker 3: Absolutely so. In a typical Hyo Vondon also leverage loans, 360 00:20:39,040 --> 00:20:42,760 Speaker 3: though they take slightly different formulations in terms of the calculation. 361 00:20:42,920 --> 00:20:47,480 Speaker 3: There is a basket which basically it strikes a bargain 362 00:20:47,600 --> 00:20:52,080 Speaker 3: between the highly levered issuers of the world and the lenders, 363 00:20:52,400 --> 00:20:55,920 Speaker 3: and it says, Okay, look, we don't want you paying dividends, 364 00:20:56,160 --> 00:21:00,280 Speaker 3: repurchasing your own stock, investing in entities outside of the 365 00:21:00,320 --> 00:21:03,600 Speaker 3: credit group, leaking value. We really don't want you to 366 00:21:03,640 --> 00:21:07,359 Speaker 3: do that, but we realize that sometimes you will. So 367 00:21:08,000 --> 00:21:11,399 Speaker 3: we will let you dividend out fifty percent of your 368 00:21:11,640 --> 00:21:16,120 Speaker 3: cash profits, and we will offset that by losses, and 369 00:21:16,200 --> 00:21:19,120 Speaker 3: not fifty percent of losses, but one hundred percent of losses, 370 00:21:19,119 --> 00:21:21,119 Speaker 3: because if you make a loss, you need to take 371 00:21:21,400 --> 00:21:26,000 Speaker 3: responsibility for that. Basically, so this basket starts essentially a 372 00:21:26,200 --> 00:21:28,760 Speaker 3: zero on day one, and then it builds over time, 373 00:21:28,800 --> 00:21:32,840 Speaker 3: and it allows the private equity sponsor or borrower to 374 00:21:32,880 --> 00:21:35,680 Speaker 3: take some money off the table if they're making profits. 375 00:21:35,920 --> 00:21:37,840 Speaker 3: And I remember learning that when I was a baby 376 00:21:37,920 --> 00:21:41,800 Speaker 3: lawyer and thinking, actually, that makes sense to me. This 377 00:21:41,960 --> 00:21:44,919 Speaker 3: is how you allow for some give and take in 378 00:21:44,960 --> 00:21:48,320 Speaker 3: a contract, and there's a real sense of balance there. 379 00:21:48,920 --> 00:21:54,280 Speaker 3: But that balance is gone because these provisions now just 380 00:21:54,600 --> 00:21:57,879 Speaker 3: completely ignore losses in many cases, so borrowers don't have 381 00:21:57,920 --> 00:22:00,720 Speaker 3: to take responsibility for that anymore, and they only get 382 00:22:00,720 --> 00:22:03,040 Speaker 3: the benefit of the profits, which they can then use 383 00:22:03,119 --> 00:22:07,080 Speaker 3: to pay dividends to move value outside of the creditor group. 384 00:22:07,960 --> 00:22:11,760 Speaker 3: To repay subordinated indebtedness. There are all sorts of you know, 385 00:22:12,000 --> 00:22:17,240 Speaker 3: just additional ways that value can be leaked which don't 386 00:22:17,280 --> 00:22:22,480 Speaker 3: reflect that fundamental bargaining agreement that yes, you can take 387 00:22:22,520 --> 00:22:24,760 Speaker 3: fifty percent the cash off the table, but you need 388 00:22:24,800 --> 00:22:27,960 Speaker 3: to leave fifty percent of the profits in the business. 389 00:22:28,400 --> 00:22:32,400 Speaker 2: Yeah, I would definitely echo the call for more detail 390 00:22:32,480 --> 00:22:35,639 Speaker 2: on where companies stand on some of these calculations that 391 00:22:36,000 --> 00:22:38,840 Speaker 2: are in the documentation. It's a nightmare for US self 392 00:22:38,880 --> 00:22:41,439 Speaker 2: side analysts as well trying to work out where a 393 00:22:41,480 --> 00:22:44,679 Speaker 2: company is against against some of these targets. With the 394 00:22:44,760 --> 00:22:47,600 Speaker 2: lack of disclosure, even when we ask, we don't always 395 00:22:47,600 --> 00:22:49,600 Speaker 2: get the information from the companies that are a bit 396 00:22:49,720 --> 00:22:52,200 Speaker 2: bit scared to provide it. One of the other issues 397 00:22:52,240 --> 00:22:56,080 Speaker 2: I think has been non ir forr US definitions of 398 00:22:56,119 --> 00:23:00,000 Speaker 2: financial terms, some like SBB might be as supposed to 399 00:23:00,119 --> 00:23:03,719 Speaker 2: child for that one. What do you think can be 400 00:23:03,760 --> 00:23:07,840 Speaker 2: done to standardize or better clarify some of the terms 401 00:23:07,920 --> 00:23:11,159 Speaker 2: for whether it's net debt or just coverage or whatever 402 00:23:11,200 --> 00:23:15,600 Speaker 2: the calculation being used is and is that on investors' 403 00:23:15,640 --> 00:23:19,480 Speaker 2: radar a much more post SPB to try and get 404 00:23:19,520 --> 00:23:22,760 Speaker 2: a better definition of what it is that the company 405 00:23:22,840 --> 00:23:23,840 Speaker 2: is being judged against. 