The recent restructuring announcement from TalkTalk provides key insights and learning points for lenders when dealing with stressed borrowers. In our recent YouTube video, our founder Sabrina Fox examined the key issues raised by TalkTalk's situation and how lenders can apply these lessons to other scenarios.
Covenant Flexibility and Consensual Restructuring
When faced with balance sheet difficulties, stressedborrowers first look to their covenant flexibility to address issues. TalkTalk's relatively tight covenant package limited their ability to maneuvercompared to peers, leading them to pursue a consensual restructuring withlenders instead. This highlights the importance of early lender action andorganization to gain leverage in the process.
Key Positives in the Restructuring
Several aspects of TalkTalk's restructuring serve as a modelfor what lenders should seek:
- Tighter lender protections in the new debt, including leverage and liquidity covenants and tighter baskets/thresholds
- Improved collateral, such as contributions of keybusiness assets
Tighter Covenants Relative to Market
One of the aspects of TalkTalk's situation that led to the consensual restructuring was a lack of covenant flexibility relative to market, which lenders can seek in future deals to reduce the likelihood of an unfavourable LME, including:
- Low non-guarantor debt capacity to limit the borrower'sability to layer in debt via structural subordination
- Lower Restricted Payments and Permitted Investments capacity
- Strong conditions on accessing build-up basket, such as default / event of default blockers and a requirement to meet the borrower’s ratio debt test
- Straightforward ratio calculations to reduce the borrower's wiggle room
These covenants restrict the borrower's ability to move assets outside the credit group or leverage them for restructuring discussions with existing lenders.
Other Important Protections
While less common today, lenders should still advocate for protections like payments for consent covenants (ensuring equal payments for lender consents) and calculation mechanics that restrict borrowers' flexibility manipulate financial ratio calculations.
Conclusion
The TalkTalk restructuring offers valuable lessons for lenders in dealing with stressed credits. By acting early, pushing for tighter protections and covenants, and advocating for their interests, lenders can improve their position and outcomes. Examining situations like TalkTalk allows us to extrapolate insights to navigate future scenarios more effectively.
Fox Legal Training clients are always several steps ahead of any potential restructuring scenario. We teach clients how to analyze covenants for key provisions, regardless of which side of the table they are viewing the situation from. Get in touch to find out more about our first-of-its-kind covenant education platform!