Out-Law Analysis 6 min. read
05 Mar 2025, 3:24 pm
Over the last 12 months, investors that support businesses in raising capital have been pushing lenders in the UK to incorporate more ‘borrower-friendly’ terms into the lender transfer provisions of their loan agreements.
This trend has arisen following a slowdown in M&A activity during 2023, where it was estimated that private credit providers had more than $400 billion of undeployed capital. This resulted in an inevitable loosening of loan agreement terms in the private credit market over 2024 as markets returned, owing to significant competition between lenders to provide more attractive terms to borrowers in order to facilitate their own deployment of capital. This recalibration in the private credit market is also starting to impact the terms offered under traditional clearing bank lending documentation.
Below, we look at the traditional lender transfer provisions found in mid-market loan agreements, which are broadly based on templates developed by the Loan Market Association (LMA), and explore the three main developments that we have seen emerge where sponsors have tried to reshape those traditional arrangements in favour of borrowers.
By way of background, there are a variety of circumstances in which lenders need or want to be able to transfer their rights and obligations under a loan agreement to another entity. Standard contractual clauses have been developed by the industry, via the LMA, that lenders and borrowers can incorporate into their loan agreement, amended as appropriate, to provide for this.
In the mid-market, the standard formulation for the lender transfer regime has historically been to incorporate the LMA standard terms as amended in order to:
However, over the last 12 months we have seen sponsor push back to this standard formulation in three main areas.
On larger deals where the sponsors typically operate across the mid-cap and large-cap markets, we are seeing sponsors push to replace the traditional borrower consent qualifications of not ‘unreasonably withheld or delayed’ and ‘deemed given’ with a requirement for any lender transfers to be subject to the borrower’s ‘sole and absolute discretion’.
In our experience, this bullish construct has had little to no purchase in traditional clearing bank-supported transactions, however it has received some traction in the private credit market where sponsors have been able to successfully argue that the inherent ‘take and hold’ nature of a unitranche facility – where both senior and subordinated debt is combined under one loan agreement – means that any lender transfers should be subject to the borrower’s express approval.
We have also seen sponsors push to extend the backstop for when deemed consent is given by the borrower or, in the most ambitious cases, push to remove the deemed consent concept in its entirety. In our experience, lenders have routinely held firm on the inclusion of a deemed consent construct and whilst there has been some flex around the timetable, we have not yet seen the underlying construct be removed from the documentation as its inclusion is invariably a lender operational policy requirement.
It remains standard practice in the majority of deals we’ve seen coming to market in the mid-tier for a ‘day one’ approved list construct to be included within the lender transfer regime. This is a prescriptive list of financial institutions to whom the parties agree that the lenders are permitted to assign their commitments without requesting the borrower’s consent in order to do so.
As a condition to the inclusion of such an approved list construct, borrowers will, in larger deals at least, typically insist on the ability to update the ‘day one’ approved list a certain number of times over the life of the facility, by removing and/or replacing the entities on the list. This conditionality will, however, invariably be subject to an express prohibition on removing any existing lenders from the approved list. In transactions with stronger lenders, lenders may also be granted an analogous ability to amend the approved list.
We are increasingly seeing sponsors push to impose additional conditionality around the approved list construct and there have been a number of important developments which we have seen recently brought to market in this regard.
For example, in transactions where the lenders are also permitted to amend the approved list, sponsors may push to include additional conditionally so that the lenders may only replace names on the approved list with entities which are “par” with the outgoing entity – resulting in the introduction of a tacit a ‘like for like’ creditworthiness test for the lenders.
In addition, we have seen sponsors often push to include carve-outs with regards to the types of entities which are permitted on the approved list. Specifically, entities which are or otherwise become industrial competitors, loan-to-own/distressed investors or similar, or net short lenders, will be disqualified from being on the approved list. This may result in the scenario where an entity is on a ‘day one’ approved list but at a later date fall within an excluded category, meaning the borrower consent transfer exemptions will no longer apply. In many of those cases, there will be a strict prohibition against transferring to them, or at least a limitation of such transfers to a core sub-set of events of default.
We have seen lenders accept requested conditions of this nature, even in transactions with a less aggressive sponsor. This is on the basis that the lenders consider it an intellectually coherent ask from the sponsor, which effectively solves the historic contradictions between the approved list and industrial competitor regimes and because it fundamentally remains within the lenders’ control as to whether or not they become an industrial competitor etc.
In the most aggressive formulations, we have also seen sponsors push to exclude any cap on the number of names that they may remove and/or replace on the approved list over the life of the facility. Lenders have understandably been hostile to this proposal as the removal of such caps theoretically allows the borrower to circumvent the approved list construct, as they would gain a de facto ability to remove any and all the names from the approved list the day after signing. This approach has received particularly strong pushback from traditional bank lenders that require the ability to sell down their day one commitments on the secondary markets as a matter of course.
We have also seen sponsors test the parameters of the lender transfer regime upon an event of default. Historically, the starting position was that the occurrence of an event of default would result in the standard borrower consent mechanics being superseded by an ability for the lenders to transfer their commitments to entities which are not on an approved list or which are otherwise loan-to-own investor/industrial competitor, without the company’s consent. The rationale for this was that, following an event of default, the lenders should have the ability to manage their own risk in a downside scenario.
However, for some time, we have been seeing a move towards a tiered system whereby the borrower consent requirements only fall away during specific categories of events of default which are deemed suitably material. These are typically limited to insolvency or payment defaults, and potentially covenant defaults, which are set out under a so called ‘significant event of default’ construct – provisions which are intended to replace the broader event of default trigger.
In addition, the most aggressive sponsors push for a blanket prohibition of transfers to industrial competitor or loan-to-own investors regardless of the occurrence of an event of default or ‘significant event of default’. From the sponsor’s perspective, the rationale for the inclusion of such a prohibition is that the transferees will not participate in a genuine and constructive manner following an insolvency scenario and that priority should be given to preserving the business as a going concern instead of engendering a mass exodus of commitments; and that lenders are otherwise still free to transfer to less hostile parties.
However, from a lender’s perspective, it is an open query as to who potential transferees would be during an insolvency scenario outside of industrial competitors or loan-to-own investors.
Ultimately, the scope and operation of the lender transfer regime is important for both sponsors and lenders. Practitioners will need to be live to ongoing developments in this area as market activity continues to pick up in 2025.