406 00:23:24,240 --> 00:23:27,560 Speaker 3: I think that there is a distinction between what the 407 00:23:27,560 --> 00:23:30,680 Speaker 3: financials as they're reported and the financials that are used 408 00:23:30,680 --> 00:23:34,400 Speaker 3: in the covenants. And IFRS Foundation does great work around 409 00:23:34,520 --> 00:23:39,080 Speaker 3: ensuring that there are standard formulations and understandings of the 410 00:23:39,240 --> 00:23:42,120 Speaker 3: terms and you know in the financial measures that need 411 00:23:42,119 --> 00:23:45,880 Speaker 3: to be reported, but in terms of the covenant calculations, 412 00:23:46,240 --> 00:23:49,080 Speaker 3: it's the same issue that you have with all of 413 00:23:49,119 --> 00:23:52,080 Speaker 3: the other types of erosion, and that is that if 414 00:23:52,119 --> 00:23:58,080 Speaker 3: standardization doesn't benefit those with the negotiating power, then standardization 415 00:23:58,440 --> 00:24:02,880 Speaker 3: will not be a focus willing buyer willing seller, despite 416 00:24:02,920 --> 00:24:05,600 Speaker 3: all of the other dynamics involved, of course, because of 417 00:24:05,640 --> 00:24:10,760 Speaker 3: their being one negotiating against many. The nature of the 418 00:24:10,800 --> 00:24:13,919 Speaker 3: market and the way that most market participants want it 419 00:24:13,960 --> 00:24:18,040 Speaker 3: to stay is that there are no regulations around how 420 00:24:18,080 --> 00:24:22,560 Speaker 3: you contract your agreement. Now, there are organizations like the 421 00:24:22,560 --> 00:24:26,320 Speaker 3: European Leverage Finance Association, which I was formerly at the 422 00:24:26,359 --> 00:24:31,240 Speaker 3: head of, that also put out great guidance around transparency 423 00:24:31,280 --> 00:24:35,159 Speaker 3: and disclosure and ensure that market practices stay at a 424 00:24:35,240 --> 00:24:39,560 Speaker 3: high at least market practice guidance stays at a high level. 425 00:24:39,880 --> 00:24:43,240 Speaker 3: But ultimately it's down to the individual market participants and 426 00:24:43,440 --> 00:24:48,760 Speaker 3: until something blows up. As you noted, there's potentially not 427 00:24:48,800 --> 00:24:51,560 Speaker 3: as much focus on that as there could be, but 428 00:24:51,840 --> 00:24:55,600 Speaker 3: that could change. If lenders want that to change, then 429 00:24:55,640 --> 00:24:57,879 Speaker 3: they come together and they make that decision and they 430 00:24:58,359 --> 00:25:01,560 Speaker 3: do their very best to affect that change. And I 431 00:25:01,600 --> 00:25:03,880 Speaker 3: think the LME blockers are a good example of where 432 00:25:03,920 --> 00:25:07,800 Speaker 3: that has been a successful a successful fight. Though they 433 00:25:07,960 --> 00:25:12,200 Speaker 3: aren't panacea. They don't solve for everything. They are there, 434 00:25:12,359 --> 00:25:15,639 Speaker 3: and there are more of them, and they do in 435 00:25:15,720 --> 00:25:19,600 Speaker 3: their own way prevent against some things. But it really 436 00:25:19,600 --> 00:25:23,879 Speaker 3: does require a concerted effort from lenders to hold the line, 437 00:25:24,400 --> 00:25:28,320 Speaker 3: and that does mean often there's blood on the streets. 438 00:25:28,600 --> 00:25:30,359 Speaker 1: It doesn't seem like there's any incentive to hold the 439 00:25:30,400 --> 00:25:32,680 Speaker 1: line that at this point, given there is a lot 440 00:25:32,720 --> 00:25:35,720 Speaker 1: more demand for credit product than there is supply, and 441 00:25:35,800 --> 00:25:37,080 Speaker 1: you know a lot of that supply has been taken 442 00:25:37,119 --> 00:25:39,639 Speaker 1: away by private markets as well. So you know, I 443 00:25:39,680 --> 00:25:42,680 Speaker 1: could read the document and I can spend hours looking 444 00:25:43,400 --> 00:25:46,120 Speaker 1: for these scary terms, but still I've got a ton 445 00:25:46,119 --> 00:25:47,560 Speaker 1: of cash I just got to put to work. You know, 446 00:25:48,320 --> 00:25:51,439 Speaker 1: I might just turn the blind eye. What stops it turning? 447 00:25:52,320 --> 00:25:55,480 Speaker 3: I do think as well, that all. You can't kind 448 00:25:55,520 --> 00:25:57,760 Speaker 3: of put all lenders in the same bucket. They have 449 00:25:57,800 --> 00:26:01,320 Speaker 3: different strategies. They can just side to trade out of 450 00:26:01,359 --> 00:26:05,880 Speaker 3: the more liquid names. They have options even after they 451 00:26:06,119 --> 00:26:08,720 Speaker 3: buy the deal. But I agree with you that the 452 00:26:08,840 --> 00:26:11,880 Speaker 3: negotiating dynamics have not changed, and i'd like to I'm 453 00:26:11,920 --> 00:26:14,080 Speaker 3: probably not the only person to use this phrase, but 454 00:26:14,119 --> 00:26:19,359 Speaker 3: it's like a teflon market, like nothing really sticks, even 