March 7, 2024 - On March 6th, the LSTA and LMA hosted their annual joint conference in London. Addressing a packed room with about 450 delegates, Tess Virmani of the LSTA and Gemma Lawrence-Pardew of the LMA started the day’s events with an overview of the Associations’ accomplishments of the past year. Virmani highlighted the release of the LSTA’s new Form of Emerging Business Credit Agreement and the soon-to-be published LSTA Form of First Lien and Second Lien Intercreditor Agreement. The LSTA Operations Technology Conference, which will be held on April 18th in Philadelphia, was also enthusiastically noted.
The first keynote speaker of the day, futurist, strategist and philosopher Benjamin Butler, was interviewed by Michael Craig of Invesco. Simply put, a futurist is someone who tries to help people understand the future. Butler revealed that, according to a recent LinkedIn poll result, 52% of respondents were most optimistic about technology and the AI revolution but only 2% were optimistic about the prospects for a peaceful and multipolar world. The impact of the AI revolution on today’s world will be huge, and Butler compared it to the invention of fire and the wheel. He also noted the demographic time bomb and the prediction that the global population could peak in 2040 at about nine billion and then drop below six billion by the turn of the century. Some nations like India will continue to export educated people around the world, and advanced nations will continue to compete for workers. His takeaways for the audience included the following advice: Flex your imagination muscle, read widely, rediscover the art of dialogue, and engage with those with different viewpoints.
The U.K. and U.S. deal terms and trends panel, moderated by Elizabeth Leckie of Allen & Overy, with Jane Gray of Covenant Review, Lewis Grimm of Jones Day, Monique Mulcare of Mayer Brown, Jeremy Selway of Deutsche Bank, Kate Weinstein of Morgan Lewis, and Sanders Witkow of Davis Polk, then compared the markets on both sides of the pond. In Europe, repricings have dominated 2024 year-to-date with volume at €16.8 billion. Maturity extensions and refinancings were also prevalent in deal flow in Europe totaling €19 billion. Like the U.S., there has been little M&A activity in Europe. In February, there was a lone LBO for Elda, which brought €918 million to the market and Motor Fuel Group brought a dual-tranche M&A financing TLB of £1.2 billion-equivalent. Only a handful of companies have near-term maturities about which to be concerned. Leverage is higher in Europe than in the U.S., and there is not much second-lien debt in European borrowers’ capital structures. For most of last year, lenders were less willing on European Amend & Extend transactions to try to make the deals more lender friendly if the borrower was still doing well. Now, with a stronger market, the panel commented that they have virtually no chance of pushing back on terms with strong credits. Notably, Covenant Review’s documentation scores reveal that the numbers are coalescing and the European and U.S. markets are now seeing similar documentation strength.
It is expected that default rates will remain below 4% in Europe. Liability management transactions (LMTs) typically delay issuer defaults rather than help avoid them. According to Fitch’s examination of 30 LMTs that were publicly disclosed between 2014 and 2023, all 30 involved distressed issuers with ratings at or below CCC+ at the time. Of the total, 17 were deemed distressed debt exchanges (DDEs) and seven subsequently filed Chapter 11 or executed DDEs. It was noted that the benefits to issuer credit profiles remain elusive. Finally, for the benefit of the European audience, the panel noted that on February 20th, the U.S. Supreme Court denied the petition for certiorari filed by the Trustee for the Millennium Labs Litigation Trust. The denial of certiorari leaves in place the decision of the Second Circuit that syndicated term loans are not securities.
The second keynote speaker of the day – and a favorite of the members of the Associations – was geopolitical strategist David Chmiel, who enthralled the audience with his talk, “A Year of Elections: What to Expect?” He examined the geopolitical state of the world and the plethora of elections that are due to take place, and then predicted their impact on the corporate loan market. The world at the end of 2024 will be dependent on the millions of choices that will be made during the year. There will be important events to watch. Even Russia, as it enters a new totalitarian state, will be watched closely because that election could be a catalyst for protests. In India, the question is how large will Modi’s support become. Elections in the west of Africa have been cancelled, and there has been a shift away from democratic institutions there, although those regions are growing in importance on the global arena because their natural resources are required by the world’s economy. When asked by Ipsos if your country is heading in the right direction, 80% of respondents in Indonesia said they believe they are heading in right direction. But in the U.S. only about 30% believe their country is heading in the right direction. On whether people think their society is broken, the Ipsos survey reveals high numbers in the U.S. and U.K. People are convinced that society needs restructuring in fundamental ways, and there is more demand for government intervention. India and Indonesia have strong trust in government whereas Americans still trust business more than government. Chmiel noted that we live in a world where governments will need to address the big issues of healthcare, infrastructure, and defense. On the last question about defense spending, there is concern about who will fill the spending gap because many citizens around the world do not want their government to increase defense spending. If a government cannot increase defense spending, they may try to build higher walls around their economies, and that will be something to monitor.
The last panel of the day, “Sustainable Finance: Investable or a Cost of Doing Business?” was led by Pardew-Lawrence who was joined by Fanny Charrier of Credit Agricole CIB, Catarina Ferreira Silba of BNP Paribas CIB, Kathrine Meloni of Slaughter & May, Vlad Mitroi of Chenavari, and Simon Thorogood of Finastra. A majority of attendees – 61% of respondents – said they view sustainable finance as investable. There has been a dip in volumes driven by some reticence on the part of borrowers who are concerned about increased regulation. Certain borrowers are concerned that sustainability-linked loans carry more risk for them, and the compliance architecture is a challenge for some of them. On the ESG side, the regulations have moved quickly and having data points that are standardized is critical. The panelists noted that more data in this area is needed, and it needs then to be made available to the market. Ultimately, it is acceptable to be challenged and to continue to focus on innovation and accept the uncertainty. The audience was cautioned that systemic changes do not come in a linear fashion.
Finally, the regulatory fireside chat with Tamara Cizeika and Ken Rivlin (who joined remotely from NYC) of Allen & Overy, “Beware the Unintended Consequences,” was a hit. The U.K.’s Financial Conduct Authority released the U.K. Sustainable Disclosure Regulation, which targets, among others, U.K.-based investment managers. However, the rules will apply only to fund managers over a certain threshold. Ultimately, only 0.38% of the FCA’s entire universe of firms which it could regulate will be caught by the rules. The SEC released its climate disclosure rules yesterday, and it is expected that the climate rule will be litigated. The final rule is different from the proposed rule, and Rivlin queried whether it should have been re-proposed. One of the most significant changes is the removal of requirements by filers to report on Scope 3 emissions. The SEC rule also scaled back Scope 1 and 2 emissions requirements, which will apply only to large filers when they are deemed to be material. Rivlin cautioned that compliance groups should think now about what stepped up compliance work they should be doing. Even though there are challenges, Cizeika thinks we are entering a golden age of sustainable finance and we should all become engaged.
For members in the U.S., please note that we plan to open registration in April for the LSTA and LMA joint conference in New York. The conference will take place on May 16th.