455 00:26:19,800 --> 00:26:23,760 Speaker 3: Liberation Day, and then it was backtracked and then everything's like, okay, cool, 456 00:26:23,800 --> 00:26:29,880 Speaker 3: that's fine then, And I just I've never seen anything 457 00:26:30,000 --> 00:26:32,920 Speaker 3: quite like it. There are it's something like four or 458 00:26:33,000 --> 00:26:37,400 Speaker 3: five different macroeconomic events happening in the world right now 459 00:26:37,440 --> 00:26:41,400 Speaker 3: that a decade or two ago would have just one 460 00:26:41,440 --> 00:26:44,560 Speaker 3: of them alone had a bigger impact on the market 461 00:26:44,600 --> 00:26:47,800 Speaker 3: that the aggregate of them is having now, and it 462 00:26:47,880 --> 00:26:53,000 Speaker 3: makes it very difficult to understand, you know, what comes next. 463 00:26:53,240 --> 00:26:56,280 Speaker 3: I don't envy the lenders in this position. 464 00:26:57,040 --> 00:27:00,480 Speaker 1: I mean, meanwhile, the US IG market spreads the tiers 465 00:27:00,520 --> 00:27:02,760 Speaker 1: into thirty years or something, and it just seems to 466 00:27:02,760 --> 00:27:05,919 Speaker 1: get tight in despite all of that macroeconomic risk that 467 00:27:06,000 --> 00:27:09,639 Speaker 1: you rightly point out. It is, as you use the 468 00:27:09,640 --> 00:27:12,880 Speaker 1: phrase earlier, Lala land, it doesn't end well. Often when 469 00:27:12,920 --> 00:27:14,840 Speaker 1: you get into these situations where everything just gets you 470 00:27:15,040 --> 00:27:17,520 Speaker 1: really pumped up, and then at the undercurrent level you've 471 00:27:17,560 --> 00:27:20,800 Speaker 1: got this bad documentation which only seems to get worse. 472 00:27:21,960 --> 00:27:24,399 Speaker 1: What are the big pressure points do you think in 473 00:27:24,480 --> 00:27:25,480 Speaker 1: terms of documentation? 474 00:27:26,040 --> 00:27:32,320 Speaker 3: Well, I do believe that these provisions which detach from 475 00:27:32,680 --> 00:27:36,919 Speaker 3: reality are the biggest issue and are a great also 476 00:27:37,080 --> 00:27:40,000 Speaker 3: big focus for lenders as well. So I don't know 477 00:27:40,040 --> 00:27:44,280 Speaker 3: if you've ever heard the phrase supergrower before, probably not 478 00:27:44,320 --> 00:27:48,359 Speaker 3: in the context of contracts, but also high water marking 479 00:27:48,480 --> 00:27:51,680 Speaker 3: is another word for it, where basically many of these 480 00:27:52,640 --> 00:27:56,000 Speaker 3: baskets they're called though they're not obviously electual baskets, but 481 00:27:56,160 --> 00:27:59,359 Speaker 3: carveouts to do things like incur debt or pay dividends. 482 00:27:59,520 --> 00:28:02,800 Speaker 3: They are presented in the greater of a fixed amount 483 00:28:02,840 --> 00:28:07,320 Speaker 3: and a grower, which is usually based on EBITDA, And 484 00:28:07,760 --> 00:28:11,600 Speaker 3: in this the case of these supergrowers, the fixed amount 485 00:28:11,840 --> 00:28:16,720 Speaker 3: actually increases in line with the EBITDA grower when it 486 00:28:16,760 --> 00:28:20,520 Speaker 3: goes up, but when EBITDAD goes back down again, it 487 00:28:20,560 --> 00:28:23,920 Speaker 3: has no effect whatsoever on the fixed amount. So this 488 00:28:24,000 --> 00:28:26,680 Speaker 3: is another one of those instances where it is detached 489 00:28:26,720 --> 00:28:31,919 Speaker 3: from reality, and it appears, you know, in a greater 490 00:28:32,080 --> 00:28:37,720 Speaker 3: frequency of deals, but it's also a focus for lenders. 491 00:28:37,800 --> 00:28:42,000 Speaker 3: There are also the uncapped cost savings and synergies. Management 492 00:28:42,040 --> 00:28:45,880 Speaker 3: is notoriously optimistic. They think that everything's going to go 493 00:28:46,040 --> 00:28:49,920 Speaker 3: up forever, and if they didn't, they wouldn't be management. 494 00:28:50,160 --> 00:28:55,040 Speaker 3: So having some contractual guard rails would be useful, and 495 00:28:55,800 --> 00:28:59,040 Speaker 3: once upon a time you could expect to see caps 496 00:28:59,160 --> 00:29:05,240 Speaker 3: around twenty five percent of EBITDA on these types of 497 00:29:05,360 --> 00:29:08,400 Speaker 3: cost savings and synergies add backs. But what we've seen 498 00:29:08,440 --> 00:29:13,680 Speaker 3: instead is barrowers pushing the envelope. Just post teriffs, there 499 00:29:13,760 --> 00:29:16,760 Speaker 3: was a barrower who came out with a term that 500 00:29:16,800 --> 00:29:20,640 Speaker 3: would add back the effect of terraces and that did 501 00:29:20,840 --> 00:29:24,000 Speaker 3: thankfully get removed during the syndication of that deal, but 502 00:29:24,040 --> 00:29:28,640 Speaker 3: it would have been the first presentation of EBITDAT even 503 00:29:28,680 --> 00:29:33,520 Speaker 3: the alusteriffs. And then there also portability has become a 504 00:29:33,520 --> 00:29:38,440 Speaker 3: big topic of focus. Private equity firms love portability. So 505 00:29:38,520 --> 00:29:42,880 Speaker 3: portability basically means that if the private equity sponsor sells 506 00:29:42,920 --> 00:29:46,520 Speaker 3: the barwer to another private equity sponsor or another party, 507 00:29:47,080 --> 00:29:49,800 Speaker 3: that they won't have to either make an offer for 508 00:29:49,920 --> 00:29:52,760 Speaker 3: a change of control to bondholders or in the case 509 00:29:52,800 --> 00:29:54,760 Speaker 3: of a loan, there will be no event of default 510 00:29:54,920 --> 00:29:57,880 Speaker 3: or mandatory prepayment, depending on which you're astction you're in. 511 00:29:58,160 --> 00:30:03,360 Speaker 3: There's no effect if certain conditions are met, including that 512 00:30:03,440 --> 00:30:08,040 Speaker 3: the barwer can comply with a specified leverage ratio. And 513 00:30:08,080 --> 00:30:10,800 Speaker 3: obviously where that leverage ratio is set is going to 514 00:30:10,840 --> 00:30:13,600 Speaker 3: be very important, and in many deals this is an 515 00:30:13,600 --> 00:30:16,800 Speaker 3: option that is available on day one, so it isn't 516 00:30:16,840 --> 00:30:19,320 Speaker 3: even as if the barer needs to delever in order 517 00:30:19,360 --> 00:30:22,960 Speaker 3: to take advantage of that provision. And other deals we're 518 00:30:22,960 --> 00:30:27,680 Speaker 3: seeing that those ratios are calculated based on first lean debt, 519 00:30:28,000 --> 00:30:30,720 Speaker 3: so first lean secure debt, rather than total debt, so 520 00:30:30,760 --> 00:30:36,200 Speaker 3: that obviously gives the barwer an easier hurdle to pass. 521 00:30:36,960 --> 00:30:39,600 Speaker 3: So you know, in the last one, I will point 522 00:30:39,680 --> 00:30:43,000 Speaker 3: out and this goes back to the famous J Crew 523 00:30:43,080 --> 00:30:45,200 Speaker 3: or infamous JA Crew. Actually think the top I'm wearing 524 00:30:45,240 --> 00:30:48,080 Speaker 3: is from J Crew, which is quite ironic in a way, 525 00:30:49,760 --> 00:30:52,400 Speaker 3: but you know, J Crew was one of the first 526 00:30:52,480 --> 00:30:55,480 Speaker 3: to take assets and put them in an unrestricted subsidiary 527 00:30:55,520 --> 00:30:59,040 Speaker 3: away from the lender group, assets that were once part 528 00:30:59,120 --> 00:31:02,640 Speaker 3: of its collateral. And there are provisions in the restricted 529 00:31:02,680 --> 00:31:08,160 Speaker 3: payments covenant that actually would prevent restricted unrestricted subsidiaries for 530 00:31:08,280 --> 00:31:12,360 Speaker 3: being used for certain things that restricted subsidiaries can't be 531 00:31:12,440 --> 00:31:15,280 Speaker 3: used for. So this is the concept of an indirect 532 00:31:15,320 --> 00:31:20,040 Speaker 3: restricted payment. But again, those who have the negotiating power 533 00:31:20,240 --> 00:31:23,200 Speaker 3: really like using unrestricted subsidiaries, so they want to be 534 00:31:23,280 --> 00:31:28,480 Speaker 3: able to use them without any restrictions. So there are 535 00:31:28,680 --> 00:31:33,000 Speaker 3: provisions that basically say you can use unrestricted subsidiaries to 536 00:31:33,080 --> 00:31:35,960 Speaker 3: do anything that are the restricted subsidiary can't do. It's 537 00:31:36,000 --> 00:31:39,960 Speaker 3: absolutely fine, and that language has also become more prevalent. 538 00:31:40,200 --> 00:31:43,720 Speaker 3: But again this makes sense, right because it's the market evolving, 539 00:31:44,160 --> 00:31:47,720 Speaker 3: and the market is evolving to benefit those who have 540 00:31:48,280 --> 00:31:53,120 Speaker 3: most negotiating power, and then those who are negotiating are 541 00:31:53,200 --> 00:31:56,040 Speaker 3: coming up with ways of coming, you know, fighting back, 542 00:31:56,120 --> 00:31:59,640 Speaker 3: So lemy blockers and co ops and you know, and 543 00:31:59,760 --> 00:32:03,080 Speaker 3: we all have litigation. That's another route that the disgruntled 544 00:32:03,640 --> 00:32:08,560 Speaker 3: you know lender can can take to potentially bite back 545 00:32:08,600 --> 00:32:13,920 Speaker 3: against the unfairness of a particular situation. But whether or 546 00:32:13,920 --> 00:32:16,640 Speaker 3: not that is going to be successful is obviously uncertain, 547 00:32:16,920 --> 00:32:21,280 Speaker 3: but it is another I guess tool that they can use. 548 00:32:21,840 --> 00:32:23,880 Speaker 2: Well. That leads me onto the question I was going 549 00:32:23,920 --> 00:32:26,560 Speaker 2: to ask you, which is is there a discrepancy here 550 00:32:26,600 --> 00:32:30,960 Speaker 2: between large sophisticated investors with lots of resources and the 551 00:32:31,000 --> 00:32:35,080 Speaker 2: smaller investor obviously in terms of trying to digest new 552 00:32:35,120 --> 00:32:39,640 Speaker 2: issuance and bonds as if they come to market, but 553 00:32:40,160 --> 00:32:46,440 Speaker 2: thinking more about actually how incentivized larger investors are to 554 00:32:46,520 --> 00:32:49,760 Speaker 2: clean this all up and standardize everything. Don't they stand 555 00:32:49,800 --> 00:32:54,200 Speaker 2: to benefit to a greater extent from having things a 556 00:32:54,240 --> 00:32:57,080 Speaker 2: little murky? Or is that just me being horrifically cynical? 557 00:32:57,560 --> 00:33:02,120 Speaker 3: Oh I am ever the optimists, So I myself would 558 00:33:02,160 --> 00:33:05,560 Speaker 3: say there are certainly hedge funds that benefit from leaving 559 00:33:05,600 --> 00:33:10,120 Speaker 3: things quite murky, But the vast majority of lenders prefer 560 00:33:10,240 --> 00:33:13,720 Speaker 3: transparency because that's how they price risk, and there is 561 00:33:13,760 --> 00:33:17,840 Speaker 3: a heck of a lot of risk embedded in covenant flexibility. 562 00:33:18,320 --> 00:33:22,160 Speaker 3: So my personal view is that everyone benefits from transparency. 563 00:33:22,200 --> 00:33:25,560 Speaker 3: I actually think the whole market benefits from transparency, and 564 00:33:25,600 --> 00:33:28,720 Speaker 3: they're study after study after study that agrees with me. 565 00:33:29,360 --> 00:33:33,040 Speaker 3: But what I would say about the smaller the minority 566 00:33:33,400 --> 00:33:37,000 Speaker 3: lender co op agreements have been in some ways kind 567 00:33:37,000 --> 00:33:40,920 Speaker 3: of great equalizer because nothing is stopping any lender from 568 00:33:40,960 --> 00:33:43,840 Speaker 3: picking up the phone and ringing round to their fellow 569 00:33:43,880 --> 00:33:46,240 Speaker 3: lenders to find out what their plans are on a 570 00:33:46,280 --> 00:33:50,440 Speaker 3: particular deal. Nothing is stopping any lender from ringing up 571 00:33:50,720 --> 00:33:56,000 Speaker 3: barwer to make an opportunistic proposal for how they could 572 00:33:56,320 --> 00:33:59,800 Speaker 3: rejig the capital structure. And yes, of course they're you know, money, 573 00:34:00,600 --> 00:34:02,800 Speaker 3: so the more you have to deploy, the easier that 574 00:34:02,800 --> 00:34:05,800 Speaker 3: it's going to be. But in terms of bringing people together, 575 00:34:05,880 --> 00:34:09,960 Speaker 3: bringing lenders together to cooperate maybe under a cooperation agreement 576 00:34:10,040 --> 00:34:13,560 Speaker 3: or to a lead into something like that, minority lenders 577 00:34:13,600 --> 00:34:16,600 Speaker 3: can do that just as well as as the bigger 578 00:34:17,080 --> 00:34:18,359 Speaker 3: the bigger fish, as it were. 579 00:34:19,160 --> 00:34:21,319 Speaker 1: On transparency, I mean, there's always someone making money when 580 00:34:21,320 --> 00:34:24,200 Speaker 1: there isn't any transparency. You presume it's the hedgephones, the advisors. 581 00:34:24,320 --> 00:34:25,799 Speaker 1: The borrow was certainly benefiting. 582 00:34:26,200 --> 00:34:28,520 Speaker 3: Oh, it is a really good time to be a lawyer, 583 00:34:28,760 --> 00:34:32,200 Speaker 3: I will tell you that is for sure. I mean 584 00:34:32,239 --> 00:34:35,680 Speaker 3: the advisors are doing very very well, and they're working 585 00:34:35,719 --> 00:34:36,240 Speaker 3: really hard. 586 00:34:36,600 --> 00:34:38,600 Speaker 1: But in terms of you know, we've talked about ALTIS 587 00:34:38,719 --> 00:34:42,040 Speaker 1: and SVV, but who else is on you know, in 588 00:34:42,120 --> 00:34:44,439 Speaker 1: terms of this kind of activity that's pushing it, who's 589 00:34:44,440 --> 00:34:45,280 Speaker 1: on the naughty step? 590 00:34:46,800 --> 00:34:49,839 Speaker 3: So I think SELECTA is another one that I would 591 00:34:49,960 --> 00:34:53,120 Speaker 3: highlight as being as being on the naughty step, as 592 00:34:53,120 --> 00:34:56,080 Speaker 3: it were, and that one isn't a really interesting example 593 00:34:56,200 --> 00:34:58,719 Speaker 3: of a borrower that you used co op a co 594 00:34:58,760 --> 00:35:01,920 Speaker 3: op agreement actually as an defensive maneuver rather than a 595 00:35:01,960 --> 00:35:05,000 Speaker 3: defensive maneuver that it was used to bring together an 596 00:35:05,040 --> 00:35:08,000 Speaker 3: ad hoc group that then was able to benefit from 597 00:35:08,320 --> 00:35:13,000 Speaker 3: positive you know, commercials as compared to the non ad 598 00:35:13,040 --> 00:35:15,120 Speaker 3: hoc group, and the non ad hoc group had no 599 00:35:15,200 --> 00:35:20,920 Speaker 3: opportunity to participate, and that is, you know, that leaves 600 00:35:20,960 --> 00:35:23,439 Speaker 3: it very difficult to challenge as well. But it's sort 601 00:35:23,440 --> 00:35:27,000 Speaker 3: of an open question whether there will be litigation and 602 00:35:27,000 --> 00:35:29,799 Speaker 3: connection with that. And I would say in general that 603 00:35:29,880 --> 00:35:33,360 Speaker 3: there are there's a reticence on the borrowers side to 604 00:35:33,520 --> 00:35:36,759 Speaker 3: take these really aggressive actions because they don't really want 605 00:35:36,800 --> 00:35:39,520 Speaker 3: to get sued. You know, most borrowers are not coming 606 00:35:39,560 --> 00:35:41,799 Speaker 3: together with their lenders to try to come up with 607 00:35:41,840 --> 00:35:44,319 Speaker 3: a plan that's going to land them in court. They 608 00:35:44,480 --> 00:35:47,400 Speaker 3: ideally want to do a deal that is going to 609 00:35:47,480 --> 00:35:50,120 Speaker 3: pass the sniff test, as it were, and then they 610 00:35:50,160 --> 00:35:52,959 Speaker 3: will come up with ways of doing an enemy which 611 00:35:53,000 --> 00:35:56,440 Speaker 3: is not non pro raada but is actually Parada to 612 00:35:56,640 --> 00:35:59,600 Speaker 3: all of their lenders and take that route so that 613 00:35:59,640 --> 00:36:01,600 Speaker 3: they they don't end up in court. But there are 614 00:36:01,600 --> 00:36:04,400 Speaker 3: some that are really willing to push the envelope. 615 00:36:04,800 --> 00:36:07,160 Speaker 1: And in terms of pushing the envelope, as I mentioned earlier, 616 00:36:07,480 --> 00:36:09,800 Speaker 1: we are seeing a lot of extreme stuff in the US, 617 00:36:09,840 --> 00:36:12,120 Speaker 1: but not so much in Europe. And the sense that 618 00:36:12,160 --> 00:36:16,040 Speaker 1: we get is that Europe is maybe slightly more genteel 619 00:36:16,080 --> 00:36:18,799 Speaker 1: and well behaved in relative terms. But is that true? 620 00:36:18,840 --> 00:36:21,040 Speaker 1: I mean, surely, you know, markets just move wherever they go, 621 00:36:21,080 --> 00:36:24,080 Speaker 1: and money follows, and you know, capitalism at work is 622 00:36:24,120 --> 00:36:26,640 Speaker 1: one of our guests. Once put, it will take hold 623 00:36:26,680 --> 00:36:28,120 Speaker 1: in Europe and it will just get worse there. 624 00:36:28,680 --> 00:36:32,960 Speaker 3: I think that many expect there to be more liability 625 00:36:33,000 --> 00:36:38,719 Speaker 3: management exercises in Europe, and the potential limitations on that 626 00:36:38,880 --> 00:36:43,280 Speaker 3: have more to do with local law restrictions directors duties 627 00:36:43,560 --> 00:36:48,440 Speaker 3: management being more nervous about falling afoul of those because 628 00:36:48,480 --> 00:36:52,360 Speaker 3: sometimes can actually have personal liability for the directors themselves 629 00:36:52,360 --> 00:36:54,800 Speaker 3: in the case of Germany. But there are some countries 630 00:36:54,840 --> 00:36:59,160 Speaker 3: where the director's duties protection is not as intense or 631 00:37:00,200 --> 00:37:03,120 Speaker 3: or strong, and France is one example of that. So 632 00:37:03,560 --> 00:37:06,400 Speaker 3: it really does depend on where the borrower is located 633 00:37:06,680 --> 00:37:11,000 Speaker 3: as to whether that is a proper dissuading factor. I 634 00:37:11,000 --> 00:37:13,239 Speaker 3: wouldn't say that, it's sort of. I know there was 635 00:37:13,480 --> 00:37:16,400 Speaker 3: a lot of to talk about Europe being more concerned 636 00:37:16,400 --> 00:37:20,160 Speaker 3: about reputation, and I really think that reputation only gets 637 00:37:20,160 --> 00:37:24,600 Speaker 3: you so far. That maybe because Europe is a smaller market, 638 00:37:24,840 --> 00:37:28,000 Speaker 3: maybe there is more of a focus on can I 639 00:37:28,239 --> 00:37:31,040 Speaker 3: bring the next deal? Will I be able to get 640 00:37:31,080 --> 00:37:34,200 Speaker 3: the next deal done? But that's a commercial question that yes, 641 00:37:34,480 --> 00:37:39,360 Speaker 3: reputation feeds into, but it's more of a would lenders 642 00:37:39,800 --> 00:37:43,200 Speaker 3: work with me again? And if not, then that will 643 00:37:43,200 --> 00:37:46,000 Speaker 3: affect my LPs because at the end of the day, 644 00:37:46,280 --> 00:37:48,520 Speaker 3: I work for them. I don't work for. 645 00:37:48,520 --> 00:37:52,080 Speaker 1: Lenders, right, But as we talked about, you know, there's 646 00:37:52,080 --> 00:37:54,200 Speaker 1: so much liquidity that you know, people have a pretty 647 00:37:54,200 --> 00:37:57,279 Speaker 1: short memory for bad things, certainly in this market as 648 00:37:57,320 --> 00:37:59,279 Speaker 1: long as it lasts. But in terms of you know, 649 00:37:59,280 --> 00:38:02,560 Speaker 1: the jurisdiction, as you mentioned, there are lots of different 650 00:38:02,640 --> 00:38:05,839 Speaker 1: jurisdictions in Europe and it is more complex than the US. 651 00:38:05,880 --> 00:38:09,960 Speaker 1: But where do you think we will see more of 652 00:38:10,000 --> 00:38:12,640 Speaker 1: this kind of activity in Europe? Do you think which 653 00:38:12,760 --> 00:38:14,920 Speaker 1: jurisdictions are most prone to it. 654 00:38:15,239 --> 00:38:19,360 Speaker 3: I would say you probably are not looking less toward Germany, 655 00:38:19,960 --> 00:38:23,040 Speaker 3: though there are always going to be exceptions to that, 656 00:38:23,120 --> 00:38:29,279 Speaker 3: of course, potentially France, Spain, the UK. I mean, those 657 00:38:29,280 --> 00:38:31,319 Speaker 3: are some I would just mention off the top of 658 00:38:31,360 --> 00:38:36,640 Speaker 3: my head. But it is potentially an issue in any country. 659 00:38:36,680 --> 00:38:40,760 Speaker 3: It just requires a very careful jurisdiction by jurisdiction analysis 660 00:38:41,000 --> 00:38:44,799 Speaker 3: to think through what the implications are or could be. 661 00:38:45,280 --> 00:38:49,560 Speaker 1: So you do then expect Europe to actually mimic the 662 00:38:49,680 --> 00:38:52,600 Speaker 1: US ultimately in terms of the way things have gone here. 663 00:38:53,120 --> 00:38:56,920 Speaker 3: I do expect there to be more leens in Europe. Absolutely, yes, 664 00:38:57,000 --> 00:38:59,280 Speaker 3: I'm not sure that there will be as much litigation 665 00:39:00,120 --> 00:39:03,719 Speaker 3: there tends to it tends that there are less litigious 666 00:39:03,760 --> 00:39:07,320 Speaker 3: folks here in Europe, but that could also change. 667 00:39:07,840 --> 00:39:10,440 Speaker 1: And when their assistant wheels in a massive pile of 668 00:39:10,440 --> 00:39:12,359 Speaker 1: prospectuses and they've got to weighe their way through, are 669 00:39:12,360 --> 00:39:14,080 Speaker 1: there any kind of red flags that you kind of 670 00:39:14,160 --> 00:39:16,279 Speaker 1: you know, look at this one for this name or 671 00:39:16,320 --> 00:39:18,359 Speaker 1: this sector or this you know, these are the ones 672 00:39:18,360 --> 00:39:19,680 Speaker 1: you've got to focus on, because these are the ones 673 00:39:19,719 --> 00:39:22,800 Speaker 1: that are most problematic. Any red flags at all, I don't. 674 00:39:22,640 --> 00:39:27,280 Speaker 3: Want to name any names that would be very inappropriate. 675 00:39:26,640 --> 00:39:28,640 Speaker 1: Mell sector types of businesses. 676 00:39:29,000 --> 00:39:33,520 Speaker 3: I would say more that when you've got very large 677 00:39:33,520 --> 00:39:36,560 Speaker 3: capital structures and cross border deals, those are the ones 678 00:39:36,600 --> 00:39:39,520 Speaker 3: that are going to float to the top in terms 679 00:39:39,560 --> 00:39:43,400 Speaker 3: of flexibility. They're going to have the most in terms 680 00:39:43,400 --> 00:39:46,840 Speaker 3: of convergence between the two markets, so the kind of 681 00:39:46,880 --> 00:39:50,200 Speaker 3: worst of both. And if you've got multiple capital structures, 682 00:39:50,200 --> 00:39:52,160 Speaker 3: then you get the worst of the convergence in the 683 00:39:52,239 --> 00:39:54,920 Speaker 3: terms and highal bonds and leverage loans. So those are 684 00:39:54,960 --> 00:39:57,520 Speaker 3: the ones you have to be really focused on. They 685 00:39:57,600 --> 00:39:59,880 Speaker 3: also tend to be the ones that end up in 686 00:40:00,080 --> 00:40:04,680 Speaker 3: syndication being upsized. So maybe the equity check reduces and 687 00:40:04,719 --> 00:40:07,600 Speaker 3: we've just seen this recently in the bootsteal and so 688 00:40:07,640 --> 00:40:10,760 Speaker 3: then that can have an effect on loosening ratios because 689 00:40:10,800 --> 00:40:13,319 Speaker 3: of the change in the capital structure. You're upsizing debt 690 00:40:13,360 --> 00:40:17,040 Speaker 3: and you're downsizing equity and things tend to loosen a bit. 691 00:40:17,160 --> 00:40:19,560 Speaker 3: So those are the ones I would say to focus 692 00:40:19,680 --> 00:40:22,240 Speaker 3: the most on. You will tend to find the most 693 00:40:22,280 --> 00:40:25,840 Speaker 3: in terms of flexibility in those types of deals. Taking 694 00:40:25,840 --> 00:40:28,759 Speaker 3: into count all of the different dynamics at play. 695 00:40:28,960 --> 00:40:30,279 Speaker 1: Can you use AI to do this? 696 00:40:31,040 --> 00:40:36,719 Speaker 3: Unfortunately, not yet. AI. It is as smart as the 697 00:40:36,719 --> 00:40:40,000 Speaker 3: people who are using it. So if you know how 698 00:40:40,040 --> 00:40:44,520 Speaker 3: to ask the right questions, then you may get better answers. 699 00:40:45,280 --> 00:40:49,680 Speaker 3: The temptation is to rely on AI without knowing what 700 00:40:49,800 --> 00:40:54,120 Speaker 3: you're supposed to ask, or without having enough information to 701 00:40:54,239 --> 00:40:58,600 Speaker 3: know whether the answer actually makes sense, and because it 702 00:40:58,680 --> 00:41:01,480 Speaker 3: feels so easy to type in a question and you 703 00:41:01,520 --> 00:41:04,200 Speaker 3: get an answer, and AI is designed to make you 704 00:41:04,320 --> 00:41:10,280 Speaker 3: believe that it's true. It is unequivocal every single time. 705 00:41:10,680 --> 00:41:13,120 Speaker 3: And so unless you know and we have our own 706 00:41:13,160 --> 00:41:16,440 Speaker 3: AI tool that we give to our students, and it 707 00:41:16,520 --> 00:41:19,640 Speaker 3: has been trained on hundreds of hours of me talking 708 00:41:19,680 --> 00:41:22,160 Speaker 3: about covenants, because it has been trained on every single 709 00:41:22,200 --> 00:41:25,480 Speaker 3: word I've ever uttered for Fox Legal Training, and I 710 00:41:25,640 --> 00:41:29,680 Speaker 3: spent months interrogating this tool and asking it questions and 711 00:41:29,719 --> 00:41:33,280 Speaker 3: getting answers and correcting it and refining and refining and refining. 712 00:41:33,640 --> 00:41:38,080 Speaker 3: So that's a great teaching tool that's great to learn from. 713 00:41:38,080 --> 00:41:41,560 Speaker 3: But even that, I say to my students, if it 714 00:41:41,680 --> 00:41:46,560 Speaker 3: doesn't seem right to you, remember it's still AI. It's 715 00:41:46,719 --> 00:41:50,560 Speaker 3: not infallible. And unless you know more or less what 716 00:41:50,719 --> 00:41:53,480 Speaker 3: the right answer is in the ballpark could be the 717 00:41:53,560 --> 00:41:57,080 Speaker 3: fundamentals of the principles involved. You're not going to know 718 00:41:57,120 --> 00:42:00,200 Speaker 3: if the answer is true, and AI is always going 719 00:42:00,200 --> 00:42:03,160 Speaker 3: to make you believe that it's right every single time. 720 00:42:03,600 --> 00:42:05,479 Speaker 1: Maybe we get to a world, though, where the AI 721 00:42:05,560 --> 00:42:08,160 Speaker 1: is writing the covenants, syndicating the deals, buying the deals, 722 00:42:08,160 --> 00:42:10,000 Speaker 1: and also assessing the covenants. 723 00:42:10,040 --> 00:42:13,480 Speaker 3: That's the future a member of We're all on the 724 00:42:13,480 --> 00:42:15,560 Speaker 3: beach like drinking mergury at. 725 00:42:15,440 --> 00:42:19,280 Speaker 1: That point, exactly, that's the plan. Great stuff. Sabrina Fox, 726 00:42:19,280 --> 00:42:21,120 Speaker 1: founder of Fox Leagual Training. Thank you so much for 727 00:42:21,160 --> 00:42:22,120 Speaker 1: being on the Credit Edge. 728 00:42:22,360 --> 00:42:24,080 Speaker 3: Thank you so much for having me. It was a 729 00:42:24,120 --> 00:42:26,080 Speaker 3: really fun conversation, and of. 730 00:42:26,040 --> 00:42:29,200 Speaker 1: Course very grateful to Aidan Cheslin from Bloomberg Intelligence. 731 00:42:29,280 --> 00:42:30,440 Speaker 2: Cheers, Thanks James. 732 00:42:30,440 --> 00:42:33,320 Speaker 1: Great to be here for even more credit market analysis 733 00:42:33,320 --> 00:42:35,520 Speaker 1: and insight. Read all of Aiden's great work on the 734 00:42:35,560 --> 00:42:38,760 Speaker 1: Bloomberg terminal. Bloomberg Intelligence is part of our research department, 735 00:42:38,760 --> 00:42:41,680 Speaker 1: with five hundred analysts and strategists working across all markets. 736 00:42:41,960 --> 00:42:45,720 Speaker 1: Coverage includes over two thousand equities and credits, plus outlooks 737 00:42:45,719 --> 00:42:48,600 Speaker 1: on more than ninety industries and one hundred market industries, 738 00:42:48,719 --> 00:42:52,680 Speaker 1: currencies and commodities. Please do subscribe to the Credit Edge 739 00:42:52,680 --> 00:42:55,880 Speaker 1: wherever you get your podcasts. We're on Apple, Spotify, and 740 00:42:55,920 --> 00:42:58,560 Speaker 1: all other good podcast providers, including the Bloomberg Terminal at 741 00:42:58,600 --> 00:43:00,960 Speaker 1: b pod go. Give us a review. It helps other 742 00:43:01,000 --> 00:43:03,960 Speaker 1: people find us, Tell your friends, or email me directly 743 00:43:04,000 --> 00:43:08,000 Speaker 1: at jcromb eight at Bloomberg dot net. I'm James Crombie. 744 00:43:08,040 --> 00:43:10,080 Speaker 1: It's been a pleasure having you join us again. Next 745 00:43:10,080 --> 00:43:11,520 Speaker 1: week on the Credit Edge,